December 17: Scientific Research and Experimental Development (SR&ED) Program Updates
The Fall Economic Statement (FES) introduces significant updates to the SR&ED tax credit incentive program, expanding eligibility and enhancing support for innovation. Historically, SR&ED-qualifying expenditures have been deductible and eligible for an Investment Tax Credit (ITC).
The credit rate has varied based on taxpayer characteristics, such as legal status and business size: a basic 15% non-refundable ITC for most taxpayers and an enhanced 35% refundable ITC for certain corporations on eligible expenditures within their expenditure limit.
The proposed changes include:
- Increased Expenditure Limit:
- Raise the annual SR&ED expenditure limit from $3 million to $4.5 million for the enhanced 35% ITC rate.
- Raise the annual SR&ED expenditure limit from $3 million to $4.5 million for the enhanced 35% ITC rate.
- Higher Taxable Capital Phase-Out Threshold:
- Increase the taxable capital threshold for determining the SR&ED expenditure limit, starting at $15 million and phasing out at $75 million (up from $10 million to $50 million).
- Increase the taxable capital threshold for determining the SR&ED expenditure limit, starting at $15 million and phasing out at $75 million (up from $10 million to $50 million).
- Eligibility Expansion to Canadian Public Corporations:
- Extend the 35% refundable ITC to eligible Canadian public corporations for up to $4.5 million of qualifying SR&ED expenditures annually (previously available only to Canadian-controlled private corporations (CCPCs)).
- For Canadian public corporations, the $4.5 million limit will phase out on a straight-line basis when average gross revenue over the previous three years is between $15 million and $75 million.
- Members of a corporate group must share the $4.5 million expenditure limit.
- Flexible Phase-Out for CCPCs:
- CCPCs can choose between:
- A gradual reduction of the $4.5 million expenditure limit based on taxable capital between $15 million and $75 million, or
- The gross revenue phase-out structure introduced for Canadian public corporations.
- CCPCs can choose between:
- Reinstatement of Capital Expenditure Eligibility:
- Restore SR&ED eligibility for capital expenditures (removed in 2014). This includes both the deduction against income and the ITC components for property acquired on or after December 16, 2024.
Implementation Timeline
The proposed changes will take effect for taxation years beginning on or after December 16, 2024. Further details will be provided in Budget 2025.
Patent Box Regime
To support the development and retention of intellectual property in Canada, the government plans to introduce a patent box regime, offering a preferential tax rate for income generated from qualifying intellectual property. Details of the regime, based on consultations held earlier this year, will also be announced in Budget 2025.
Summary
The SR&ED expenditure limit and taxable capital thresholds have remained unchanged for decades. By extending eligibility for the 35% refundable ITC to small-cap public companies and increasing support for Small and Medium Enterprises (SMEs), these changes are a positive step forward for Canada’s innovation ecosystem. They provide much-needed incentives to foster research, development, and intellectual property growth within the country.
