SR&ED Tax clip: 2013 Provincial and territorial R&D tax credits (June 20, 2013)

Canada offers one of the most favourable packages of R&D tax incentives among the major industrialized countries. In addition to the federal incentives, taxpayers carrying on R&D can 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 can also claim the credits. Credits can be fully claimed against a taxpayer's provincial or territorial income tax.

2012-2013 provincial and territorial R&D tax credit changes

  • Alberta — retroactive to January 1, 2009, changes:
    • recalculate the scientific research and experimental development (SR&ED) 'grind' (i.e. the deduction of the federal SR&ED tax credit when calculating Alberta’s SR&ED tax credit) to address a technical deficiency that, in some cases, caused an incorrect calculation of the grind, for taxation years ending before April 1, 2012
    • introduce two anti-avoidance rules that apply if the timing of the federal SR&ED grind elimination creates an opportunity to avoid the application of the grind
    • parallel Alberta’s proxy amount to the federal proxy amount, which declines from 65% to 60% for 2013 and to 55% after 2013
    • allow Alberta eligible expenditures to include amounts transferred to the claimant under an agreement filed for federal income tax purposes
    • extend the deadline for filing prescribed SR&ED forms to 15 months (from 12) after the due date for a corporation’s income tax return

See our DevelopmentsAlberta’s SR&ED changes clarified.'

  • Manitoba
    • Manitoba's credit will parallel the changes to the federal SR&ED Tax Credit that reduce:
      • the prescribed proxy amount from 65% to 60% in 2013 and to 55% in 2014
      • the amount of contract payments incurred after 2012 that are claimable (other than payments to eligible Manitoba institutes) from 100% to 80%
    • Manitoba will not adopt federal changes that remove capital expenditures from the investment tax credit base.
    • Technical amendments will ensure Manitoba's credit operates as intended.
  • Quebec — Changes:
    • increase the R&D wage tax credit base rate from 17.5% to 27.5% for eligible biopharmaceutical corporations in Quebec that incur R&D expenditures after November 20, 2012, and before January 1, 2018 (see footnote 11)
    • include in income any Quebec R&D tax credits received after November 20, 2012, that relate to R&D expenditures incurred for taxation years starting after November 20, 2012 (see footnote 15)
  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 [5]

Manitoba

Mar. 8/2005 n/a 20% Yes/No [4]
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 (OITC) Tax years ending  May 4/1999 [6] n/a 10% [6] Yes n/a
Business research institute tax credit (OBRI) May 6/1997 20% [7]
R&D tax credit
(ORDTC) [8]
Tax years ending Dec. 31/2008 4.5% No 3 yrs
[8]
20 yrs

Prince Edward Island

No provincial R&D tax incentives

Quebec

R&D wage tax credit [15] April 21/2005 n/a 17.5% or 37.5% [10] [11] Yes n/a
June 12/2003 April 22, 2005 17.5% or 35% [10]
Tax years beginning
May 9/1996 [9]
June 13/2003 20% or 40%
[10] [12]
University, public research centre and research consortium tax credit [14] [15] June 12/2003 n/a 35%  [13]
April 30/1987 June 13/2003 40%  [13]
Tax credit on dues and fees paid to a research consortium [14] May 14/1992 June 13/2003 40%
Private partnership tax credit [14] [15] March 23/2006 n/a 35%
Pre-competitive tax
credit [14]
June 12/2003 March 24/2006 35%
Jan. 1/1997 June 13/2003 40%

Saskatchewan

Corporations in general March 31/2012 n/a 15% No 3 yrs 10 yrs
March 18/2009 April 1/2012
Qualifying CCPCs n/a Yes [16] n/a
All corporations March 19/1998 March 19/2009 No 3 yrs 10 yrs

Yukon

June 30/2000 or Dec. 31/2000 [17] n/a 15%  [18] Yes n/a

[1] Alberta's credit equals 10% of eligible SR&ED expenditures to a maximum expenditure level of $4 million (maximum credit is $400,000). For taxation years ending after March 31, 2012, taxpayers will no longer be required to deduct the federal SR&ED investment tax credit when calculating Alberta's SR&ED refundable tax credit. For related technical changes, see our Developments ‘Alberta’s SR&ED changes clarified.

