The Scientific Research and Experimental Development (SR&ED) program offers Investment Tax Credits (ITCs) and refunds to Canadian businesses engaging in R&D activities. However, eligibility for specific ITC rates and refunds varies depending on several factors, including the type of corporation, the nature of expenditures, and the business’s financial standing. This article outlines the essential aspects of ITC rates and refundability, helping companies navigate their SR&ED claims effectively.
Factors Influencing ITC Rates and Refundability
The rate and refundability of ITCs in SR&ED depend on four primary factors:
Type of Corporation: Enhanced ITCs are available for certain types of Canadian-Controlled Private Corporations (CCPCs). CCPCs are privately held Canadian corporations that are not controlled by non-residents or public corporations, based on either de jure (legal) or de facto (factual) control. “Qualifying corporations” within the CCPC category can access a higher ITC rate and greater refundability if they meet specific income and ownership criteria.
Type of Expenditure: Eligible expenditures for ITCs include current and capital expenditures (for assets before 2014) and certain contract payments. Notably, 80% of contracted SR&ED expenditures are eligible if they meet CRA’s criteria.
Qualified Expenditures: Qualified expenditures in the SR&ED program encompass allowable SR&ED expenses, shared-use equipment, and the prescribed proxy amount, depending on the year.
Expenditure and Qualifying Income Limits: For CCPCs, the maximum enhanced ITC rate of 35% applies to qualified expenditures up to $3 million annually, with expenditures above this threshold subject to a standard 15% rate. Other businesses, including non-qualifying corporations, individuals, and trusts, receive a 15% ITC rate on qualified SR&ED expenditures.
ITC Rates and Refund Options for Different Entity Types
Qualifying CCPCs:
ITC Rate: 35% on SR&ED expenditures up to $3 million and 15% on amounts exceeding this limit.
Refundability: Qualifying CCPCs can receive a 100% refund on 35%-rated SR&ED expenditures and a 40% refund on eligible capital expenditures (pre-2014). For expenditures over $3 million, ITCs are not refundable.
Non-Qualifying CCPCs:
ITC Rate: 35% on qualified SR&ED expenditures within the $3 million limit.
Refundability: Non-qualifying CCPCs are eligible for refunds on ITCs at 35% but receive only a 40% refund rate on capital expenditures and no refund on ITCs earned at the 15% rate.
Individuals and Trusts:
ITC Rate: 15% for SR&ED expenditures.
Refundability: 40% refund rate on SR&ED expenditures, provided the trust beneficiaries are eligible for SR&ED.
Partnership Members: Members of partnerships, including CCPCs, individuals, and trusts, are eligible for ITCs but cannot receive refunds.
Excluded Corporations: Corporations controlled by tax-exempt entities, public authorities, or related parties are ineligible for SR&ED ITCs and refunds.
Refund Process and Carryforward/Carryback of ITCs
ITCs earned within a tax year must first be applied against the taxes payable for that year. Any unused ITCs can be carried back up to three years or carried forward for up to 20 years. However, if the ITCs are not applied within this timeframe, they will expire. It’s essential for corporations, particularly CCPCs, to leverage these credits efficiently within the allowable period to maximize SR&ED tax benefits.
Important Situations Affecting ITC Claims
Control Changes: Events like acquisitions, mergers, or corporate restructuring can impact ITC eligibility and refundability. When control of a corporation changes, any unused ITCs from prior periods may be restricted or lost.
Recapture Rules: If a corporation sells or repurposes assets originally used in SR&ED, ITCs may need to be repaid through recapture rules.
The SR&ED ITC program offers significant tax advantages for Canadian businesses, but navigating ITC rates and refund eligibility requires a deep understanding of corporation types, expenditure limits, and refund options. At Viewin Advisory, we provide tailored guidance to ensure that SR&ED claims are optimized and compliant, helping businesses maximize their ITC benefits while staying on top of eligibility requirements. Contact us to learn how we can support your SR&ED claim, from documentation to strategic ITC planning.