The most robust Canadian government-backed financial support program for research and development (R&D) is the Scientific Research and Experimental Development (SR&ED) tax incentive program. This program annually provides over $3 billion in tax credits to thousands of small to medium-sized businesses across Canada. Innovative enterprises that receive these credits need to be aware of the SR&ED expenditure limit to ensure this tax incentive program is adequately utilized. Below is an in-depth look at the SR&ED expenditure limit. Continue reading to learn more!
What is the SR&ED Expenditure Limit?
Enterprises that qualify for SR&ED tax credits may receive a refundable or non-refundable investment tax credit (ITC) or a deduction against income. However, this depends on the size and type of organization. Numerous types of businesses qualify for SR&ED tax credits, including trusts, Canadian-controlled private corporations (CCPCs), and individuals. While corporations that are not CCPCs, including trusts and proprietorships, may claim a non-refundable ITC at a 15% rate on qualifying SR&ED expenditures, the regulations for CCPCs are more accommodating. CCPCs may earn a refundable ITC at a 35% enhanced rate on their SR&ED-eligible expenses incurred over the fiscal year. However, there is a maximum of $3 million that can be claimed; this is known as the SR&ED expenditure limit.
What About Reductions to the Expenditure Limit?
Reductions in the SR&ED expenditure limit can occur. Reductions begin when an enterprise’s taxable capital for the previous financial year (with or without affiliated corporations) reaches $10 million. As taxable capital increases past $10 million, the SR&ED expenditure limit begins to phase out. Once taxable capital reaches $50 million, the expenditure limit becomes $0.
Calculating Your Company’s Expenditure Limit
While there is a formula in the Income Tax Act that enables corporations to determine their expenditure limit, there are separate formulas for businesses connected to other corporations and those not associated with other companies. For CCPCs claiming for tax years ending before March 19, 2019, the formula considers the taxable income from the previous tax year and, if applicable, the taxable revenue of other connected corporations from years prior. First, the last year’s taxable income is considered before future tax consequences. However, if the previous tax year was shorter than 51 weeks, the CCPC must adjust the taxable income using a ratio of 365 to the number of days represented in that tax year. If the current tax year is less than 51 weeks, the CCPC will divide the expenditure limit by the number of days in the tax year.
If the CCPC has two or more tax year endings in the same calendar year and is associated with another corporation with the same tax year endings, then additional rules will apply. In this particular case, the SR&ED expenditure limit for each tax year ending in the calendar year is the same as the limit for the first tax year, except if the tax year is less than 51 weeks, in which case the limit is apportioned based on the number of days in the year.
How SR&ED Expenditure Limit Allocation Works
The business or CCPC and any associated corporation must distribute the annual expenditure limit to determine the ITCs earned at the enhanced rate. Another related company may use the money not set aside for the Canadian-Controlled Private Corporation, but only up to a certain amount determined by their spending limit. If a corporation is connected with another business in a tax year, it may exceed the spending limit, but only if all related CCPCs agree on how they will distribute their spending limit for that calendar year. The CCPCs can fill out a form provided by the Canada Revenue Agency to indicate their agreement. If they do not submit this form within 30 days of being asked, the CRA will determine how the spending limit will be distributed.
Finance Your SR&ED Tax Credits with Easly!
If your innovative organization receives an SR&ED refund, your business may be eligible for non-dilutive capital from Easly! At Easly, we work with companies from diverse industries that receive SR&ED tax credit refunds from the Canadian government. Our clients can access this capital as non-dilutive funding when they need it throughout the year rather than in one lump-sum payment from the CRA.
Contact Easly to find out more about how your organization can accelerate its SR&ED refund today!