R&D Tax Incentive Rates Across Canada
Where R&D is conducted in Canada, the expenditures are deductible as a regular business expense, and also generate substantial tax credits. These tax credits can represent from 20% of the expenditure, to almost 50% in favourable circumstances. Often these credits are refundable (even if no taxes have been paid), and thus offer a critical source of funding for many companies.
The large variability in the tax credit rates noted above comes from a number of factors. In essence, these factors all relate to policy decisions by Federal and Provincial tax authorities to increase incentives for smaller, Canadian controlled companies. Provincial incentives generally reward companies for only the work performed within that province. Provincial incentives are available in all provinces except P.E.I., Nunavut and Alberta.
The rate at which a specific company earns tax credits is calculated based primarily on the following factors:
- Taxable income (in the prior fiscal year)
- Ownership (Canadian vs. Foreign, Public vs. Private)
- Location of the R&D within Canada
- Size (measured by the amount of capital employed)
Once the expenditures eligible for SR&ED tax credit are determined by Canada Revenue Agency reviewers, Provincial tax authorities generally accept these amounts. The product of the qualifying expenditures and the appropriate tax credit rate, governs the amount of the tax credit/refund. The mechanics of the process are a bit confusing at first, but not difficult to understand. Numerous rules have evolved over the long history of the program, and the various provinces provide credits in different manners. A summary of the credits for expenditures made in a province is given in the table presented below.
Starting first with the federal credits, they are earned at a rate of either 20% or 35% of the expenditures. The rate depends on the company’s prior year’s corporate group’s taxable income, and whether it is a Canadian controlled private corporation (CCPC) or not.
The federal tax credit rates can be summarized as follows:
| Company Status | Tax Credit Rate |
| CCPC, taxable income < $500,000 | 35%Z |
| Others | 20% |
A CCPC may earn a 35% tax credit on the first $2 million of expenditures, and 20% beyond this amount. Eligibility for the 35% rate in a given year is determined by the prior year taxable income. If a CCPC earns between $300,000 and $500,000, the $2 million expenditure limit is gradually reduced. Companies or associated company groups with taxable capital in excess of $15 million are not eligible for the 35% rate. Non-CCPC’s include any public companies, foreign owned ones, partnerships, and individual taxpayers.
Based on the detailed breakdown of costs allowed by the Canada Revenue Agency at the federal level, the provinces then apply their tax credits. Some provinces apply a flat credit rate to all expenditures for all companies. Quebec distinguish between CCPC’s and other companies. Quebec provides a generous incentive, but primarily only on the labour component of SR&ED. Further differences between provinces occur in the treatment of capital expenditures, the refundability of credits, and whether the tax credit is considered government assistance (affecting the credit earned at the Federal level), etc.
The Strategy
Be aware of the large variations in SR&ED tax credit and refundability due to company size (net income), and the location of research activities within Canada. In the planning of your research consider possible changes in corporate structure and research locations. Minor changes in your business plans may well result in substantially larger credits.
| Province | Rate | Refundable? | Available To? |
| New Brunswick | 15% | Yes | All Corporations |
| Newfoundland | 15% | Yes | All Corporations |
| Nova Scotia | 15% | Yes | All Corporations |
| Prince Edward Island | 00% | No | Not Available |
| Ontario[1] | 10% | Yes | See Note 1 |
| Quebec [2] | 17.5% or 37.5% | Yes | See Note 2 |
| Saskatchewan | 15% | No | All Corporations |
| Manitoba | 20% | No | All Corporations |
| British Columbia[3] | 10% | Yes | Smaller Corporations |
| Yukon Territory | 00% | Yes | Not available |
| Nunavut | 00% | No | Not available |
| Northwest Territories | 00% | No | Not available |
- Ontario allows a deduction in arriving at taxable income for the amount of the federal investment tax credit included in income. Ontario applies its own limits and criteria in determining qualification for refundable tax credits. The Ontario credit is refundable to smaller corporations.
- Quebec credits apply to salaries and certain other expenses. The rate is 37.50% for smaller CCPC’s and 17.5% for non-CCPC’s and larger CCPC’s. Credits also apply to amounts paid to subcontractors performing R&D in Quebec, but at a reduced rate.
- BC has a sunset clause on its legislation. The program applies to expenditures made before September 1, 2009.
| Province | Small CCPC | Larger CCPC or non-CCPC | ||||
|---|---|---|---|---|---|---|
| Provincial credit | Federal credit [1] | Combined credit | Provincial credit | Federal credit [1] | Combined credit | |
| AB | 0% | 35.00% | 35.00% | 0% | 20% | 20% |
| BC | 10.00% | 35.00% | 41.50% | 10% | 18% | 28% |
| MB | 20.00% | 28.00% | 48.00% | 20% | 16% | 36% |
| NB | 15.00% | 29.75% | 44.75% | 15% | 17% | 32% |
| NL | 15.00% | 29.75% | 44.75% | 15% | 17% | 32% |
| NS | 15.00% | 29.75% | 44.75% | 15% | 17% | 32% |
| NU | 0% | 35.00% | 35.00% | 0% | 20.00% | 20.00% |
| ON [2] | 10.00% | 31.50% | 41.50% | 0% | 20% | 20% |
| PEI | 0% | 35.00% | 35.00% | 0% | 20% | 20% |
| PQ | 37.50% | 21.87% | 59.37% | 17.50% | 16.50% | 34% |
| SK | 15.00% | 29.75% | 44.75% | 15% | 17% | 32% |
- The eligible Federal expenditures are reduced by the Provincial tax credit receivable.
- Ontario extends refundable treatment to non-CCPCs subject to size tests. Smaller non -CCPCs receive 10% refundable provincial tax credits and 18% non-refundable federal tax credits for a combined credit of 28%.
