SR&ED Tax Clips: 2008 Provincial and territorial R&D tax credits — June 10, 2008

Among the major industrialized countries, Canada offers one of the most favourable packages of R&D tax incentives. In addition to the federal incentives, taxpayers carrying on R&D may also benefit from provincial or territorial tax credits. To help individuals and corporations maximize their potential R&D tax incentives, a summary of the rules for provincial and territorial R&D tax credits follows.

All R&D tax credits are available to corporations. In Newfoundland and Labrador, Quebec and the Yukon, individuals may also claim the credits. In all jurisdictions that offer R&D tax credits, the credit may reduce provincial or territorial income tax. In Ontario and Quebec, R&D tax credits may also offset capital taxes.

		For R & D expenditures incurred		Rate	Refundable?		Carry back	Carry forward
		After	Before
Alberta		Dec. 31/2008	n/a	10% [1]	Yes [3]		n/a
British Columbia	Qualifying CCPCs	Aug. 31/1999	Sep. 1/2014 [2]
	Corporations in general				No		3 yrs	10 yrs [4]
Manitoba		Mar. 8/2005	n/a	20%
		Mar. 11/1992	Mar. 9/2005	15%
New Brunswick		Dec. 31/2002	n/a	15%	Yes		n/a
		Feb. 25/1994	Jan. 1/2003	10%	No		3 yrs	7 yrs
Newfoundland and Labrador		Dec. 31/1995	n/a	15%	Yes		n/a
Northwest Territories		No territorial R&D tax incentives
Nova Scotia		Tax years ending Dec. 31/1993	n/a	15%	Yes		n/a
		Dec. 31/1983	Tax years ending Jan. 1/1994	10%	No		3 yrs	7 yrs
Nunavut		No territorial R&D tax incentives
Ontario	Innovation tax credit	Tax years ending May 4/1999 [5]	n/a	10% [5]	Yes		n/a
	Business research institute tax credit	May 6/1997		20% [6]
	SR&ED tax credit [7]	Tax years ending Dec. 31/2008		4.5%	No		3 yrs [7]	20 yrs
Prince Edward Island		No provincial R&D tax incentives
Quebec	R&D wage tax credit	April 21/2005	n/a	17.5% or 37.5% [9]	Yes		n/a
		June 12/2003	April 22, 2005	17.5% or 35% [9]
		Tax years beginning May 9/1996 [8]	June 13/2003	20% or 40% [9] [10]
	University, public research centre and research consortium tax credit	June 12/2003	n/a	35% [11]
		April 30/1987	June 13/2003	40% [11]
	Tax credit on dues and fees paid to a research consortium	June 12/2003	n/a	35%
		May 14/1992	June 13/2003	40%
	Private partnership tax credit [12]	March 23/2006	n/a	35%
	Pre-competitive tax credit [12]	June 12/2003	March 24/2006	35%
		Jan. 1/1997	June 13/2003	40%
Saskatchewan		Mar. 19/1998	n/a	15%	No		3 yrs	10 yrs
Yukon		June 30/2000 or Dec. 31/2000 [13]	n/a	15% [14]	Yes		n/a

[1] Alberta's SR&ED tax credit will be calculated using the definition of eligible expenditures in the federal SR&ED tax credit program. The credit is limited to 10% of $4 million of eligible expenditures annually, for a maximum annual credit of $400,000.

[2] British Columbia extended its SR&ED tax from August 31, 2004 to August 31, 2009 and then to August 31, 2014.

[3] British Columbia's refundable R&D tax credit is limited to 10% of the lesser of: (a) eligible British Columbia R&D expenditures and (b) the federal R&D expenditure limit (i.e., $3 million or less for taxation years ending after February 25, 2008).

[4] Manitoba extended the carry-forward period from 7 years to 10, for 2004 and later taxation years.

