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:

1. Taxable income (in the prior fiscal year)
2. Ownership (Canadian vs. Foreign, Public vs. Private)
3. Location of the R&D within Canada
4. 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.

Alberta 00% No Not available

Table 1: Highlights of Provincial Tax Credit Rates

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 [1]]	10%	Yes	See Note 1 [2]
Quebec [2 [3]]	17.5% or 37.5%	Yes	See Note 2 [4]
Saskatchewan	15%	No	All Corporations
Manitoba	20%	No	All Corporations
British Columbia[3 [5]]	10%	Yes	Smaller Corporations
Yukon Territory	00%	Yes	Not available
Nunavut	00%	No	Not available
Northwest Territories	00%	No	Not available

1. 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.
2. 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.
3. BC has a sunset clause on its legislation. The program applies to expenditures made before September 1, 2009.

Table 2: Combined Provincial and Federal Tax Credits for $100 of R&D Expenditure

Province	Small CCPC			Larger CCPC or non-CCPC
	Provincial credit	Federal credit [1 [6]]	Combined credit	Provincial credit	Federal credit [1 [7]]	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 [8]]	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%

1. The eligible Federal expenditures are reduced by the Provincial tax credit receivable.
2. 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%.

Web Links

• Federal Web Site and Forms [9]

SR&ED recovery rates not impacted by loss carry backs

January 2001 Updated March 2006

The Income Tax Act allows a company that incurs losses, to apply those losses to retroactively decrease the taxable income that it reported in any of the three prior years. This provision can allow a company to claim a refund of some prior years’ tax payments.

The level of taxable income of a Canadian controlled private corporation (CCPC) that meets a certain size test, affects its tax credit rate. In the past, certain CCPCs were able to retroactively increase their federal SR&ED tax credit rates for a particular year from 20% to 35%, by carrying back subsequent years’ losses. Some of these companies received substantial additional refunds of investment tax credits by doing this. The ability to raise the investment tax credit rate by applying loss carry backs was blocked for taxation years ending after 1996.

Companies that are CCPCs are eligible for an additional 15% credit, over and above the standard 20% rate on some of their SR&ED expenditures, if they meet a certain size test, and if the total of their and all associated companies’ combined taxable incomes in their last taxation year of the preceding calendar year, is not $500,000 or more. When determining taxable income for the purpose of the rules, a taxpayer is to ignore “specified future tax consequences”. The definition of specified future tax consequences includes the effect of loss carry backs.

CCPCs that follow a regular policy of calculating their taxable income within 180 days of year end, and paying wage bonuses to shareholder managers within that same time period, to keep income below $300,000, will generally not be affected by these rules. However, companies that wait beyond 180 days may find that when they calculate taxable income, they are over the threshold amount, and that their rate for the following year will be reduced from 35% to 20%, on all or part of their expenditures.

The Strategy
Calculate taxable income within a short period following your year-end. If you have taxable income over $300,000 consider paying bonuses within 180 days of year-end to reduce it. Consider the amount of anticipated SR&ED expenditures in the following year in making such a decsion.