Federal and provincial research and development tax credits

In Canada, research and development (R&D) tax credits are offered by both federal and provincial governments. There are twofold incentives available under the federal Scientific Research and Experimental Development (SR&ED) program:

1. A deduction of the current SR&ED expenditures incurred in the year to reduce the income for tax purposes, or to add them to a pool that can be deducted in future years
2. An ITC can be claimed on a taxpayer’s SR&ED qualified expenditure pool, which is defined in subsection 127(9) of the ITA. The types of expenditures that may be deducted for SR&ED purposes and qualify for ITC purposes are generally laid out in subsection 37(1) of the ITA. SR&ED capital expenditures after Dec. 31, 2013, no longer qualify for SR&ED tax incentives. The ITC rate applied against eligible SR&ED expenditures varies by the type of entity, taxable income and capital requirements, as well as the provinces in which the SR&ED is conducted. To file a SR&ED claim, claimants must adhere to the filing requirements of the SR&ED programs.

Provincial R&D programs use the federal government’s definition of SR&ED and generally follow the same expenditure rules as the federal program, with certain exceptions. To be entitled to claim any provincial R&D tax credit, a taxpayer must have a permanent establishment (PE) in the province, except for Quebec. For the Quebec R&D wage credit, the taxpayer does not need a PE as long as the work was carried out in Quebec, and the taxpayer must file a Quebec tax return.

The following table summarizes the ITC rates available in Canada:

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Notes

1. Capital expenditures are no longer eligible for taxation years after 2013.
2. The expenditure limit must be shared and allocated among associated corporations. The ceiling is progressively eliminated when taxable capital used in Canada is between $10 million and $50 million. For fiscal years ended before March 19, 2019, the ceiling could also be reduced when taxable income was between $500,000 and $800,000. However, if a CCPC also meets the definition of a "qualifying corporation", the CCPC can earn a refundable ITC at the basic rate of 15% on an amount over $3 million, and 40% of the ITC can be refunded. Also, 40% of the refunded rate will be reduced to 0% if taxable income is greater than $500,000 or when the taxable capital used in Canada exceeds $50 million (or other conditions).
3. The maximum expenditure limit must be shared and allocated among associated corporations. The 10% credit was eliminated in Alberta provincial budget 2019 effective Jan. 1, 2020. Expenditures incurred after Dec. 31, 2019, will no longer be eligible for the SR&ED tax credit. Taxation years that straddle Dec. 31, 2019, may still have eligible expenditures up to the end of the 2019 calendar year.
4. The credit is not refundable for other corporations or for a CCPC’s expenditures in excess of the expenditure limit.
5. Capital expenditures continue to be eligible expenditures in Manitoba. The 15% tax credit for research and development carried on in Manitoba under an eligible contract with a qualifying research institute is fully refundable. When eligible research and development is not undertaken under an eligible contract with an institute, 50% of the tax credit amount is refundable, and the rest is non-refundable.
6. The annual expenditure limit of $3 million of qualified expenditures is phased out when the corporation's taxable paid-up capital for its preceding tax year exceeds $25 million, and it is eliminated when it reaches $50 million. The expenditure limit is also phased out when the corporation's taxable income for its preceding tax year is over $500,000 but does not exceed $800,000.
7. There is a $20 million annual cap. The cap must be allocated within an associated group of corporations.
8. The 30% rate applies only to the first $3 million of qualified expenditures. The rate gradually decreases from 30% to 14% when the world assets of the group are between $50 million and $75 million. The 14% credit is available for 50% of amounts paid to an unrelated subcontractor for R&D performed by employees in Quebec and for 100% of amounts attributed to wages paid to employees of a related subcontractor in Quebec.
9. Effective April 1, 2017, qualifying expenditures by Saskatchewan CCPCs are eligible for a 10% refundable R&D tax credit for the first $1 million annual qualifying expenditures. Qualifying expenditures in excess of the annual limit and qualifying expenditures by other corporations continue to be eligible for the 10% non-refundable R&D tax credit. The total refundable and nonrefundable R&D tax credits that may be claimed by a corporation will be limited to $1 million per year.
10. The Yukon R&D tax credit is refundable at the rate of 15% of eligible expenditures. An additional 5% is available on amounts paid or payable to the Yukon College.