[5] Ontario corporations qualify for the refundable credit on eligible expenditures incurred up to the expenditure limit ($3 million* or less) and must be shared by associated corporations. The expenditure limit is reduced when:

• the previous year's taxable capital of the worldwide associated group is between $25 million and $50 million; or
• the previous year's taxable income of the worldwide associated group is between $400,000* and $700,000*.

* The expenditure limit and taxable income thresholds have increased, as follows:

		Expenditure limit	Taxable income thresholds
			Phase-out starts (i)	Phase-out ends
Taxation years ending	before 2003	$2 million	$200,000	$400,000
	after 2002		$300,000	$500,000
	after 2006		$400,000	$600,000
	after February 25, 2008 (ii)	$3 million		$700,000

100% of current expenditures and 40% of capital expenditures are eligible for the credit.

The OITC was originally available to Canadian-controlled private corporations effective for taxation years ending after December 31, 1994. For taxation years ending after May 4, 1999, the credit is extended to all public and private corporations and is no longer limited to the amount eligible for the federal 35% R&D tax credit.

[6] Ontario's credit is calculated as 20% of qualifying payments (up to $20 million annually on an associated basis) to Ontario eligible research institutes.

[7] Commencing taxation years ending after 2008, Ontario's deduction for the portion of the federal investment tax credit relating to qualifying Ontario SR&ED expenditures will be replaced with a 4.5% non-refundable tax credit that can be carried forward 20 years and carried back three, to taxation years ending after 2008.

[8] Before this date, Quebec's R&D wage tax credit was subject to different eligibility criteria, rates and restrictions.

[9] Quebec Canadian-controlled corporations with less than $50 million* in assets, on an associated basis, can claim the 37.5% rate on up to the spending limit of $3 million* of R&D wages, on an associated basis. For those with assets between $50 million* and $75 million*, the 37.5% rate is gradually reduced to 17.5%. The rate increased from 35% to 37.5% on R&D expenditures incurred after April 21, 2005. The rate is 17.5% for all other taxpayers. For expenditures incurred before June 13, 2003, the 35% rate was 40% and the 17.5% was 20%. 50% of payments to unrelated subcontractors are eligible for the credit. All thresholds are in respect of the previous year, on a worldwide associated basis.

* The spending limit and asset thresholds have increased, as follows:

		Spending limit	Asset thresholds
			Phase-out starts	Phase-out ends
Effective	before December 5, 2006	$2 million	$25 million	$50 million
	after December 4, 2006		$50 million	$75 million
	taxation years ending after March 13, 2008	$3 million (i)

[10] Corporations that qualified for Quebec's R&D wage tax credit at the 40% rate (i.e., corporations under Canadian control with assets under $25 million) qualified for an additional 15% tax credit based on the increase in all R&D expenditures over the average expenditures in the last three taxation years. This additional credit was to have been available to eligible corporations until taxation years beginning before July 1, 2004, but its expiry was accelerated to taxation years beginning after June 12, 2003.

[11] Quebec's 35% (40% before June 12, 2003) credit is available on 80% of payments to certain eligible entities (e.g., universities and public research centres).

[12] The Quebec tax credit for private partnerships replaced the pre-competitive research tax credit.

[13] The credit applies to eligible expenditures incurred in the Yukon after June 30, 2000 for corporations, and after December 31, 2000 for individuals.

[14] Yukon's rate is 20% on R&D expenditures made to the Yukon college.

PricewaterhouseCoopers Comments
Among the major industrialized countries, Canada offers one of the most favourable packages of R&D tax incentives, which includes provincial and territorial tax credits available to corporations that conduct qualified scientific research and experimental development (SR&ED) in the particular jurisdiction.

In addition to provincial and territorial incentives, corporations carrying on SR&ED may also benefit from federal tax credits discussed in Federal R&D investment tax credits: 1996 — 2008. For federal tax purposes, most current and certain capital expenditures on account of SR&ED are deductible. Provincial and territorial tax credits are considered to be government assistance for federal tax purposes, and therefore reduce expenditures that are eligible for the federal SR&ED deduction and federal investment tax credits.