Current standing of SR&ED
If an eligible taxpayer is engaged in SR&ED, they may be able to earn tax incentives that reduce the income tax payable. Under the current SR&ED program, qualifying expenditures incurred in eligible work may be fully deductible in the year they are incurred and may be eligible for an investment tax credit. However, the rate and refundability of the investment tax credit will vary based on the type of entity the taxpayer falls under:
- Non-CCPC Corporations: Eligible for a 15 per cent non-refundable tax credit on qualified SR&ED expenditures.
- Unincorporated Businesses, Individuals and Certain Trusts: Can access a 15 per cent partially refundable tax credit.
- Canadian-Controlled Private Corporations (CCPCs): Benefit from a 35 per cent fully refundable tax credit on up to $3 million of qualifying expenditures annually. This expenditure limit is phased out for taxable capital employed in Canada between $10 million and $50 million in the previous year. Expenditures exceeding this limit qualify for a 15 per cent tax credit, which may be partially refundable depending on prior-year income.
While the current program encourages scientific development, the federal government hopes to further encourage Canadian businesses to invest in innovation and drive economic growth.
Changes proposed by the 2024 statement
Enhancements to the SR&ED program
The federal government proposed the following updates to the SR&ED program to promote continuous development of intellectual property within Canadian businesses:
- Increasing the annual expenditure limit from $3 million to $4.5 million for the enhanced 35 per cent investment tax credit for CCPCs.
- Increasing the taxable capital phase-out thresholds for determining expenditure limit from $10 million–$50 million to $15 million–$75 million.
- Extending the eligibility of the enhanced refundable SR&ED credit of 35 per cent to Canadian public corporations on up to $4.5 million of qualifying expenditures.
- An eligible Canadian public corporation would be a corporation that, throughout the taxation year, is resident in Canada, has a class of shares listed on a designated stock exchange or, if not, has elected or been designated by the Minister of National Revenue to be a public corporation, and is not controlled directly or indirectly in any manner whatever by one or more non-resident persons. Canadian-resident corporations whose shares of capital stock are all or substantially all owned by one or more eligible Canadian public corporations would also be eligible.
- Access to the $4.5 million expenditure limit would be phased out on a straight-line basis when the corporation’s average gross revenue over the three preceding years is between $15 million and $75 million.
- Allowing CCPCs to elect to have their expenditure limit for the enhanced SR&ED credit determined based on the same gross revenue phase-out structure proposed for Canadian public corporations.
- Restoring the pre-2014 eligibility rules for capital expenditures for the SR&ED program to deduct against income and qualify for investment tax credits for property acquired on or after Dec. 16, 2024.
These proposed enhancements would apply to taxation years that begin on or after the date of the 2024 statement, Dec. 16, 2024.
Further information regarding these proposed changes and program administration will be detailed in the upcoming 2025 federal budget as these proposals represent the first of more reforms to come to the SR&ED program.
New proposed incentive
As a result of consultations held earlier this year, the federal government is proposing to implement a patent box regime to encourage the development and retention of intellectual property in Canada. Further details of this regime will be announced in the 2025 federal budget.
Impacts of changes
The proposed updates to the SR&ED program are expected to significantly enhance innovation and intellectual property development within Canadian businesses. Increasing the annual expenditure limit for the enhanced 35 per cent investment tax credit for CCPCs from $3 million to $4.5 million will provide more substantial financial support for small and medium-sized enterprises, encouraging greater investment in Research and Development (R&D) activities. Raising the taxable capital phase-out thresholds from $10 million–$50 million to $15 million–$75 million will allow more businesses to benefit from the enhanced tax credit, fostering a broader base of innovation. Extending the 35 per cent refundable SR&ED credit to Canadian public corporations will incentivize larger companies to invest more in R&D, potentially leading to significant advancements and commercialization of new technology. Restoring capital expenditure eligibility for deductions and investment tax credits on property acquired after Dec. 16, 2024, will promote further investment in essential R&D infrastructure. Additionally, the government’s consideration of a patent box regime could provide additional tax incentives for businesses to develop and commercialize intellectual property in Canada, enhancing the country’s competitive edge in the global market. Overall, these changes aim to strengthen Canada’s innovation, support business growth and drive economic development through enhanced R&D activities.
Looking ahead
The myriad of proposed changes to the current SR&ED program will provide Canadian businesses with improved access to government and tax assistance to allow for innovation. To prepare for these changes, Canadian businesses should assess how the increased limits, extended eligibility and improved tax incentives will affect their upcoming or current SR&ED project plans. Additionally, businesses should continuously monitor any future updates that are to arise from the forthcoming 2025 federal and provincial budgets.
