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:
- 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
- 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:
- Capital expenditures are no longer eligible for taxation years after 2013.
- 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).
- 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.
- The credit is not refundable for other corporations or for a CCPC’s expenditures in excess of the expenditure limit.
- 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.
- 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.
- There is a $20 million annual cap. The cap must be allocated within an associated group of corporations.
- 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.
- 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.
- 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.