Under Canadian tax law, there are three major benefits for qualifying SR&ED expenditures. These are:
- A full tax deduction in the year that such expenditures are incurred;
- The ability to "pool" SR&ED expenditures, which enables you to carry over deductions to the extent that they are not needed currently; and
- Eligibility for attractive investment tax credits (ITCs), which can be refundable in cash if you don't need them to reduce current taxes payable.
The main focus for most businesses is the ITC on qualifying expenditures, and this is particularly attractive for Canadian-controlled private corporations (CCPCs) that carry on qualifying SR&ED activities.
Federally, the general rule is that businesses can claim a non-refundable tax credit equal to 15% of eligible expenditures. However, for CCPCs, the credit can be as high as 35% and can be refundable. The higher rate and refundability are available on the first $3,000,000 of eligible expenses incurred by the CCPC (or the associated group, if the corporation is associated with other corporations). This limit is phased out where a CCPC/associated group's prior year taxable income exceeds $500,000 or taxable capital employed in Canada exceeds $10 million in the prior year. It is eliminated where prior year taxable income exceeds $800,000 or taxable capital reaches $50 million.
In addition to the federal tax incentives, many of the provinces have their own SR&ED tax incentives that businesses can take advantage of. Other types of incentives may also be available to support commercial or technological development.