Scientific Research and Experimental Development: 2008 Federal Budget Enhancements

Canadian businesses that conduct scientific research and experimental development (SR&ED) in an effort to discover new, improved, or technologically advanced products or processes will have increased access to Investment Tax Credits (ITCs). The SR&ED incentives provided by the federal and provincial governments are considered among the best in the world. These were further enhanced by changes in the 2008 Federal Budget.

Corporations earn ITCs on qualified SR&ED expenditures at the rate of 35% or 20%. The maximum expenditure limit for the 35% ITC, which is available to Canadian Controlled Private Corporations (CCPCs), was increased to $3 million from $2 million as of February 26, 2008. The $3 million expenditure limit is phased-out when the prior year's taxable income (including taxable income of associated companies) exceeds $400,000, or when taxable capital (also computed on an associated company basis) exceeds $10 million. It is reduced by $10 for every dollar of taxable income and by $0.075 for every dollar of taxable capital employed in Canada (TCEC) above the thresholds.

Based on the Budget changes, the extra 15% credit is eliminated at taxable income of $700,000 and TCEC of $50 million. Prior to the Budget, the thresholds were $600,000 and $15 million respectively.

CCPCs that qualify for the 35% ITC are eligible to receive a 100% refund of the credits earned on current SR&ED expenditures in excess of the amount used to reduce tax otherwise payable.

The following table illustrates the maximum refundable ITCs available to a CCPC for taxation years ending after February 25, 2008. The table assumes an SR&ED current expenditure of $3 million and a refundable ITC rate of 35%.

The taxable capital and taxable income figures in the table relate to the prior taxation year of all associated corporations. For taxation years that straddle the Budget date, the expenditure limit increase and the taxable income and taxable capital phase out limits will be pro-rated based on the number of days in the taxation year that are after February 25, 2008.

Both Quebec and Ontario have followed the federal increase to the expenditure limit.

In addition to the enhanced ITCs for CCPCs, the budget announced the following:

• The ITC carry forward period was increased from 10 years to 20 years for unused ITCs earned in the 1998 to 2005 taxation years.
• Qualified expenditures will include certain salaries or wages incurred in respect of SR&ED carried on outside of Canada after February 25, 2008. The expenditures are limited to 10% of salaries attributable to SR&ED carried on in Canada. The 10% limit is pro-rated for the number of days in the taxation year after February 25, 2008.
• There are new improvements to the administration of the SR&ED incentive program, including the simplification of the SR&ED claim form.

Contact your Collins Barrow advisor to help determine if your Scientific Research & Experimental Development might qualify for these newly enhanced incentives.

Abe Zylberlicht is a Tax Partner in the Montreal office of Collins Barrow.