SR&ED Tax clips: Federal investment tax credits for R&D and property: 2011 (October 14, 2011)

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 maximize their potential R&D tax incentives, a summary of the rules for federal tax credits follows. Investment tax credits for property are also included.

This summary of federal investment tax credits (ITC) and refund rates applies to expenditures incurred after December 31, 2010. For R&D ITCs before 2011, see Federal R&D tax credits: 1998 - 2010. ITCs are not earned until the property is "available for use" and can be fully claimed against a taxpayer's federal tax. Unused ITCs can reduce federal taxes payable in the previous three years and the next twenty.

See chart (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.

[2] CCPCs will qualify for refundable tax credits if the previous year's taxable income of the associated group (before any loss carrybacks) does not exceed the CCPC's "qualifying income limit" for the year. A CCPC's $500,000 qualifying income limit is reduced by $0.0125 for every $1 of the previous year's taxable capital of the associated group employed in Canada above $10 million, up to $50 million.

[3] The SR&ED ITC can be claimed on qualified expenditures incurred 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 salary or wages incurred by a taxpayer in respect of SR&ED carried on outside Canada that is related to the taxpayer's business. 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.

The salary or wages incurred outside Canada is limited to 10% of the total salary and wages directly attributable to SR&ED carried on in Canada by the taxpayer.

[4] 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.

PwC 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 2012 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.