Fall economic statement 2024

On December 16, 2024, the fall economic statement (FES) prepared by Deputy Prime Minister and Minister of Finance Minister Chrystia Freeland was tabled in Parliament but was not accompanied by the usual speech in light of Ms. Freeland’s resignation from cabinet earlier in the day. Prior to this statement, on December 13, 2024, Ms. Freeland and Minister of Export Promotion, International Trade and Economic Development, Mary Ng announced significant enhancements to the Scientific Research and Experimental Development (SR&ED) tax incentive program. These changes are included in the FES and are outlined in this article.

Other tax updates included in the FES include an extension of certain accelerated capital cost allowance claims for certain capital investments and improvements to some clean energy tax credits including announcing the electric vehicle supply chain investment tax credit (EVSCITC).

Improvements to the SR&ED program

The government announced four major proposals that will increase access to tax incentives for qualified expenditures related to SR&ED. These changes are proposed to come into effect for taxation years that begin on or after December 16, 2024.

Increase the annual expenditure limit for CCPCs

An increase to the annual expenditure limit on which Canadian-controlled private corporations (CCPCs) are entitled to earn an enhanced investment tax credit (ITC) has been proposed. Under current law, CCPCs who incur eligible SR&ED expenditures can receive a refundable investment tax credit of 35% of qualifying expenditures. This refundable credit has an annual limit of $3 million of qualifying expenditures or a maximum refundable credit of $1,050,000 per year. The government announcement proposes to increase the annual limit to $4,500,000 per year, for a maximum refund of $1,575,000 per year. CCPCs with expenditures above this limit can claim a non-refundable 15% credit on qualifying expenditures.

Extend the enhanced refundable credit to Canadian public corporations

Currently, Canadian public companies can claim a 15% ITC on qualifying expenditures. This ITC is not refundable, so it can only be claimed when the company has taxes payable, and the claim cannot be greater than federal taxes otherwise payable. Growing companies that invest significantly in SR&ED may not be profitable in their first years. Therefore, this change in the ITC available to Canadian public companies could accelerate the timing of claiming ITCs. In addition, for the first time Canadian public companies will have access to an increased rate of ITC on the first $4,500,000 of qualifying expenditures as the rate on these expenditures will increase from 15% to 35%.

Eligible Canadian public corporations will be corporations that:

• were resident in Canada throughout the taxation year; 
• have a class of shares listed on a designated stock exchange or has elected, or been designated by the Minister of National Revenue, to be a public corporation; and
• are not controlled directly or indirectly in any manner whatever by one or more non-resident persons.

In addition, Canadian-resident corporations owned by one or more eligible Canadian public corporations would also be eligible.

Public companies would have reduced access to the 35% ITC when the corporation's average gross revenue over the three preceding years is between $15 million and $75 million. The limit of $4,500,000 would start to decline at revenues over $15 million and be completely eliminated when revenues exceed $75 million. For purposes of this test, when a corporation that is a member of a corporate group that prepares consolidated financial statements, gross revenue would be as reported in the annual financial statements of the group presented to shareholders at the highest level of consolidation. Members of a corporate group for financial reporting purposes would be required to share access to the enhanced SR&ED credit's expenditure limit.

For a corporation that is not a member of such a corporate group, gross revenue would be as reported in the corporation's annual financial statements prepared in accordance with generally accepted accounting principles and presented to shareholders.

Restore the eligibility of capital expenditures

Restoring the eligibility of capital expenditures has been proposed for both the deduction against income and the investment tax credit components of the SR&ED program. Since 2014, only current expenditures have been eligible to be qualifying expenditures. This proposal will allow capital expenditures to form part of the SR&ED qualified expenditure pool, provided that the capital expenditure is for SR&ED. This will allow these capital expenditures to be deducted against income in the year they are incurred or in a future year and to qualify for the SR&ED ITC. This change would apply to property acquired on or after December 16, 2024 and, in the case of lease costs, to amounts that first become payable on or after December 16, 2024. Where the corporation is a CCPC claiming a refundable ITC, only up to 40% of the capital expenditure will qualify for the refundable ITC.

