18 December 2024 Canada announces enhancements to scientific research and experimental development incentive program - The Canadian government has announced enhancements to the federal scientific research and experimental development (SR&ED) tax incentive program.
- The proposed enhancements will generally apply for tax years beginning after 15 December 2024.
- This Alert highlights the key changes to the program, including the reinstatement of capital expenditures as eligible SR&ED expenditures.
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On 13 December 2024, the federal government announced in a news release that the 2024 Fall Economic Statement (FES) would include various proposed enhancements to the scientific research and experimental development (SR&ED) tax incentive program. On 16 December 2024, the FES confirmed the proposals included in the news release and announced further clarifications with respect to certain measures. The proposals are intended to generally come into force for tax years beginning on or after 16 December 2024. (For more information on the other measures included in the FES, see EY Global Tax Alert, Canada issues Federal Fall Economic Statement 2024, 17 December 2024.) In the 2024 FES, the government introduced enhanced fiscal measures to support SR&ED, with the objective of increasing research and development (R&D) investments by small and medium-sized Canadian enterprises with high-growth potential. Currently, the SR&ED tax incentive program offers a limited 15% nonrefundable tax credit on eligible SR&ED expenditures for most corporations, excluding Canadian-controlled private corporations (CCPCs). For CCPCs, the program provides a fully refundable enhanced tax credit at a rate of 35% on up to CA$3m of qualifying SR&ED expenditures annually, with this expenditure limit subject to a gradual phase-out for taxable capital employed in Canada ranging from CA$10m to CA$50m. The FES confirmed the following proposed enhancements, which follow from consultations launched by the Department of Finance earlier this year: - Increased expenditure limit — The annual expenditure limit on which CCPCs are entitled to earn a 35% SR&ED investment tax credit (ITC) has been increased from CA$3m to CA$4.5m.
- Increased phase-out thresholds — Prior-year taxable capital phase-out thresholds for purposes of determining the annual expenditure limit have been increased from CA$10 m and CA$50m, to CA$15m and CA$75m, respectively. In addition, CCPCs will have the option to have their annual expenditure limit determined based on gross revenue instead of taxable capital, as proposed for Canadian public corporations (see below).
- Extending refundability — The 35% refundable SR&ED ITC has been extended to eligible Canadian public corporations, up to the increased CA$4.5m annual expenditure limit. However, unlike for CCPCs, the CA$15m and CA$75m phase-out thresholds for determining the annual expenditure limit will be based on a public corporation's average gross revenues over the prior three years instead of its taxable capital for the preceding year. In addition, also unlike for CCPCs, qualifying expenditures exceeding an eligible Canadian public corporation's annual expenditure limit will not be eligible for a partially refundable SR&ED ITC.
- Reinstating capital expenditures — The pre-2014 eligibility of capital expenditures (for property acquired after 15 December 2024, or lease costs first becoming payable after that date) has been reinstated for both the SR&ED income deduction and the SR&ED ITC. Qualifying CCPCs eligible to earn a 35% SR&ED ITC will be entitled to partial refundability of the credit at a rate of 40% on their capital expenditures.
For purposes of the above enhancements, an eligible Canadian public corporation is a corporation that, throughout the tax year is resident in Canada, has a class of shares listed on a designated stock exchange or, if not, has elected or been designated to be a public corporation, and is not controlled directly or indirectly in any manner whatever by one or more nonresident persons. Canadian-resident corporations all or substantially all owned by one or more eligible Canadian public corporations will also be eligible. The FES further indicates that the proposed changes represent the first of further reforms related to the SR&ED tax incentive program and promoting innovation that the government intends to advance and that more details on the program and updates to qualified expenses will be announced in Budget 2025. The proposed SR&ED ITC rates are summarized in the following table (shaded boxes indicate proposed changes). SR&ED federal ITC rates1 | | | ITC rate on qualified expenditures2 | Tax years beginning before 16 December 2024 | Tax years beginning after 15 December 2024 | | | Current expenditures | Capital expenditures | Current expenditures | Capital expenditures | CCPCs | Up to expenditure limit3 | 35% (100% refundable) | None | 35% (100% refundable) | 35% (40% refundable) | Over expenditure limit — Qualifying corporations4 | 15% (40% refundable) | None | 15% (40% refundable) | 15% (40% refundable)5 | Over expenditure limit — Nonqualifying corporations | 15% (nonrefundable) | None | 15% (nonrefundable) | 15% (nonrefundable) | Canadian public corporations | Up to expenditure limit6 | 15% (nonrefundable) | None | 35% (100% refundable) | 35% (nonrefundable)7 | Over expenditure limit | 15% (nonrefundable) | None | 15% (nonrefundable) | 15% (nonrefundable) | Corporations other than CCPCs and Canadian public corporations | No expenditure limit applicable | 15% (non-refundable) | None | 15% (nonrefundable) | 15% (nonrefundable) | Individuals, partnerships and trusts | No expenditure limit applicable | 15% (40% refundable) | None | 15% (40% refundable) | 15% (40% refundable)8 |
