SR&ED Tax Clips: Federal R&D tax credits: 1998 – 2010 (July 15, 2010)

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

This summary of federal R&D investment tax credits (ITC) and refund rates applies to expenditures incurred after December 31, 1997. 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.

See chart 1 (Summary table)

[1] 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 $500,000*, up to $800,000*; 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*.

*Increases to the expenditure limit and taxable income and taxable capital thresholds follow:

See chart 2

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

[2] The SR&ED ITC can be claimed on expenditures incurred:

• before February 23, 2005, on SR&ED performed within the 12-nautical-mile territorial sea; and
• after February 22, 2005, on SR&ED performed in Canada’s Exclusive Economic Zone (an area within 200 nautical miles of the Canadian coastline).

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.

For more information, see Developments - Scientific Research and Experimental Development (SR&ED) Work Outside Canada.

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 2010 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.