QUESTION:
Our company is considering a possible acquisition in Toronto. The business in question has revenues just under $4 millon dollars (CAN) and fewer than 50 employees. If we go through with the purchase, would the fact that we are a larger company and/or the fact that we are based in France impact the 35% investment tax credit the company is currently receiving?
ANSWER:
A Canadian Controlled Private Corporation (CCPC) enjoys a refundable investment tax credit (ITC) of 35% on their first $3 million dollars of qualified scientific research and experimental development (SR&ED) expenditures. This threshold is called the expenditure limit. Any qualified SR&ED expenditures in excess of the expenditure limit will earn a non-refundable ITC at the basic rate of 15%. The ITC for SR&ED is phased out where taxable capital exceeds $10 million dollars. Taxable capital looks at the balance sheet of a corporation and would include shareholders’ equity and long-term debt – sources of capital.
For an expenditure to be eligible for the ITC, it must be directly associated with work done in Canada within one of three categories:
- basic research, undertaken for the advancement of scientific knowledge without a specific practical application in view;
- applied research, undertaken for the advancement of scientific knowledge with a specific practical application in view; or
- experimental development, undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes.
Support work in one of the following fields is also eligible if it directly supports one of the three work categories:
- Engineering;
- Design;
- Operations research;
- Mathematical analysis;
- Computer programming;
- Data collection;
- Testing; or
- Psychological research.
Note: Unused ITCs can be carried back three years or carried forward 20 years.
Corporations that are not CCPCs can still claim the non-refundable SR&ED ITC at the basic rate of 15%.
So, if your foreign, France-based company controls the Canadian company post-acquisition, the SR&ED investment tax credit will drop to the 15% rate (as the Canadian company will no longer be a CCPC). To be clear, there is no revenue limit, no income limit, and no employee number requirement. The test is one of where control is—in this case, Canada or France—and the amount of taxable capital deployed in the corporation.
Details on the ITC policy can be found on the SR&ED Investment Tax Credit Policy page of the government of Canada website. Additional general information can also be found here.
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