The 2019 Federal Budget removed the prior year’s taxable income as one of 2 factors used to determine the SR&ED (“scientific research & experimental development”) expenditure limit. All Canadian-controlled private corporations (aka “CCPCs”) are entitled to 35% refundable tax credits on their “SR&ED expenditure limit”.
The SR&ED expenditure limit starts at $3 million and was reduced as taxable income in the preceding year rose above $500,000. For every dollar of taxable income above $500,000, the SR&ED expenditure limit was reduced by $10. This had the effect of eliminating the SR&ED expenditure limit when the taxable income of the preceding year increased to $800,000.
Once that happened the company was only entitled to a 15% non-refundable tax credit.
As a result, in the past practitioners worked to keep taxable income lower using a variety of techniques. This could have consequences that would work at cross-purposes to the public policy intention of the SR&ED program.
Budget 2019 proposes to repeal the use of taxable income as a factor in determining a CCPC’s annual expenditure limit for the purpose of the enhanced 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 refundable SR&ED credit regardless of their taxable income.
As a CCPC’s taxable capital begins to exceed $10 million, this access will gradually be reduced as shown in the highlighted column in Table 5.
This change will provide a more predictable phase-out of the enhanced SR&ED credit rate, which will more effectively support growing small and medium-sized
firms as they scale up.
This measure will apply to taxation years that end on or after Budget Day.
…from Investing in the Middle Class – Budget 2019
After these changes take effect, the expenditure limit will be reduced only by “taxable capital”. Note that taxable capital remains in the Income Tax Act after capital tax was eliminated. It is used as a proxy for a company’s size. While taxable capital can be complex to calculate, it can be approximated by looking at total assets.
If total assets are less than $10 million, there is no need to calculate taxable capital. The expenditure limit will be reduced in a straight line as taxable capital increases from $10 million. The expenditure limit will be entirely extinguished when taxable capital exceeds $50 million.