What is SR&ED?
Canada’s Scientific Research and Experimental Development (SR&ED) tax credit incentive program provides more than $3 billion in tax incentives to over 20,000 claimants annually. It is the single largest federal program that supports business research and development (R&D) in Canada.
SR&ED provides small and medium-sized CCPCs (Canadian controlled public corporations) with an annual fully refundable 35% tax credit on up to $3 million of qualifying expenditures related to scientific research and experimental development in a variety of industries. It also provides annual non-refundable credits of 15% for all other companies.
The program costs the government roughly $3 billion a year and is used by more than 20,000 companies.
Taxable Income Under Current SR&ED Program
In the existing program, access to the federal tax credit (ITC) was determined by a business’ level of income and capital. The expenditure limit for a taxation year is based on two factors – taxable income and taxable capital employed in Canada in the previous tax year.
Under the current rules, “the government claws back the value of the credits when companies earn more than $500,000 a year and phases it out completely when they earn more than $800,000.” (Globe & Mail)
In terms of the ITC, this means that under the existing program, when CCPCs exceed the taxable income threshold, the government reduced the 35% tax credit to 15%.
“Experts say the policy has had the perverse effect of prompting companies to pay out income in salaries to employees rather than reinvesting in the business – just to stay below the income threshold.” (Globe&Mail)
Proposed Changes to Taxable Income in SR&ED Program
In the case of the fully refundable enhanced tax credit, the 2019 budget proposes to repeal the use of taxable income as a factor in determining a CCPC’s annual expenditure limit.
This means that regardless of taxable income, ITC stays at 35% regardless of taxable income.
The Budget document explains further that the expenditure limit would be “reduced only where taxable capital employed in Canada for the previous taxation year is between $10 million and $50 million, effective for taxation years that end after March 19, 2019.” (2019 Fed Budget)
While the budget eliminates the income test, effective with the current tax year, the $10-million limit on how much capital a company can have in order to qualify for the refundable credit remains in place.
Talk to one of our SRED Unlimited Consultants about how we can help your company get rewarded for your research and innovation with the SR&ED enhanced tax credit.
