Opinion & Analysis Policy & Government Relations

SR&ED in the Fall Economic Statement (2024) – December 16, 2024

December 16, 2024 Elizabeth Lance

On December 16, 2024, the Liberal government released the Fall Economic Statement (2024) – but without the Minister of Finance and Deputy Prime Minister Chrystia Freeland

SR&ED in the Federal Budget – A Recap of Recent Budgets (pre-2023)

In 2017, a minor change was made which was covered in a brief bullet point under “Closing Tax Loopholes”:

Clarify the intended meaning of “factual control” under the Income Tax Act for the purpose of determining who has control of a corporation in order to prevent inappropriate access to supports such as the small business tax rate and the enhanced refundable 35-per-cent Scientific Research and Experimental Development Tax Credit for small businesses ¹.

In the 2019 budget, a major change was proposed: repealing the use of taxable income as a factor in determining a CCPC’s annual expenditure limit for the enhanced SR&ED tax credit. As a result, small CCPCs with taxable capital of up to $10 million will benefit from unreduced access to the enhanced refundable SR&ED credit regardless of their taxable income.

The 2020 budget was not released due to the COVID-19 pandemic, while the 2021 budget contained no direct reference to the SR&ED program.

An interesting revelation was made with the 2022 budget, whereby the government stated they intended to undertake a review of the SR&ED program to ensure that it effectively encouraged R&D that benefits Canada. Specifically, the review was to examine whether changes to eligibility criteria would be warranted to ensure the adequacy of support and improve overall program efficiency.

SR&ED in the Federal Budget (2023)

In the 2023 budget, the Government stated they intend to continue with their review of the program (emphasis added):

The Scientific Research and Experimental Development (SR&ED) tax incentive program continues to be a cornerstone of Canada’s innovation strategy by supporting research and development with the goal of encouraging Canadian businesses of all sizes to invest in innovation that drives economic growth.

In Budget 2022, the federal government announced its intention to review the SR&ED program to ensure it is providing adequate support and improving the development, retention, and commercialization of intellectual property, including the consideration of adopting a patent box regime. The Department of Finance will continue to engage with stakeholders on the next steps in the coming months.²

Many were waiting to see what would be meant regarding ensuring the changes reflect “adequacy of support” and to “improve overall program efficiency.”

Prior Promises – Liberal Platform 2021

One of the promises of the Liberal platform in 2021 (Liberal Party Promises SR&ED Reform) suggested they would expand the program, not reduce it:

Reform the Scientific Research and Experimental Development Program to reduce red tape and the need for consultants, better align eligible expenses to today’s innovation and R&D, and make the program more generous for those companies who take the biggest risks, promoting productivity, new inventions, and the creation of good jobs. ³

Since the Liberal-NDP government is expected to be in place until 2025, we hope they will be able to stand behind their initial goals to expand and develop the SR&ED program; however, we have been writing about this program for over fifteen years and know that changes can happen at any time, sometimes with minimal warning.

SR&ED in the Fall Economic Statement (2024)

Resignation of Finance Minister / Deputy Prime Minister Amid Critical Economic Announcement

In an unexpected turn of events this morning (December 16, 2024), the Minister of Finance and Deputy Prime Minister Chrystia Freeland tendered her resignations at 907am via Twitter. The departures come at a pivotal moment for the government, as officials were preparing to release the detailed Fall Economic Statement—a comprehensive plan that includes significant enhancements to the Scientific Research and Experimental Development (SR&ED) program.

The resignations introduce a layer of complexity to the current political landscape, especially with Parliament scheduled to adjourn shortly for the holiday season. This timing raises questions about the continuity of leadership and the seamless implementation of the recently announced economic measures.

Despite the upheaval, the Fall Economic Statement was released, outlining a robust framework aimed at bolstering Canada’s innovation sector. Below are the key sections extracted directly from the statement, beginning in Chapter 2: Investing to Raise Wages | 2024 FES (Pages 107-108):

Boosting Scientific Research and Experimental Development

The Scientific Research and Experimental Development (SR&ED) tax incentives are a cornerstone of Canada’s innovation strategy. The program currently supports the research and development activities of over 22,000 businesses operating in Canada. About 75 per cent of SR&ED credits are claimed by Canadian-controlled businesses. Making this support more generous, and targeting it to high-growth potential firms, would further encourage Canadian businesses to invest in innovation and drive economic growth.

Informed by consultations earlier this year on how to best deliver new funding:

The 2024 Fall Economic Statement proposes several new enhancements to the SR&ED program, effective for taxation years that begin on or after the date of this Fall Economic Statement:

˗ Increasing the annual expenditure limit on which Canadian-controlled private corporations are entitled to earn an enhanced 35 per cent investment tax credit, from $3 million to $4.5 million;

˗ Increasing the prior-year taxable capital phase-out thresholds for the enhanced credit from $10 million and $50 million to $15 million and $75 million, respectively; and,

˗ Extending the enhanced refundable SR&ED credit to Canadian public corporations.

