Tax Insights: SR&ED updates ─ Enhanced credits, expanded eligibility and emerging opportunities

In brief

What happened?

On August 15, 2025, the Department of Finance released draft legislative proposals to implement various tax and other measures and technical amendments, many of which were previously announced. The proposals include the federal 2024 Fall Economic Statement proposals that significantly enhance the Scientific Research and Experimental Development (SR&ED) tax incentive program by:

• for taxation years that begin after December 15, 2024:
  • increasing the amount of SR&ED expenditures that could be eligible for the enhanced 35% refundable SR&ED investment tax credit (ITC)
  • expanding access to the enhanced 35% refundable SR&ED ITC to more companies, including certain Canadian public corporations
• for property acquired after December 15, 2024, restoring eligibility for capital expenditures

The Department of Finance has requested that interested parties provide feedback on these proposals by September 12, 2025.

Why is it relevant?

These are the most significant SR&ED program changes in over a decade and are designed to make the incentives more accessible and to encourage innovation among Canadian businesses.

Actions to consider

Canadian businesses should promptly review their eligibility for SR&ED incentives and ITC refundability based on these new proposals.

In detail

The proposed enhancements to the SR&ED program

Overview of the proposals

The key enhancements to the SR&ED tax incentive program, which are designed to expand access and increase benefits, are effective for taxation years beginning after December 15, 2024. The key enhancements are as follows:

• Higher expenditure limit – The annual expenditure limit under which a Canadian-controlled private corporation (CCPC) can earn the enhanced 35% refundable SR&ED ITC will increase from $3 million to $4.5 million. As a result, a qualifying CCPC can now claim up to $1.575 million annually in refundable ITCs, up from $1.050 million. For CCPCs, the prior year taxable capital thresholds (on an associated basis) at which the annual expenditure limit begins to be reduced will increase from $10 million and $50 million, to $15 million and $75 million, respectively. This change will allow more mid-sized companies to access the enhanced 35% refundable ITC.
• Expanded eligibility – Eligibility for the enhanced 35% refundable ITC will be extended to “eligible Canadian public corporations” (ECPCs); see below for more information.
• New gross revenue expenditure limit structure – For:
  • ECPCs, the annual expenditure limit will be gradually reduced if the ECPC’s average gross revenue (on a consolidated basis) over the three preceding years exceeds $15 million. The limit is fully eliminated when it reaches $75 million.
  • CCPCs, a new gross revenue structure will be available, with an option for a CCPC to elect to use this structure (instead of using the taxable capital structure). This will allow each CCPC to choose the approach that provides the most beneficial expenditure limit.
• Restored eligibility of capital expenditures – The eligibility of capital expenditures for the SR&ED tax incentive program has been restored, effective for capital property acquired after December 15, 2024.

What is an “eligible Canadian public corporation” (ECPC)?

An ECPC must, throughout the taxation year:

• be resident in Canada
• have a class of shares listed on a designated stock exchange (or have elected or been designated by the Minister of National Revenue to be a public corporation)
• not be controlled, directly or indirectly in any manner whatever, by one or more non‑resident persons

Canadian‑resident corporations, all or substantially all the shares of which are owned by one or more ECPCs, would also be eligible for the refundable ITC.

How does the gross revenue phase-out structure work?

An ECPC will be eligible for the enhanced 35% ITC rate on up to $4.5 million of qualifying SR&ED expenditures annually. Access to the $4.5 million expenditure limit for any given tax year will be phased out based on a corporation's gross revenue. Specifically, the expenditure limit will be reduced on a straight-line basis when the corporation's average gross revenue over the three preceding years is between $15 million and $75 million.

For a corporation that is a member of a corporate group that prepares consolidated financial statements, gross revenue will be the amount reported in the group’s annual financial statements that are presented to shareholders at the highest level of consolidation. Members of a corporate group for financial reporting purposes will be required to share access to the enhanced SR&ED ITC's expenditure limit.

For a corporation that is not a member of such a corporate group, gross revenue will be the amount reported in the corporation's annual financial statements, prepared in accordance with generally accepted accounting principles, that are presented to shareholders.

How do CCPCs elect to use the gross revenue phase-out structure?

Instead of determining eligibility for the enhanced SR&ED ITC based on taxable capital, a CCPC will have the option to elect to have its expenditure limit for the enhanced SR&ED ITC determined based on the same gross revenue phase‑out structure proposed for an ECPC.

What are the SR&ED capital expenditure rules?

The federal 2024 Fall Economic Statement proposed to restore the eligibility of capital expenditures for both the deduction against income and ITC components of the SR&ED program. The rules will generally be the same as those that existed before 2014. This change will apply to:

• property acquired after December 15, 2024, and
• in the case of lease costs, amounts that first become payable after December 15, 2024

For the purposes of immediate expensing under the SR&ED program, eligible capital expenditures will be those incurred to acquire new or used depreciable property that the claimant intends to either:

• use all or substantially all (i.e. 90% or more) of the operating time in its expected useful life in the performance of SR&ED in Canada
• consume all or substantially all of its value in the performance of SR&ED in Canada

The property will be eligible for expensing once it becomes available for use. Depreciable property that has been used in any manner before its use in the SR&ED program will qualify for the immediate income deduction but will not qualify for any SR&ED ITCs.

For qualifying CCPCs with access to the SR&ED program's enhanced 35% ITCs, credits earned on capital expenditures will be eligible for partial refundability at a rate of up to 40%, unlike credits earned on current expenditures, which are fully refundable up to a CCPC's expenditure limit.

If a taxpayer sells, or converts the use of, SR&ED capital property, recapture rules, which are designed to recover previously claimed tax benefits, will apply. These rules will affect both the capital cost allowance claimed and unclaimed SR&ED capital expenditures, as well as the SR&ED ITC.

Overview of federal SR&ED ITC and refund rates

The table below provides an overview of the federal SR&ED ITC and refund rates and the enhanced measures announced in the federal 2024 Fall Economic Statement.

1. Unused federal ITCs may reduce federal taxes payable for the previous three taxation years and be carried forward twenty years.
2. Generally, a CCPC’s $3 million expenditure limit in respect of the 35% credit is reduced by $0.075 for every $1 of its previous year’s taxable capital employed in Canada above $10 million, up to $50 million. The threshold is on an associated basis.
3. Generally, a CCPC’s or ECPC’s $4.5 million expenditure limit in respect of the 35% credit is reduced by $0.075 for every $1 of:
   ●  for a CCPC, its previous year’s taxable capital employed in Canada above $15 million, up to $75 million, or if the CCPC elects, its average gross revenue (on a consolidated basis) over the three preceding years that exceed $15 million, up to $75 million
   ●  for an ECPC, its average gross revenue (on a consolidated basis) over the three preceding years that exceed $15 million, up to $75 million
4. Federal changes provide that new capital property acquired generally after December 15, 2024 is eligible for ITCs.
5. The SR&ED ITC is also available for certain salaries or wages incurred in respect of SR&ED carried on outside Canada (limited to 10% of salaries and wages directly attributable to SR&ED carried on in Canada).

The takeaway

The proposed SR&ED enhancements aim to boost Canada’s innovation by improving cash flow for companies focused on research and development. Businesses that incur SR&ED expenditures should start updating their strategy, because these new rules will affect 2025 SR&ED claims and may expand their eligibility for and/or increase their refundable SR&ED ITCs.