Canadian companies generally have been investing less in R&D now than in the past. The need to increase investment in R&D makes the SR&ED program more important than ever. On 15 April 2024, in response to a consultation launched by the Department of Finance on 31 January with respect to cost-neutral ways to modernize and improve the SR&ED program, a submission was made by EY Canada with various recommendations, including: - Revising the program to make the ITC refundable for all companies to have the greatest impact on incenting more R&D investment in Canada
- Reviewing the ITC rate of 15% for nonrefundable claims to assess whether the rate is globally competitive
- Reconsidering the current requirement to be a CCPC to earn a 35% ITC, as well as the related CA$50m taxable capital limit, in light of the current Canadian business environment
The changes tabled in the FES on 16 December 2024 should help Canadian companies increase their investment in R&D and, in turn, help boost the percentage of GDP spent on R&D activities. The FES indicates that these proposed changes should provide support to innovative businesses estimated at CA$1.9b over six years, starting in 2024-25, with CA$370m per year ongoing. It further states that a portion of this support will be sourced from existing Budget 2024 funding (i.e., CA$750m over five years, starting in 2025-26, with CA$150m per year ongoing). The changes proposed in the FES seem to be consistent with the recommendations included in EY Canada's submission to the Department of Finance. Affected multinational enterprises with interests in Canada should reach out to their tax advisors for further information or assistance in reviewing the potential impact of the proposed changes. | * * * * * * * * * * |
Endnotes1 ITCs may be used to offset Part I tax otherwise payable in a tax year, may be carried back three years or forward 20 years to offset Part I tax, or, if applicable, may be refundable. 2 The rate at which the prescribed proxy amount is calculated is 55% — the prescribed proxy amount, which is used to calculate "notional" overhead expenditures in lieu of itemizing them, is included in the computation of qualified expenditures of taxpayers that elect to use the proxy method. In addition, 20% of the otherwise qualified expenditures made by a taxpayer for SR&ED performed for or on behalf of the taxpayer by an arm's-length person are disallowed. It is proposed that qualified expenditures will include eligible capital expenditures in respect of property acquired after 15 December 2024 or lease costs first becoming payable after that date (similar to pre-2014, qualified expenditures will include expenditures for shared-use equipment). 3 The expenditure limit is proposed to be increased from CA$3m to CA$4.5m. The expenditure limit is reduced when the taxable capital of the corporation (or associated group) for the preceding year exceeds a proposed CA$15m threshold (previously CA$10m), with a proposed phase-out limit of CA$75m (previously CA$50m). The expenditure limit must be shared among associated corporations. It is proposed that CCPCs will have the option to have their expenditure limit determined based on gross revenue instead of taxable capital employed in Canada, as proposed for Canadian public corporations (see below). 4 A corporation is a qualifying corporation if it is a CCPC in the tax year and its taxable income for the previous year does not exceed its qualifying income limit for the tax year. Where a corporation is associated with one or more corporations in the tax year, the taxable income of all the associated corporations for the preceding year cannot exceed the qualifying income limit of the corporation for the tax year. The qualifying income limit is CA$500k less any reduction where the taxable capital of the corporation (and of all its associated corporations) exceeds a proposed CA$15m threshold (previously CA$10m), with a proposed phase-out limit of CA$75m (previously CA$50m). 5 We have assumed refundability will be the same for qualifying corporations as under the pre-2014 rules. 6 The expenditure limit is proposed to be CA$4.5m and is proposed to be reduced when the average gross revenue of the corporation (or members of a corporate group that prepares consolidated financial statements) over the three preceding years exceeds CA$15m, with a phase-out limit of CA$75m. The expenditure limit must be shared among members of a corporate group that prepares consolidated financial statements. 7 We have assumed refundability will be the same for public corporations as under the pre-2014 rules. 8 We have assumed refundability will be the same for individuals, partnerships and trusts as under the pre-2014 rules. | | * * * * * * * * * * | | Contact Information | For additional information concerning this Alert, please contact: Ernst & Young LLP (Canada), Toronto Ernst & Young LLP (Canada), Atlantic Canada Ernst & Young LLP (Canada), Quebec Ernst & Young LLP (Canada), Prairies Ernst & Young LLP (Canada), British Columbia | | Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor |
Document ID: 2024-2330 |
