SR&ED Tax Clips: Federal SR&ED investment tax credits enhanced (April 3, 2008)

The 2008 federal budget enhances the scientific research and experimental development (SR&ED) tax incentive program by:

  • increasing the parameters used to determine the enhanced SR&ED investment tax credits (ITCs) available to Canadian-controlled private corporations;
  • extending the SR&ED ITC to certain salary or wages incurred in respect of SR&ED carried on outside Canada; and
  • improving the administration of the program.

Additional recently announced enhancements extend the carry-forward period for unused SR&ED ITCs earned in the 1998 to 2005 taxation years from 10 years to 20.

To enhance the scientific research and experimental development (SR&ED) tax incentive program, the federal government will:

  1. increase the annual expenditure limit and the taxable income and capital phase-out ranges used to determine the enhanced SR&ED investment tax credits (ITCs) available to Canadian-controlled private corporations (CCPCs);
  2. extend the carryforward period for unused SR&ED ITCs earned in the 1998 to 2005 taxation years from 10 years to 20;
  3. extend the SR&ED ITC to certain salary or wages incurred in respect of SR&ED carried on outside Canada; and
  4. improve the administration of the SR&ED program.

Items i and iii (see above) are included in Bill C-50, Budget Implementation Act, 2008(1) , which received first reading in the House of Commons on March 14, 2008.

Enhanced SR&ED ITCs for CCPCs
For taxation years ending after February 25, 2008, the parameters used to determine the enhanced SR&ED ITCs available to CCPCs increased as follows:

Taxation years ending
before February 26, 2008
after February 25, 2008*
Annual expenditure limit
$2 million
$3 million
Phase-out range
Taxable income
$400,000 to $600,000
$400,000 to $700,000
Taxable capital
$10 million to $15 million
$10 million to $50 million
* To determine the expenditure limit for a straddle taxation year, separate calculations with the old and new phase out ranges are required.

The rules that apply to qualified SR&ED in Canada as a result of these changes are outlined below.

ITC rate
Refund rate
Qualifying CCPCs 35% of annual expenditures
up to threshold ($3 million* or less)

+ 20% of qualified expenditures not eligible for the 35% rate

 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
* Generally, a CCPC’s $3 million expenditure limit in respect of the 35% credit is reduced by:
  • $10 for every $1 by which its previous year’s taxable income exceeded $400,000, up to $700,000; and
  • $0.075 for every $1 of its previous year’s taxable capital employed in Canada above $10 million, up to $50 million.
Thresholds are on an associated basis.

The table below illustrates the maximum refundable ITCs that can be earned by a CCPC with a $3 million expenditure limit for taxation years ending after February 25, 2008.

Taxable income*
$400,000
$500,000
$600,000
$700,000
Taxable capital*
$10 million
$1,050,000
$700,000
$350,000
Nil
$20 million
$787,500
$525,000
$262,500
$30 million
$525,000
$350,000
$175,000
$40 million
$262,500
$175,000
$87,500
$50 million
Nil
* Previous year’s taxable capital and/or taxable income on an associated basis.

Unused SR&ED ITC carryforward period
The federal government proposes to extend the carryforward period for unused ITCs earned in the 1998 to 2005 taxation years by corporations as well as by individuals, to 20 years from 10. The carryforward period previously had been extended from 10 years to 20 for SR&ED ITCs incurred or earned in taxation years ending after 2005.

SR&ED carried on outside Canada
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
  • will not include 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.

Administrative improvements
  • The Canada Revenue Agency (CRA) will implement a plan to improve the administration of the SR&ED program. The plan includes:
  • introducing a new SR&ED claim form and guide and an eligibility self-assessment tool;
  • reviewing the program’s policies and procedures to ensure they are aligned with current business practices and applied in a consistent manner across the country;
  • increasing the CRA’s scientific capacity and improving its services to claimants by hiring and training SR&ED technical reviewers;
  • enhancing the quality assurance methodology at the national and local levels, including real-time review of claim decisions; and
  • reviewing dispute resolution procedures to ensure their effectiveness.

PricewaterhouseCoopers Comments
The federal SR&ED enhancements are intended to create a competitive business environment that supports innovation by helping Canadian businesses that incur SR&ED expenditures in and outside Canada, especially small- and medium-sized companies that may benefit from higher refundable SR&ED ITCs and a improved administrative process.

(1) The full title is: An Act to implement certain provisions of the budget tabled in Parliament on February 26, 2008 and to enact provisions to preserve the fiscal plan set out in that budget.