The federal and most provincial/territorial governments of Canada provide tax incentives for "Scientific Research and Experimental Development," which creates one of the lowest net research costs in the world.
Qualified expenditures include Canadian:
There are currently two rates of federal investment tax credit for SR&ED in Canada:
Generally speaking, C.C.P.C.'s have <=50% of their shares controlled by "public corporations" or "foreign parties."
20
40
CCPC's with prior- year taxable capital employed in Canada between $10 million and $50 million: Expenditures up to expenditure limit Expenditures over expenditure limit
0
3. Expenditure limit for CCPC's is phased out for prior-year taxable "group" capital employed in Canada between $10 million and $50 million.
4. Ontario and Quebec include foreign or public companies. Quebec uses ranges of $50 and $75 million for phasing out their enhanced credits to "Qualified Corporations".
The specific mechanics of the current phase-out formula is provided in the Income Tax Act.
The amount of SR&ED expenditures that can earn tax credits at the enhanced rate is referred to as the "expenditure limit." The expenditure limit is generally $3 million for CCPCs with prior-year taxable income of $500,000 or less. This expenditure limit is reduced on the basis of the following two criteria.
1. First, the expenditure limit is phased out for CCPCs with prior-year taxable income between $500,000 and $800,000. For each dollar by which taxable income for the prior year exceeds $500,000, the SR&ED expenditure limit for the year is reduced by $10.
2. In addition, the expenditure limit is phased out for CCPCs with prior-year taxable capital employed in Canada between $10 million and $50 million. For every $10 by which taxable capital employed in Canada for the prior year exceeds $10 million, the SR&ED expenditure limit for the year is reduced by $4.
In a "worst case" scenario, the loss of this enhanced status could cost a company $1,050,000 annually in lost cash flows from the phase-out of the enhanced Federal Investment Tax credits. This loss becomes significantly higher in provinces where additional ITC's are provided to small businesses based on their eligibility for the enhanced Federal credits.
The CRA is responsible for administering the SR&ED tax incentives provided by the federal government and, in accordance with the Tax Collection Agreements, the tax incentives for research and development provided by Ontario, Manitoba, Alberta, New Brunswick, Newfoundland and Nova Scotia.
Quebec does not have an agreement with the federal government for administering their provincial corporate income tax and, accordingly, administer their own research and development tax incentive.
Notes: 1) The federal tax credit is reduced by the provincial tax credit receivable.
2) Ontario and Quebec offer additional SR&ED incentives, which are not covered by the scope of this table.
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