Cutting-edge technologies are a key driver of growth for businesses. Incentives to implement technology make Canada a more attractive place to invest.

Businesses need more capital to boost productivity and compete in the economy of tomorrow, capital which Canada is providing. By helping businesses purchase and implement productivity-enhancing technology, such as IT systems capable of running machine learning for eligible SR&ED projects, we can help businesses improve their bottom lines.

To help businesses increase their investment in productivity-enhancing assets, the 2024 Fall Economic Statement proposes to restore the eligibility of capital expenditures for both the deduction against income and the investment tax credit components of the SR&ED program, effective for property acquired on or after the date of this Fall Economic Statement.

These proposed changes represent the first of further reforms related to the SR&ED program and promoting innovation that the government intends to advance. More details on program administration and updates to qualified expenses will be announced in Budget 2025.

Specific details are outlined in the Business Income Tax Measures Tax Measures: Supplementary Information | 2024 FES (Page 262 – 265)

Scientific Research and Experimental Development Tax Incentive Program

Under the Scientific Research and Experimental Development (SR&ED) tax incentive program, qualifying expenditures are fully deductible in the year they are incurred. In addition, these expenditures are generally eligible for an investment tax credit. The rate and level of refundability of the credit vary depending on the characteristics of the taxpayer, including its legal status and its size. In general terms:

For most corporations other than Canadian-controlled private corporations (CCPCs), a 15 per cent non-refundable tax credit is available on qualified SR&ED Unincorporated businesses, individuals, and certain trusts have access to a 15 per cent partially refundable tax credit on qualified SR&ED expenditures.

For CCPCs, a fully refundable enhanced tax credit at a rate of 35 per cent is available on up to $3 million of qualifying SR&ED expenditures The $3 million expenditure limit for a taxation year is gradually phased out based on prior-year taxable capital, which applies on the basis of an associated group. The expenditure limit is gradually reduced where taxable capital employed in Canada for the previous taxation year is between $10 million and $50 million.

Qualifying expenditures in excess of a CCPC’s expenditure limit are eligible for the 15 per cent tax credit. Depending on whether a CCPC’s income in the previous taxation year exceeds its qualifying income limit, these credits can be partially refundable.

Expenditure Limit and Taxable Capital Phase-out Thresholds

The 2024 Fall Economic Statement proposes to increase the expenditure limit on which the enhanced 35 per cent rate can be earned from $3 million to $4.5 million. As a result, qualifying CCPCs would be able to claim up to $1.575 million per year of the enhanced, fully refundable tax credit.

The taxable capital phase-out thresholds for determining the expenditure limit would also be increased from $10 million and $50 million to $15 million and $75 million, respectively.

Canadian Public Corporations

The 2024 Fall Economic Statement also proposes to extend eligibility for the enhanced refundable tax credit to eligible Canadian public corporations.

An eligible Canadian public corporation would be a corporation that, throughout the taxation year:

is resident in Canada;

has a class of shares listed on a designated stock exchange (a list is available on the Department of Finance website) or, if not, has elected, or been designated by the Minister of National Revenue, to be a public corporation; and,

is not controlled directly or indirectly in any manner whatever by one or more non-resident persons.

Canadian-resident corporations all or substantially all of the shares of the capital stock of which are owned by one or more eligible Canadian public corporations would also be eligible.

An eligible Canadian public corporation would be eligible for the enhanced 35- per-cent tax credit rate on up to $4.5 million of qualifying SR&ED expenditures annually. Access to the $4.5 million expenditure limit for any given tax year would be phased out based on a corporation’s gross revenue. Specifically, the expenditure limit would be reduced on a straight-line basis when the corporation’s average gross revenue over the three preceding years is between $15 million and $75 million.

For 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.

Credits earned in respect of expenditures above their expenditure limit would be eligible for a 15-per-cent non-refundable credit rate.

Election for CCPCs

Instead of determining eligibility based on taxable capital, CCPCs would have the option to elect to have their expenditure limit for the enhanced SR&ED credit determined based on the same gross revenue phase-out structure proposed for Canadian public corporations.

Coming into Force

The proposed new rules to determine eligibility for the enhanced SR&ED credit would apply for taxation years that begin on or after the date of the 2024 Fall Economic Statement.

Additional Tax Support for Productivity-Enhancing Assets

The SR&ED program delivers support to businesses through both an immediate deduction against income and a tax credit. Currently, eligible expenditures under the SR&ED program generally include salary and wages, as well as the cost of materials, contract payments, third-party payments and overhead expenditures. Capital expenditures were removed from eligibility under the SR&ED program for property acquired after 2013.

The 2024 Fall Economic Statement proposes to restore the eligibility of capital expenditures for both the deduction against income and investment tax credit components of the SR&ED program. The rules would be generally the same as those that existed prior to 2014. This change would apply to property acquired on or after the date of the 2024 Fall Economic Statement and, in the case of lease costs, to amounts that first become payable on or after the date of the 2024 Fall Economic Statement.

