Tax Credit Rates & Spending

Topics:

 Types of Qualified Expenses
 Federal SR&ED Tax Credit Rates and Rates of Refundability
 Mechanics to Determining "Expenditure Limits" for Enhanced Credits

 SR&ED Tax Incentives - Federal vs. Provinces/Territories
 Budgeted Expenditures for SR&ED Tax Credits - Federal vs. Provinces/Territories

 Types of Qualified Expenses

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:

• Wages,
• Subcontractors,
• Overheads, and
• Materials and Capital equipment which are "consumed through SR&ED performed in Canada."

 Federal SR&ED Tax Credit Rates and Rates of Refundability

There are currently two rates of federal investment tax credit for SR&ED in Canada:

• a general rate of 20% &
• an enhanced rate of 35%  for "qualified" C.C.P.C.'s (Canadian-controlled private corporations)

Generally speaking, C.C.P.C.'s have <=50% of their shares controlled by "public corporations" or "foreign parties."

“Qualified" C.C.P.C.'s are those with:

• prior-year taxable income under $400,000 and
• prior-year taxable capital (assets) employed in Canada under $10 million.

 Mechanics to Determining "Expenditure Limits" for Enhanced Credits

The specific mechanics of the current phase-out formula is provided in the Income Tax Act. 

1) Current SR&ED Income Phase Out

2) a) Current SR&ED Capital Phase Out (Years Ending > Feb 25th 2008)  

     b) Historical SR&ED Capital Phase Out (Years Starting < Feb 25th 2008)

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 $400,000 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 $400,000 and $700,000. For each dollar by which taxable income for the prior year exceeds $400,000, 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. 

 SR&ED Tax Incentives - Federal vs. Provinces & Territories

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.

 Budgeted Expenditures for SR&ED Tax Credits - Federal vs.
 Provinces & Territories