There has been a lot written about the 2019 federal budget. This article aims to go further on the impact of the proposed changes to the SR&ED tax credit, who benefits the most, the reasoning behind the changes, and our thoughts.
SR&ED Before the Proposed Changes
Prior to the budget announcement, CCPCs (Canadian Controlled Private Corporations) could earn a fully refundable enhanced federal rate of 35% of up to $3 million in eligible R&D expenditures. However, the expenditure limit of $3 million was gradually reduced, and sometimes fully eliminated, if your company met any of the following criteria:
- Taxable income in the previous fiscal year is greater than $500,000 with it being fully eliminated at $800,000
- Taxable capital employed in Canada in previous fiscal year is over $10 million with it being fully eliminated at $50 million
Simplified, if your last year’s taxable income was greater than $500,000 or your taxable capital was greater than $10 million then your $3 million R&D expenditure limit began to reduce. When your income was over $800,000 or taxable capital great than $50 million then it disappeared.
Consequently, any eligible expenditures in excess of a CCPC’s limit would simply qualify for the basic 15% federal rate that all other corporations (i.e. public or foreign-controlled corporations) are entitled to with only 40% of it being still refundable.
SR&ED After the Proposed Changes
Effective for taxation years ending on or after March 19th, taxable income will no longer be used to determine a CCPC’s expenditure limit. Taxable capital employed in Canada, on the other hand, will continue to be used to determine one’s expenditure limit using the same nominal boundaries as before, $10 million to $50 million.
As well, any excess amount above a CCPCs expenditure limit will still be treated with the standard federal rate of 15% with 40% still being refundable as opposed to 0% refundable for non-CCPCs.
What This Means for SR&ED Claimants
The major beneficiary of this federal measure will not be early-stage startups who are still trying to find product-market fit. Nor will capital intensive businesses in sectors like energy, telecom, transportation, etc. benefit. Rather, profitable scale-ups in the information technology and biotechnology industries will see material changes to their SR&ED claim. This tactical approach follows the recommendations of several think tanks that Canada needs to do a better job backing scale-up winners.
Our Thoughts on the Changes
We feel that the modification to the program is a good one as: 1) it simplifies the government program (almost always a good thing) and 2) will help profitable scale-ups grow faster. As a refresher, Peter Misek, Founding Partner of Framework Ventures, explains Canada’s struggle in supporting scale-up companies:
Source: BNN Bloomberg
Knowing that scale-ups disproportionately create half of all new jobs in Canada, this expansion to the SR&ED program could be part of the solution.
Having said that, we feel that better guidance on the core admissibility tests, particularly in information technology and collaborative development, could benefit both CRA and claimants.
How R&D Partners Can Help
If you are claiming the SR&ED tax credit and have questions or comments about your claim, please do not hesitate to contact Mike Lee, President of R&D Partners at 1-800-500-7733 for more information.