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.
Changes to the federal investment tax credit (ITC) program (apply starting 2013 or 2014)
- reduce the 20% scientific and research expenditures (SR&ED) ITC rate to 15% for taxation years ending after 2013 (pro-rated for taxation years straddling January 1, 2014);
- provide that capital property acquired (including shared use and leased capital property), generally after 2013, is neither deductible as an SR&ED expenditure nor eligible for ITCs;
- reduce the overhead proxy rate (used to calculate SR&ED overhead expenses as a percentage of eligible salary and wages) from 65% to 60% after December 31, 2012, and to 55% after December 31, 2013 (pro-rated for taxation years that straddle these dates); and
- provide that 80% (reduced from 100%) of SR&ED contract payments (net of SR&ED capital expenditures) to an arm's length contractor incurred after 2012 will be eligible for ITCs.
See our Developments " Legislative proposals confirm SR&ED changes."
Atlantic Investment Tax Credit changes
- gradually eliminated for certain oil and gas and mining activities (see footnote 5).
This summary of ITCs 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.
|Investment tax credit (ITC) rate||Refund rate|
|Qualified SR&ED in Canada 3||Qualifying Canadian-controlled private corporations (CCPCs) 2||35% of annual qualified expenditures up to
threshold ($3 million 1 or less)
+ 20% of qualified expenditures not eligible for the 35% rate (i.e., in excess of the expenditure limit)
|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
|Individuals||40% of ITCs|
|Qualified property in Atlantic provinces, Gaspé region and prescribed offshore regions 4, 5||Qualifying CCPCs 2||10% 5||40% of ITCs|
|Individuals||40% of ITCs|
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.
For more information, see Developments, Scientific Research and Experimental Development (SR&ED) Work Outside Canada.
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, logging, farming or fishing, and until March 28, 2012, mining, oil and gas (see footnote 5).
5. Generally for assets acquired after March 28, 2012, the Atlantic Investment Tax Credit (AITC) is reduced (subject to possible transitional relief) for certain oil and gas and mining activities, from 10% to 5% in 2014 and 2015 and nil after 2015.
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 SR&ED anywhere in Canada and most current and certain capital expenditures on account of SR&ED are deductible for federal tax purposes. However, as mentioned above, changes will reduce the benefits that are available under the SR&ED program, commencing 2013 or 2014.
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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.