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Increased Value Through SR&ED Your Business

Tax Reform

Ryan Pernia of Entax


Background:

Under the SR&ED program (the Scientific Research and Experimental Development Tax Incentive Program), CCPC’s (Canadian-Controlled Private Corporations) are entitled to an enhanced federal investment tax credit (ITC) of 35 percent up to $3 Million of SR&ED expenditures incurred in the tax year versus a base SR&ED ITC rate of 15 percent. The expenditure limit was reduced based on two core factors (commonly referred to as the “grind down”):

·       Taxable Income:  ten dollars of the expenditure limit is lost for taxable income in the prior taxation year that exceeds $500,000. So, for companies (or associated group) where income exceeds $800,000, the expenditure limit is grinded down to zero and thus the SR&ED ITC rate drops to 15 percent.

·       Taxable Capital: The expenditure limit is also grinded down if the corporation (or associated group) Taxable Capital exceeds $10 million and is wholly eliminated at $50 million in the prior tax year.

The Change:

The Budget proposes to eliminate the taxable income threshold for accessing the enhanced 35 percent credit. This allows very profitable companies (or their associated groups) to benefit from the full 35 percent SR&ED ITC rate. This proposal is expected to apply for tax years ended on or after March 19, 2019.

$ Impact Example: 

A BC corporation with $800,000 of taxable income with $100,000 in Eligible SR&ED expenditures prior to this change would be eligible for a combined SR&ED ITC (both Federal and BC) of $23,500 whereas it is now eligible for $41,500 of total ITC.  A 76% increase in ITC benefits!

Our Commentary:

We see this change as a positive to Profitable operating company groups (manufacturing, farming, family businesses etc.), a boon for many professional corporations (esp. specialist physicians) and companies that have a “lumpy” taxable income history (profitable one year and a loss the next) as all of these companies who have typically claimed at 15 percent Federal ITC now are at 35 percent.

This change represents a widening and increase of the SR&ED program; a net benefit to current SR&ED claimants. We don’t anticipate this will bring many new claimants into the program although some claimants may now feel there is better ROI to claim SR&ED rather than to forgo it.

Our CRA sources have indicated they will administer the program as of the March 19th, 2019 year end so we are assuming March 30th, 2019 year end corporations will benefit from this change.