With Bill C-15 introducing new eligibility rules for SR&ED capital expenditures (sometimes referred to as “capex”) for purchases made after December 15, 2024, there are new opportunities for businesses to claim a greater share of their R&D spending and access additional non-dilutive funding for technology development in Canada. Depending on the province or provinces in which a corporation operates, refundable tax credits on equipment used for R&D can be up to 40% of purchase or lease costs.
This blog will cover the criteria for eligible capex, what is involved in claiming capex, special considerations, differences with shared and leased equipment and some best practices for identifying and claiming expenditures.
What is an Eligible Capital Expenditure?
CRA considers eligible capital expenditures to be a purchase or lease of depreciable property for use in SR&ED activity being performed in Canada. This can include equipment used to produce prototypes including computer hardware and software, but does not include general purpose office equipment such as desks, photocopiers, cell phones, furniture, building or a leasehold interest in a building, and does not include non-depreciable property such as land.
To receive the maximum credit for eligible capex purchases, the property must be “all or substantially all” (defined as 90% or more of its operating time) used for SR&ED activity. Reduced credits are available for property used “primarily” (defined as being used between 50% and 90%) for SR&ED. Property used less than 50% of its operating time on SR&ED is not eligible for SR&ED credits.
What is Needed to Claim Capital Expenditures?
To claim capital property in your SR&ED claim, you will need the following:
- A record of what was acquired, how much was paid, and when it was available for use (such as the purchase invoice or lease agreement).
- How much of its operating time was spent on SR&ED activity. Operating logbooks for the equipment can help substantiate how the property is claimed and serves as evidence that further reinforces the work performed in the overall SR&ED claim.
Special considerations for Capital Expenditures
Unlike current expenditures such as labour and materials consumed or transformed, which are associated with the project activities performed in each fiscal year of the claim, capital expenditures involve acquiring property that will be used for multiple years and its use by the company may change as its needs evolve. For example, if a claimant sells its depreciable property that earned SR&ED credits, or converts it to commercial use, any credits previously claimed from the equipment are effectively repaid to CRA via an income inclusion in the corporation’s income tax return.
Shared-Use Equipment
Typically, a business has more activities than just R&D; CRA recognizes it is not uncommon for such property to be used for both R&D and commercial activities. If the equipment is used primarily for SR&ED, it is considered “Shared-Use-Equipment” (SUE).
SUE is claimed at a rate of 25% of its acquisition cost in the year it is acquired, and an additional 25% of its cost in the year following acquisition. Once the property has been claimed as shared-use for two years, it is no longer eligible for further SR&ED credits, meaning you can only claim a maximum of 50% of the equipment’s cost, if it is SUE.
Leased Equipment
Sometimes it will make more sense for a company to lease equipment it is using to complete SR&ED activity. In the case of leased equipment, if it is used more than 90% of the time on SR&ED activities, you can claim 100% of the lease costs incurred in the tax year for purposes of SR&ED credits. When the leased equipment is used for between 50% – 90% of its time on SR&ED activities, you can claim 50% of the lease costs in the tax year for purposes of SR&ED credits.
Best Practices for Identifying and Claiming Capital Expenditures
With these expanded eligibility rules, there are new techniques to best organize and claim equipment in an SR&ED claim. Best practices include:
- Have a plan for how you will use the equipment over its useful life. Considering your usage over the equipment’s lifetime can influence whether leasing or purchasing makes more sense.
- Keep purchase records, delivery slips to support claimed dates of purchase and a record of availability for use.
- Have a process to log or otherwise record the operational use of equipment, especially for SUE. This also helps build evidence supporting your overall SR&ED claims.
Maximizing SR&ED Credits with Welch LLP
The key takeaway: Review your equipment needs when planning SR&ED activity and explore your needs and ability to set up R&D testing in-house to recover more money than contracting out testing.
The SR&ED advisors at Welch LLP are always available to provide guidance and help corporations optimize their R&D claims.