[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:

  1. eligible British Columbia R&D expenditures, and
  2. the federal R&D expenditure limit (i.e. $3 million or less for taxation years ending after February 25, 2008).

[4] Manitoba's 20% credit is:

  • fully refundable for eligible expenditures incurred after 2009 by a corporation with a permanent establishment in Manitoba that carries on research and development in Manitoba under an eligible contract with a qualifying research institute
  • partially refundable (25% in 2011 and 50% after 2011) for in-house R&D expenditures

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

[6] Ontario corporations qualify for the refundable tax credit on qualified expenditures incurred up to the expenditure limit ($3 million or less) that 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 $500,000 and $800,000

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

The OITC was originally available to Canadian-controlled private corporations 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.

The following table provides a history of the expenditure limit and taxable income thresholds discussed above.

    Expenditure limit Taxable income thresholds Maximum annual credit
Phase-out starts (i) Phase-out ends
Taxation years ending before 2003 $2 million $200,000 $400,000 $200,000
after 2002 $300,000 $500,000
after 2006 $400,000 $600,000
after February 25, 2008 (ii) $3 million $700,000 $300,000
generally, after 2009 (iii) $500,000 $800,000
  • (i) The taxable income thresholds have increased as a result of increases in the federal small business limit.
  • (ii) To determine the expenditure limit for a taxation year that includes February 26, 2008, separate calculations with the old and new phase-out ranges are required.
  • (iii) The thresholds apply to a taxation year only if the previous taxation year ends after 2008.

[7] Ontario's credit is calculated as 20% of qualifying payments (up to $20 million annually on an associated basis) to Ontario eligible research institutes. The maximum annual credit is $4 million.

[8] For taxation years ending after 2008, the R&D tax credit replaces Ontario's deduction for the portion of the federal investment tax credit relating to qualifying Ontario R&D expenditures. The credit can be carried back only to taxation years ending after 2008.

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

[10] 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 is 17.5% for all other taxpayers (except in certain cases, the rate is 27.5% for biopharmaceutical corporations — see footnote 11). 50% of payments to arm's length subcontractors are eligible for the credit. All thresholds are in respect of the previous year, on a worldwide associated basis.

The following table provides a history of the spending limit and asset thresholds discussed above.

  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)

(i) For taxation years that include March 13, 2008, the $3 million spending limit is pro-rated based on the number of days in the taxation year after March 13, 2008.

In addition, the 37.5% rate was 35% for R&D expenditures incurred before April 22, 2005. For expenditures incurred before June 13, 2003, the 35% rate was 40% and the 17.5% rate was 20%.

[11] Quebec's November 20, 2012 budget increases the R&D wage tax credit base rate from 17.5% to 27.5% for eligible biopharmaceutical corporations in Quebec that incur R&D expenditures after November 20, 2012, and before January 1, 2018 (i.e. the credit rate will be 27.5% to 37.5%, instead of 17.5% to 37.5% — see footnote 10).

[12] Corporations that qualified for Quebec's R&D wage tax credit at the 40% rate (i.e. Canadian-controlled corporations 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 until taxation years beginning before July 1, 2004, but its expiry was accelerated to taxation years beginning after June 12, 2003.

[13] In some cases, 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).

[14] The Quebec tax credit for:

  • dues and fees paid to a research consortium is part of the tax credit for university, public research centre and research consortium after June 12, 2003
  • pre-competitive research is replaced by the private partnerships tax credit after March 23, 2006

[15] Quebec's November 20, 2012 budget includes in the taxpayer's income, Quebec R&D refundable tax credits received by the taxpayer after November 20, 2012, that relate to R&D expenditures incurred for taxation years starting after November 20, 2012.

[16] For R&D expenditures incurred after March 31, 2012, Saskatchewan's 15% tax credit is refundable only for Canadian-controlled private corporations (CCPCs) and only on qualifying expenditures incurred up to the federal R&D expenditure limit (i.e. $3 million or less) annually.

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

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

PwC 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 SR&ED in the particular jurisdiction.

In addition to provincial and territorial incentives, corporations carrying on SR&ED can also benefit from federal tax credits discussed in Federal investment tax credits for R&D and property: 2011 - 2013. For federal tax purposes, most current expenditures and before 2014, 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.