On August 15, 2025, the Department of Finance released for consultation draft proposal to expand the Scientific Research and Experimental Development (“SR&ED”) tax credit program. The proposed expansion of the tax credit was previously announced in the 2024 Fall Economic Statement.
Increased federal expenditure limit
Currently in the SR&ED program, Canadian-controlled private corporations (“CCPC”) can benefit from the enhanced federal investment tax credit (“ITC”), which has a credit rate of 35% and is refundable to the corporation if it is not applied against the corporation’s income tax. This is only applicable to the first $3 million of SR&ED expenditures, which is known as the expenditure limit; expenditures in excess of $3 million are subject to the regular 15% credit rate. The expenditure limit is gradually reduced if the corporation and its associated group of corporations’ taxable capital employed in Canada in the prior tax year reaches $10 million and is completely eliminated at $50 million. Under the current rules, the maximum enhanced federal ITC a corporation can receive is $1,050,000.
Finance proposed in the news release to increase the expenditure limit to $4.5 million per tax year; therefore, a CCPC could receive up to $1,575,000 of enhanced federal ITC, a $525,000 increase in refundable credits. They also proposed to increase the taxable capital thresholds, where the expenditure limit reduction would start at $15 million, and then reduced to nil at $75 million.
Enhanced federal ITCs for Canadian public corporations
Currently, Canadian public corporations are not eligible to receive the enhanced federal ITC (i.e., they have no federal expenditure limit). A Canadian public corporation is a corporation that is a resident in Canada, not controlled by one or more non-residents of Canada, and has a class of shares listed on a designated stock exchange.
Finance proposed to make Canadian public corporations eligible for the enhanced federal ITC, with the same proposed enhancements for CCPCs discussed earlier. The difference is the calculation of the corporation’s expenditure limit, which would be based on gross revenue: reduction occurs when the corporation’s average gross revenue from the past three years is between $15 million and $75 million. Once over $75 million, the corporation is subject to the regular 15% non-refundable credit.
As an option, this expenditure limit calculation can also be used for CCPCs if they elect to do so. CCPCs that have a large taxable capital or part of an associated group with a large taxable capital, but low gross revenues, should consider using this method of calculating their expenditure limit.
These proposed enhancements to the federal expenditure limit would apply for tax years that begin on or after December 16, 2024 (date of the 2024 Fall Economic Statement).
Reintroducing capital expenditures in SR&ED
The four main eligible expenditures that can be claimed for SR&ED credits are salaries, materials, Canadian subcontractors, and overhead. Capital expenditures used to be included, but were removed after 2013. Finance is proposing to reintroduce capital expenditures as an eligible expenditure category for SR&ED for amounts that become payable on or after December 16, 2024.
Capital expenditures for SR&ED result in the acquisition of depreciable property other than a building or leasehold property. If the property is used all or substantially all (“ASA”) (≥ 90% of its operating time) in the prosecution of SR&ED in Canada and the claimant is a CCPC, the credit rate can be up to 40% of the expenditure and be partially refundable. The expenditure can also be fully deducted when calculating the corporation’s taxable income in the tax year.
If the capital property does not meet the definition of ASA (i.e., used for commercial and SR&ED work), it could be considered shared-use equipment. Shared-use equipment is property used primarily (operating time is between 50% and 90%) for the prosecution of SR&ED in Canada. This means it is still included in the calculation of SR&ED credits, but it cannot be fully deducted against the corporation’s income.
Thoughts on the changes
These proposed changes would be a great benefit to Canadian corporations as this means more cash back in the hands of companies that employ Canadians and keep cutting-edge R&D within Canada. As it currently stands, the SR&ED rules allow CCPCs to get up to approximately 60 cents on every dollar spent on R&D salaries. With these proposed changes, companies would be incentivized to spend more and expand their R&D operations in Canada.
For Canadian public corporations, many of these companies were likely CCPCs when they were founded, benefitted from growth, and were then listed on a stock exchange, which denied their access to the enhanced credit. These proposed changes are showing that Finance encourages Canadian companies to continue to grow operations within Canada, and even if they decide to IPO, the Canadian government will still be there to finance their R&D operations in Canada.
It’s great to see that capital expenditures are coming back to the SR&ED program. R&D requires lots of investment in capital property for the corporation to remain competitive. As with the other proposals, bringing back capital expenditures into the SR&ED program shows that Finance is serious about keeping R&D in Canada.