Deduction Against Income

Eligible capital expenditures for the purposes of immediate expensing under the SR&ED program would be expenditures incurred to acquire new or used depreciable property that the claimant intends to either:

use all or substantially all of the operating time in its expected useful life in the performance of SR&ED in Canada, or,

consume all or substantially all of its value in the performance of SR&ED in Canada.

Eligible property would be eligible for expensing once it becomes available for use.

If these criteria are met, the expenditure could be fully deducted for the purpose of determining taxable income in the year the eligible property becomes available for use or carried forward to the extent it is not deducted in the tax year (i.e., as part of a pool of deductible SR&ED expenditures).

Qualifying SR&ED Expenditures for Tax Credit Purposes

Qualifying capital expenditures would also generally be eligible for the SR&ED tax credit, with some differences from those eligible for immediate expensing, including:

The acquisition of property that had been used or acquired for use or lease before it was acquired by the claimant would not be eligible for a tax credit.

A SR&ED-related capital expenditure ineligible for a full deduction against income because it does not meet one of the all-or-substantially-all tests noted above could still be considered “shared-use equipment”, meaning that part of the cost of the property would be eligible for the tax credit.

Other Rules

For qualifying CCPCs with access to the SR&ED program’s enhanced 35-per-cent tax credit, credits earned on capital expenditures would be eligible for partial refundability at a rate of up to 40 per cent, unlike credits earned on current expenditures which are fully refundable up to a CCPC’s expenditure limit.

If a taxpayer sells, or converts the use of, SR&ED capital property, recapture rules would apply in respect of the capital cost allowance for claimed and unclaimed SR&ED capital expenditures, as well as the investment tax credit.

As noted above, these changes are theoretically effective for taxation years that begin on or after the date of this Fall Economic Statement. The changes would apply to property acquired on or after the date of the 2024 Fall Economic Statement and, in the case of lease costs, to amounts that first become payable on or after the date of the 2024 Fall Economic Statement.

What’s the catch?

There are a few steps required before the above will come into effect. In the Canadian parliamentary system, the Fall Economic Statement (FES) undergoes a structured approval process to be officially accepted and implemented. Here are the key steps required for the FES to be accepted:

Introduction to Parliament: The FES is typically presented by the Minister of Finance in the House of Commons. It outlines the government’s economic plans, including budgets, fiscal policies, and significant program changes like the enhancements to the SR&ED program.
Debate and Scrutiny: Once introduced, Members of Parliament (MPs) debate the contents of the FES. This stage allows for detailed examination and discussion of the proposed measures, ensuring transparency and accountability.
Committee Review: The statement may be referred to relevant parliamentary committees for in-depth analysis. Committees can call experts, stakeholders, and government officials to provide testimony and answer questions about specific aspects of the FES.
Voting in the House of Commons: After thorough discussion and any necessary amendments, the FES is put to a vote in the House of Commons. For the FES to pass, it generally requires a majority vote in favor. Given that the FES often includes confidence measures, a successful vote typically affirms the government’s mandate to implement its economic policies.
Senate Review (if applicable): While the Senate can review and suggest further amendments, it rarely rejects financial legislation. The primary role of the Senate is to provide a secondary layer of scrutiny rather than to block legislation passed by the elected House of Commons.
Royal Assent: Once both Houses of Parliament approve the FES, it is sent to the Governor General for Royal Assent. This formal approval is the final step required for the FES to become law and for its measures to take effect.
Implementation: After receiving Royal Assent, the government proceeds with implementing the policies and measures outlined in the FES. This includes allocating funds, launching new programs, and adjusting existing initiatives as specified.

Impact of Parliamentary Votes and Leadership Changes:

Confidence Votes: Given that the FES encompasses critical financial and economic policies, its approval is often considered a confidence vote for the government. A majority in favor typically signifies continued support for the current administration.
Resignations and Leadership Vacancies: The resignation of key figures such as the Minister of Finance / Deputy Prime Minister can introduce uncertainties. However, if the government maintains its joint NDP-Liberal majority and can swiftly appoint interim or new ministers, the FES can still proceed as planned. Leadership stability is crucial for the seamless passage and implementation of such significant economic measures.
Parliamentary Schedule: With Parliament scheduled to adjourn shortly after the FES release, timely debate and voting are essential. Delays caused by unexpected resignations could impact the approval process, potentially postponing the implementation of key policies until the government reconstitutes and reconvenes.

Thus, for the Fall Economic Statement to be officially accepted and implemented in Canada, it must be introduced and subsequently approved through a vote in Parliament, specifically in the House of Commons. This process ensures that the government’s economic policies receive democratic scrutiny and support before becoming law. Therefore, while these proposed changes are very exciting, making financial decisions based on them should be reserved until it receives Royal Assent.