SR&ED Tax Clips: Federal R&D investment tax credits: 1996 — 2008 (June 10, 2008)

Among the major industrialized countries, Canada offers one of the most favourable packages of R&D tax incentives. Federal, provincial and territorial R&D tax incentives are available. To assist individuals and corporations maximize their potential R&D tax incentives, a summary of the rules for federal tax credits follows.

This summary of federal investment tax credits (ITC) and refund rates apply to expenditures incurred after December 31, 1995. Different rates may apply to expenditures incurred before 1996 and different types of property may qualify. ITCs are not earned until the property is "available for use" and may be fully claimed against a taxpayer's federal tax. Unused ITCs may reduce federal taxes payable in the previous three years and the next twenty (ten years for ITCs earned before 1998 taxation years; a federeal proposal retroactively extends the 20-year carryforward to unused ITCs earned in the 1998 to 2005 taxation years.)

		Investment tax credit (ITC) rate	Refund rate
Qualified property in Atlantic Provinces, Gaspé region, and prescribed offshore regions [1]		10% [1]	n/a
Certified property in RDIA regions [2]		0% [2]	n/a
Qualified SR & ED in Canada [4], [5]	Qualifying Canadian-Controlled Private Corporations (CCPCs) [3]	35% of annual expenditures up to threshold ($3 million [3] or less) + 20% of qualified expenditures not eligible for the 35% rate (i.e., in excess of the expenditure limit)	100% of ITCs on current expenditures computed at the 35% rate + 40% of ITCs on capital expenditures computed at the 35% rate and of ITCs computed at the 20% rate
	Other corporations	20%	n/a
	Individuals		40% of ITCs

[1] Prescribed offshore regions include offshore areas adjacent to the coasts of Newfoundland and Labrador, Prince Edward Island, Nova Scotia, New Brunswick and the Gaspé Peninsula. Qualified property generally includes new buildings and machinery and equipment to be used primarily in Canada in manufacturing or processing, mining, oil and gas, logging, farming or fishing.

The ITC rate is 15% (instead of 10%) for eligible property that was:

• acquired before 1995; or
• under construction by the taxpayer before February 22, 1994.

[2] The Yukon and Northwest Territories, and parts of each of the provinces have been designated as RDIA regions at different times under the Regional Development Incentives Act. Certified property includes new structures and machinery and equipment used primarily in manufacturing and processing.

A 30% rate applies to eligible property that was under construction by the taxpayer before February 22, 1994. In all other cases, the credit has been eliminated for property acquired after 1994.

[3] CCPCs will generally claim the 35% ITC for current scientific research expenditures before capital expenditures because only current expenditures qualify for the 100% refund.

Generally, a CCPC's $3 million* expenditure limit in respect of the 35% credit is reduced by:

• $10 for every $1 by which the previous year's taxable income of the associated group exceeded $400,000*, up to $700,000*; and
• $0.075** for every $1 of the previous year's taxable capital of the associated group employed in Canada above $10 million*, up to $50 million*.

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

		Expenditure limit	Taxable income thresholds		Taxable capital thresholds
			Phase-out starts (i)	Phase-out ends	Phase-out starts	Phase-out ends
Taxation years ending	before 2003	$2 million	$200,000	$400,000	$10 million	$15 million
	after 2002		$300,000	$500,000
	after 2006		$400,000	$600,000
	after February 25, 2008 (ii)	$3 million		$700,000		$50 million

** $0.40 for taxation years ending before February 26, 2008 (transitional rules apply to taxation years that include February 26, 2008).

Non-refundable credits can be applied against federal taxes payable:

• in the current year; or
• in the previous three years and the next twenty (ten years for ITCs earned before 1998 taxation years).

[4] Expenditures incurred before February 23, 2005, on SR&ED performed within the 12-nautical-mile territorial sea were eligible for the SR&ED incentives. After February 22, 2005, expenditures on SR&ED performed in Canada’s Exclusive Economic Zone (an area within 200 nautical miles of the Canadian coastline) will qualify for the SR&ED investment tax credit.

[5] The SR&ED ITC is extended to permissible salary or wages incurred by a taxpayer in respect of SR&ED carried on outside Canada after February 25, 2008. Permissible salary or wages:

• must be incurred in respect of Canadian-resident employees carrying on SR&ED activities outside Canada and the activities must be directly undertaken, and performed solely in support of SR&ED carried on, by the taxpayer in Canada; and
• exclude remuneration based on profits, bonus, salary or wages subject to an income or profits tax imposed by a foreign country.

Permissible salary or wages will be limited to 10% of the total salary and wages directly attributable to SR&ED carried on in Canada by the taxpayer. For the first taxation year ending after February 25, 2008, the 10% limit will be pro-rated based on the number of days in the taxation year that are after February 25, 2008.

PricewaterhouseCoopers CommentsAmong the major industrialized countries, Canada offers one of the most favourable packages of R&D tax incentives. Federal ITCs are available to corporations that conduct qualified scientific research and experimental development (SR&ED) anywhere in Canada and most current and certain capital expenditures on account of SR&ED are deductible for federal tax purposes.

In addition to federal incentives, corporations carrying on SR&ED may also benefit from provincial or territorial tax credits discussed in 2008 Provincial and territorial R&D tax credits. 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 ITCs.