SR&ED Tax Clips: Federal R&D investment tax credits: 1996 — 2007

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 in taxation years ending before 2006).

		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]	Qualifying Canadian-Controlled Private Corporations (CCPCs) [3]	35% of annual expenditures up to threshold ($2 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

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

A CCPC's $2 million expenditure limit in respect of the 35% credit and cash refunds is reduced by:

• $10 for every $1 by which the previous year's taxable income of the associated group exceeded $400,000*, up to $600,000*; and
• $0.40 for every $1 of the previous year's taxable capital of the associated group employed in Canada above $10 million (up to $15 million).

* The taxable income thresholds have increased, as a result of the increase in the federal small business limit, as follows:

	Taxable Income Thresholds
Taxation years ending	Phase-out starts	Phase-out ends
before 2003	$200,000	$400,000
after 2002	$300,000	$500,000
after 2006	$400,000	$600,000

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 in taxation years ending before 2006).

[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 from the Canadian coastline) will qualify for the SR&ED investment tax credit.

PricewaterhouseCoopers Comments
Among 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 2007 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.