Canada’s Fall Economic Statement: A Silver Lining for Innovators Amidst the Chaos
On a day where the only thing Canadians could talk about was the resignation of the then finance minister on the date of the delivery of the government’s 2024 Fall Economic Statement (FES 2024) and the chaos that ensued, some may have missed significant proposals to help Canadian innovators in a time when they’re needed the most. FES 2024 introduces new initiatives designed to boost production in industries that are vital to the productivity of the Canadian economy.
Notably, FES 2024 announces changes to the Scientific Research and Experimental Development (SR&ED) tax incentive program and the government’s intent to implement a patent box regime. Following consultations with affected stakeholders in early spring 2024, the government has now announced its intention to introduce a lower corporate tax rate on the commercialization of intellectual property created and held in Canada, with details to be outlined in budget 2025. This should make Canada an attractive place for innovators to house their intellectual property.
The key changes to the SR&ED tax program, proposed to come into force on December 16, 2024, include:
1. Changes to How Much a Company Can Spend and How Large It Can Be
Currently, qualifying Canadian-controlled private corporations (CCPC) are eligible for a fully refundable enhanced tax credit at a rate of 35% on up to $3 million of qualifying SR&ED expenditures. The refundability of this tax credit gives CCPCs cash to pay their expenditures, which has significant value. FES 2024 proposes to increase this cap to $4.5 million, allowing qualifying CCPCs the ability to claim up to $1.575 million per year of the enhanced, fully refundable tax credit. In addition, the expenditure limit is gradually reduced where taxable capital employed in Canada for the previous year is between $10 million and $50 million. FES 2024 proposes to change the taxable capital phase-out thresholds to $15 million to $75 million.
2. Extension of the Enhanced Refundable Tax Credits to Canadian Public Corporations
The biggest change to the current rules will be to allow Canadian public corporations to be eligible for the enhanced refundable tax credit that is currently only available to CCPCs. Currently, Canadian public corporations are entitled to a 15% nonrefundable tax credit on qualifying SR&ED expenditures. Thus, such companies must have taxable income to be able to utilize the credit. FES 2024 proposes to allow eligible Canadian public corporations to take advantage of the enhanced refundable 35% tax credit on up to $4.5 million of qualifying SR&ED expenditures annually. Eligible Canadian public corporations are corporations that, throughout the tax year: (i) are resident in Canada, (ii) have a class of shares listed on a designated stock exchange or have elected to be a public corporation for tax purposes, and (iii) are not controlled directly or indirectly in any manner by nonresident persons. The expenditure limit will be phased out when the corporation’s gross revenue over the three preceding years is between $15 million and $75 million. FES 2024 provides that CCPCs can also elect to use the gross revenue test if they wish. Note that these rules are not extended to Canadian companies that are controlled by nonresidents. Those companies will still be limited to the 15% nonrefundable tax credits.
3. The Reintroduction of Qualifying Capital Expenditures
FES 2024 proposes to restore the eligibility of certain capital expenditures (which were removed in 2013) for both the deduction against income and the investment tax credit components of the SR&ED program. Eligible capital expenditures for purposes of immediate expensing would be those incurred to acquire new or used depreciable property that the claimant intends to either use in the performance of SR&ED in Canada, or consume its value in the performance of SR&ED in Canada. In addition, such capital expenditures would be eligible for SR&ED tax credits with some differences.
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