Federal SR&ED update
The SR&ED tax credit program was implemented 35 years ago in an effort to keep Canadian businesses competitive and growing. Since then, there have been numerous legislative changes and tweaks. Here’s a look at SR&ED in 2020 and beyond, and what the recent modifications could mean for your business.
Before Bill C-97
Expenditures are generally deductible in the year they are incurred and eligible for an investment tax credit (ITC). This credit is larger and refundable for corporations that are Canadian-controlled private corporations (CCPCs) for the first $3 million in qualifying expenditures. However, the amount eligible for the enhanced credit was reduced once a CCPC’s taxable income for the previous year reached $500,000 (before being eliminated at $800,000) and once a CCPC’s taxable capital employed in Canada reaches $10 million (before being eliminated at $50 million).
After Bill C-97 – more companies get the higher refundable rate!
As part of the 2019 federal budget, Bill C-97 received royal assent on June 21, 2019 and became law. It has eliminated the use of taxable income as a factor in determining a CCPC’s annual expenditure limit for the purpose of the enhanced Scientific Research and Experimental Development (SR&ED) tax credit. As a result, small CCPCs with taxable capital of up to $10 million will benefit from unreduced access to the enhanced 35 per cent refundable SR&ED investment tax credit regardless of their taxable income. As a CCPC’s taxable capital begins to exceed $10 million, this access will gradually be reduced.
Alberta SR&ED credit update
The Alberta 10 per cent SR&ED credit is administered by the Alberta Ministry of Finance and Enterprise and is a lucrative credit to its refundable nature on up to $4 million in eligible expenditures of a qualified corporation, for a maximum credit of $400,000.
However, in October 2019, Alberta’s United Conservative Party, under the leadership of Premier Jason Kenney, tabled its first budget since the party took leadership of the province in April and dramatic changes were set to occur. The 2019 provincial budget slashed several provincially funded tech and innovation programs. A day ahead of tabling the budget, Kenney indicated it would be a “challenging” budget, with Alberta’s Minister of Finance Travis Toews signalling that it would “set a new direction” for the province. The government’s budget outlines $1.3 billion in cuts, with the province cutting operating spending by 2.8 per cent over the coming years. The overall goal of the budget is to eliminate Alberta’s $8.7 billion deficit by 2022-2023.
The Kenney provincial budget put an emphasis on its desire to make Alberta into a competitive environment for businesses and investments, both foreign and domestic. According to the government, its plans to reduce the corporate income tax rate will make Alberta among the most attractive investment destinations in North America by 2022, explaining that Alberta’s corporate tax rate will be 30 per cent lower than any Canadian province and that Alberta will have a lower combined federal-provincial corporate tax rate than 44 U.S. states.
However, even with the plan for reduction in corporate taxes, the budget proposed cutting five business tax credit programs starting in 2020, including the lucrative provincially refundable SR&ED tax credit which tacked on an added 10 per cent rate to the federal government’s SR&ED program. Other changes include the elimination of the well-regarded Alberta Investor Tax Credit (AITC), which could hurt the tech and innovation sector for bringing in much-needed venture capital. This tax credit granted a 30 per cent rebate on the amount of equity capital invested in an eligible Alberta small business working in the research, development or commercialization of new technology. Further eliminations included the Capital Investment Tax Credit (a program providing businesses in certain sectors with a tax credit of up to $5 million), the Community Economic Development Corporation Tax Credit and the Interactive Digital Media Tax Credit.
The budget claimed that eliminating these five tax credits would reduce Alberta’s tax expenditures by over $400 million by 2022-2023.