Federal SR&ED Expenditure Limit
When preparing an SR&ED claim, it is important to understand the financial mechanisms that are used in calculating the amount of Investment Tax Credits (ITCs) that you are entitled to. Perhaps the most impactful financial mechanism to be aware of is the SR&ED Expenditure Limit.
Before diving into the details of how the SR&ED Expenditure Limit impacts an SR&ED claim, let’s take a step back and refresh ourselves about some of the SR&ED program basics.
Ok, Quick Refresh
The SR&ED program operates by granting either refundable or non-refundable ITCs based on expenses incurred during projects that meet the definition for SR&ED. Whether a project qualifies as SR&ED or not is the subject of a future blog post, but for now let’s assume that all the projects we discuss today are fully qualified SR&ED projects. Now, ITCs are granted at two levels during an SR&ED claim: at a Federal level and at a Provincial level. At the Provincial level, different Provinces and Territories have different rules that govern what rates will be applicable to determine the amount of ITCs you are entitled to. For instance, we wrote an article about the recent changes to the Alberta SR&ED program, which you can read more about here. At the Federal level however, the governing SR&ED rules are consistent across the country. Additionally, they type of corporation impacts which rules apply to its SR&ED claim. For consistency, we will be discussing Canadian Controlled Private Corporations (CCPCs).
What is the Purpose of the Federal SR&ED Expenditure Limit?
Understanding the purpose of the Federal SR&ED Expenditure Limit is important. While the name may imply that any expenses past this amount are not eligible for the SR&ED program, this is not the case. The Federal SR&ED Expenditure Limit is the maximum amount at which expenses are eligible for the enhanced investment tax credit rate, which is 35%. Any expenditures exceeding this amount will still be eligible for the basic investment tax credit rate, which is reduced to 15%. So, if your SR&ED expenses exceed the Federal SR&ED Expenditure Limit, the amount they exceed the limit by can still be used to claim ITCs, but only at the reduced basic investment tax credit rate.
What is the SR&ED Federal Expenditure Limit?
$3 Million. There, simple right? Well actually, while this answer is often true, there are more details that need to be analyzed. The Federal SR&ED Expenditure Limit starts at $3 million but can be reduced based on the corporation’s taxable capital employed in Canada. The Federal SR&ED Expenditure Limit starts to decrease once the corporation has $10 million of taxable capital and is fully reduced to $0 once the corporation reaches $50 million of taxable capital in the previous tax year.
In most cases going forward, that’s all you will need to consider. However, for tax years ending before March 19th 2019, you will also need to consider the corporation’s taxable income. The Federal SR&ED Expenditure Limit starts to decrease when the corporation’s taxable income for the previous year is more than $500,000. The more taxable income a corporation receives, the more the Federal SR&ED Expenditure Limit is reduced by, until at the $800,000 mark of taxable income the Federal SR&ED Expenditure is reduced fully down to $0. Once the initial Federal SR&ED Expenditure Limit based on the taxable income is determined, the deduction based on the taxable capital is then applied.
Does this affect Refundable vs Non-Refundable ITCs?
As we mentioned before, the SR&ED can provide refundable and non-refundable ITCs, and the Federal SR&ED Expenditure Limit certainly impacts this. ITCs generated from expenditures at or below the Federal SR&ED Expenditure Limit (for a CCPC) will be fully refundable at the enhanced rate of 35%. Any additional ITCs generated from expenditures that exceed the Federal SR&ED Expenditure Limit are at the basic rate of 15%, and whether they are partially refundable or not depends on if a corporation is a “Qualified Corporation” or not.
A corporation is considered to be qualified if in the previous tax year their taxable income was at or below a certain amount. This amount starts at $500,000 and is reduced to $0 as the corporation’s taxable capital increases from $10M to $50M.
In the event that a Qualified Corporation earns ITCs generated at the basic rate, 40% of these ITCs will be refundable, and the remaining 60% of the ITCs generated from the basic rate will be non-refundable. If the corporation made more than the amount of taxable income as outlined above, then 100% of the ITCs generated from the basic rate will be non-refundable.
In Summary,
We have discussed the Federal SR&ED Expenditure Limit, what the purpose of the Federal SR&ED Expenditure Limit is, how it changes, and how it impacts refundable vs non-refundable ITCs. The main takeaways are:
- Federal SR&ED Expenditure Limit is the amount below which qualified expenditures generate ITCs at the enhanced tax rate of 35%.
- Expenditures above the Federal SR&ED Expenditure Limit generate ITCs at the basic tax rate of 15%.
- The Federal SR&ED Expenditure Limit starts at $3 million and reduces down to zero as the corporation’s taxable capital increase from $10M to $50M.
- ITCs generated from expenditures below the Federal SR&ED Expenditure Limit are fully refundable, whereas ITCs generated from expenditures above the Federal SR&ED Expenditure Limit may be partially non-refundable.
And there you have it. A quick walkthrough of the Federal SR&ED Expenditure Limit that hopefully educated you more on how it works. These are the major contributing factors, but like with every SR&ED claim, there are often unique factors that may impact exactly which rules will govern your claim. Advance-Tek is here to discuss your claim more, and to help you figure out exactly where your claim is positioned. Reach out anytime to us, and we’d be happy to discuss this further!