Budget announces modest changes to SR&ED tax credit program

The federal government has expanded the allowable size of companies eligible for 35% refundable R&D tax credits but the changes fall far short of recommendations from nearly all of Canada's major industry associations. While industry was seeking full refundability for scientific research and experimental development (SR&ED) tax credits, the Budget extended limited refundability to slightly larger qualifying firms. The rules for large firms — many of which are finding it increasingly expensive to perform R&D in Canada — remain unchanged.

Full refundability was estimated to cost roughly $1 billion in foregone revenues, which are projected to reach $4.7 billion in 2008 (see chart below). In contrast, the changes proposed in the Budget will cost an additional $10 million in FY08-09 and $45 million in FY09-10.

The changes expand the potential pool of firms eligible for the tax credits by allowing qualifying Canadian-controlled private corporations to increase their annual maximum refund from $700,000 to $1.05 million. They also increase the upper limit of the taxable income phase-out from $600,000 to $700,000, while the upper limit for taxable capital phase-out is increased from $15 million to $50 million.

"We believe the program needs more substantive reform," says Bernard Courtois, president and CEO of the Information Technology Association of Canada. "These measures simply aren't enough to incent substantial R&D investors to keep high-value knowledge jobs in Canada."

The Budget also permits firms to conduct 10% of allowable SR&ED labour expenditures outside of Canada under certain circumstances. Examples provided include access to environmental conditions not available in Canada such as desert or tropical climates.

The Budget announced a further $15 million over two years to undertake a range of administrative improvements to the SR&ED program. As administered by Canada Revenue Agency, the enhancements include hiring more technical reviewers, giving reviewers more time to work with claimants and improving quality assurance methodology.

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