Increase the prior-year taxable capital phase-out thresholds for CCPCs

An increase has been proposed for the enhanced 35% credit from $10 million and $50 million to $15 million and $75 million, respectively. Currently, the availability of the 35% refundable tax credit for qualifying SR&ED expenditures is limited by the size of the company combined with corporations within an associated group of corporations. The size of the company is measured by “taxable capital”, which is generally the sum of the corporation’s debt and equity reduced by qualifying investments. The annual expenditure limit for expenditures that qualify for the 35% ITC is reduced when taxable capital is over $10 million at the end of the previous taxation year and eliminated when taxable capital reaches $50 million. The proposal would start the reduction in the annual limit applicable to the refundable tax credit at taxable capital of $15 million and eliminate it at taxable capital of $75 million. As noted above, for public companies, access to the enhanced ITC is based on revenue instead of capital. The proposals would allow CCPCs to elect to use that revenue threshold instead of the taxable capital test.

Accelerated Investment Incentive and immediate expensing

This FES proposes to fully reinstate the Accelerated Investment Incentive (AII) and immediate expensing measures for a five-year period, with a four-year phase-out after 2029.

The AII provides for enhanced first-year capital cost allowance (CCA) on eligible property acquired after November 20, 2018, and available for use before 2028. The AII began phasing out in 2024 and was set to be fully eliminated after 2027. 

The FES proposes to fully re-instate the AII for qualifying property acquired on or after January 1, 2025, and that becomes available for use before 2030. It would be phased out starting in 2030 and be fully eliminated for property that becomes available for use after 2033. Generally, if eligible property is acquired on or after January 1, 2025, and becomes available for use before 2030:

• The proposed enhanced first year CCA would be up to three times the normal CCA rate on eligible property.
• For eligible property not normally subject to the half-year rule, the enhanced CCA would be equal to one-and-a-half times the normal first year CCA.

Immediate expensing 

Under the immediate expensing measures, the following CCA classes qualified for an enhanced first-year CCA of 100%:

• Class 53 Manufacturing or processing machinery and equipment 
• Class 43.1 (and Class 43.2) clean energy generation and energy conservation equipment
• Classes 54, 55 and 56 zero-emission vehicles

These immediate expensing measures are currently being phased out for property that becomes available for use after 2023 and before 2028.

The FES proposes to fully reinstate these immediate expensing measures for qualifying property acquired on or after January 1, 2025, and that becomes available for use before 2030. Phasing out would begin in 2030 and fully eliminated for property that becomes available for use after 2033. 

Clean energy credits

The FES provides a way that the clean electricity investment tax credit could be available to provincial and territorial Crown corporations for investments made in eligible property situated in eligible jurisdictions. In addition, further details are provided for a proposed electric vehicle supply chain investment tax credit (EVSCITC), which provides for a credit of 10% of the capital cost of eligible building property used in qualifying EV supply chain segments.

To be eligible for the EVSCITC, all or substantially all of the use of property would have to be in one or more of the three qualifying EV supply chain segments:

• EV assembly, which would comprise the final assembly of a motor vehicle that is either fully electric or a plug-in hybrid that has a battery capacity of at least 7kWh.
• EV battery production, which would comprise the manufacturing of battery cells used in the powertrains of fully electric or plug-in hybrid vehicles, or battery modules used in the powertrains of fully electric or plug-in hybrid vehicles.
• Cathode active material (CAM) production.

In addition, only corporations qualify for this credit, and a corporation would be required to invest at least $100 million in each of the three qualifying EV supply chain segments. The EVSCITC would apply to property that is acquired and becomes available for use on or after January 1, 2024. The credit rate would reduce to 5% for property that becomes available for use in 2033 or 2034 and eliminated thereafter.