Credit refundability is now extended and capital expenditures are reintroduced.

The Department of Finance of Canada has announced significant updates to the Scientific Research and Experimental Development (SR&ED) program through the 2024 Fall Economic Statement. These updates will result in an increase in the tax credits claimed by taxpayers conducting qualified activities. The new proposed rules for determining eligibility for the enhanced SR&ED credit will take effect for taxation years starting on or after December 16, 2024.

• Expenditure Limit Increase

The limit for the enhanced 35% rate will increase from $3 million to $4.5 million, allowing Canadian-Controlled Private Companies (CCPCs) to claim more (up to $525,000) and benefit from a fully refundable tax credit for that portion. For non-CCPCs and expenditures incurred by CCPCs above the $4.5 million cap, the credit rate will remain at 15%.

The phase-out thresholds for taxable capital are also set to increase. When calculating credits and to determine the expenditure limit for CCPCs, taxpayers are required to consider the taxable capital of the company and all associated companies (from the preceding fiscal year) in Canada. The taxable capital phase-out thresholds will increase from $10 million and $50 million to $15 million and $75 million, respectively. This adjustment signifies a potential increase in the tax credits that can be claimed.

• Eligibility Extension for Canadian Public corporations

The enhanced refundable tax credit will extend to eligible Canadian public corporations, which will be able to claim the 35% rate on up to $4.5 million of qualifying SR&ED expenditures annually. The expenditure limit will phase out based on the corporation’s gross revenue. Specifically, the expenditure limit would be reduced on a straight-line basis when the corporation’s average gross revenue over the three preceding years is between $15 million and $75 million.

• Election for CCPCs

Instead of determining eligibility based on taxable capital, CCPCs would have the option to elect to have their expenditure limit for the enhanced SR&ED credit determined based on the same gross revenue phase-out structure proposed for Canadian public corporations.

• Capital Expenditures

The eligibility of capital expenditures for both the deduction against income and the investment tax credit components of the SR&ED program will be restored (the SR&ED Capital Expenditures Policy from 2014 will apply, and we are expecting an update in the future weeks). This applies to property acquired on or after the date of the 2024 Fall Economic Statement. As a reminder, Criteria for Eligibility will be based on the following rules:

• All or Substantially All Use: The property must be used all or substantially all of its operating time in its expected useful life for SR&ED activities in Canada.
• Shared-Use Equipment: If the property did not meet the “all or substantially all” criteria, it could still qualify as “shared-use equipment,” meaning part of the cost would be eligible for the tax credit.

For qualifying CCPCs, credits earned on capital expenditures will be eligible for partial refundability at a rate of up to 40%, unlike credits earned on current expenditures which are fully refundable up to a CCPC’s expenditure limit. Recapture rules will apply if SR&ED capital property is sold, or its use is converted.

The updates to the SR&ED program announced in the 2024 Fall Economic Statement represent a significant enhancement for taxpayers engaged in qualified research activities. With increased expenditure limits, expanded taxable capital thresholds, and the reintroduction of capital expenditures as eligible claims, CCPCs stand to benefit substantially from these changes.

For more information, feel free to contact us!