Updates to Canada’s scientific research and experimental development (SR&ED) tax incentives could further benefit businesses by providing credits for costs associated with research, experimental development and related support work—but ongoing political uncertainty means revisions could be stalled for the near future.
SR&ED is a federal tax incentive program designed to encourage businesses to conduct research and development (R&D) in Canada.
Under the program there are two incentives:
- Qualifying expenditures for eligible work may be fully deductible in the year they are incurred or carried forward indefinitely to be deducted in a subsequent year against business income.
- Claimants may be eligible for an investment tax credit. Canadian-controlled private corporations (CCPCs) generally receive a fully refundable tax credit at the enhanced rate of 35 per cent on eligible R&D expenditures, whereas non-CCPC corporations and certain other taxpayers generally receive either a partly or fully non-refundable tax credit at the basic rate of 15 per cent on eligible R&D expenditures.
Around 80 per cent of Canada’s support for R&D is delivered in the form of tax incentives, which at the federal level is through the SR&ED program. Small businesses (with gross annual income less than $4 million) submit more than 60 per cent of claims annually, with most claims filed by CCPCs.
Under the current program, access to the higher enhanced rate is limited to a maximum threshold and any qualified expenditures exceeding this limit are only eligible at the basic rate.
The expenditure limit decreases or is eliminated entirely when a CCPC’s taxable capital for the prior year exceeds $10 million to 50 million—including the taxable capital of any associated corporations, which can significantly reduce access to the higher rate.
Certain costs like those related to patents, software and other capital assets are excluded from the program.
Plans to enhance the program were announced in December as part of the fall economic statement (FES) following two rounds of consultations.
The proposed changes would increase the annual expenditure limit for CCPCs, expand the taxable capital phase-out thresholds, extend eligibility for the 35 per cent refundable tax credit to Canadian public corporations, and restore capital expenditures as qualified SR&ED expenditures.
Where these changes would require legislative amendment, their likelihood of becoming law is unknown as Parliament was prorogued until late March after Justin Trudeau announced his resignation as prime minister and Liberal leader.
Growing calls for an early election by Opposition politicians add further uncertainty to the proposed SR&ED changes as they currently stand. The Conservative Party, the official Opposition party, has indicated it would like revisions to the SR&ED program—although it’s unclear what those would entail.
The Conservatives’ 2023 policy declaration supported an expansion of this credit and more SR&ED tax incentives. Conservative innovation critic Rick Perkins, while not speaking to specific party policies, recently indicated he believes the SR&ED program needs an overhaul to better focus on supporting Canadian businesses.
Proposed patent box regime
Businesses engaging in SR&ED-eligible activities are likely also generating intellectual property—and the introduction of a patent box regime at the federal level was also foreshadowed in the fall economic statement.
A patent box regime provides preferential tax rates on income generated by eligible intellectual property, including but not limited to patents, to incentivize R&D related to the domestic creation and retention of intellectual property.
These regimes already exist in 13 European Union member states and provincially in Quebec and Saskatchewan.
A consultation was held between Jan. 31, 2024, and April 15, 2024, on developing a federal patent box regime in Canada. The FES announced that details of the patent box regime the federal government intends to implement would be released in the 2025 federal budget.
The budget is normally delivered in April, but with suspended committee meetings due to prorogation and the possibility of an early election call once Parliament resumes, it is unclear when a budget will be delivered.
