The latest Fall Economic Statement (FES) casts a hopeful spotlight on Canada’s commitment to strengthening its economy through innovation. The government has re-emphasized support for research and development (R&D) initiatives with proposed enhancements to the Scientific Research and Experimental Development (SR&ED) tax incentive program. These changes stand to deliver significant benefits for companies conducting R&D in Canada and aim to foster a more vibrant ecosystem of innovation and economic growth.
What is the SR&ED Program?
The SR&ED program offers two types of tax incentives. The first is a deduction against income, whereby eligible businesses can deduct allowable SR&ED expenditures from their income. The second is an Investment Tax Credit (ITC), which reduces a company’s income tax payable by a percentage of their eligible SR&ED expenditures.
Depending on an entity’s structure and financial profile, SR&ED ITC rates range from 15% (for most businesses) to 35% (for Canadian-controlled private corporations – CCPCs). Projects that typically qualify include those that meet core scientific and technological criteria and aim to advance knowledge in a given field.
Key Enhancements Announced in the Fall Economic Statement
Over the years, companies have pointed to certain barriers in the SR&ED program, such as the 2014 exclusion of capital expenditures and narrow limits on eligible businesses. The Fall Economic Statement aims to remove these barriers with the following proposed amendments:
Increased Expenditure Limit for CCPCs – One of the most notable updates is the increase of the SR&ED expenditure limit for CCPCs from $3 million to $4.5 million. This modification effectively allows qualifying CCPCs to receive up to $1.575 million annually in refundable credits (calculated at the 35% rate). For companies already engaged in active R&D, this increase can substantially impact their ability to manage and fund new projects. It also offers a more expansive incentive for those planning to scale their research activities.
Expanded Taxable Capital Phase-Out Thresholds – The new phase-out thresholds for determining whether a CCPC qualifies for the 35% rate have been widened. Historically, businesses would start to lose their enhanced rate once their taxable capital exceeded $10 million, phasing out entirely by $50 million. Now, phase-out begins at $15 million and finishes at $75 million.
Additionally, CCPCs now have the option to elect a revenue-based approach instead of using taxable capital to determine their annual expenditure limit. This flexibility can help CCPCs align their SR&ED credit claims with their business model, particularly if revenue is their most straightforward performance indicator.
Inclusion of Canadian Public Corporations – Perhaps the most attention-grabbing announcement is that certain Canadian public corporations can now access the enhanced SR&ED rate of 35%, up to the specified $4.5 million annual limit. Previously, this enhanced rate was only offered to CCPCs. Under this enhancement, Canadian public corporations will be offered the same phase-out thresholds as CCPCs, but annual expenditure limits may only be determined based on gross revenue, not taxable capital.
Restoration of Capital Expenditures Eligibility – Reversing rules that have been in place since 2014, the FES proposes to bring back the eligibility of capital expenditures for both the deduction against income and the SR&ED ITC. This means that new depreciable property used “all or substantially all” in R&D activities may now be included in a company’s SR&ED claim if the property is acquired on or after 16 December 2024. For industries that rely heavily on custom equipment, research facilities, or advanced lab infrastructure, this opens the door to more robust SR&ED benefits and increased strategic planning around capital acquisitions.
Potential Patent Box Regime – Beyond the SR&ED enhancements, the FES also mentions the government’s intent to propose a patent box regime in the future. Although details remain scarce, a patent box typically allows for preferential tax treatment on profits earned from intellectual property developed through R&D. Many jurisdictions use these regimes to encourage the commercialization of innovations locally. The government has stated that more information will be provided in the 2025 Federal Budget, signalling that Canada may be laying a foundation for stronger IP retention and commercialization incentives.
Final Thoughts
These proposed enhancements underscore the government’s renewed focus on spurring Canadian innovation. The reintroduction of capital expenditures and increased expenditure limits will likely invigorate efforts in clean technology, artificial intelligence, manufacturing, and other innovation-driven sectors. With more financing support and refundable credits accessible to a broader set of corporations, Canada hopes to see a surge in major R&D projects.
Over time, these measures may help Canadian companies become more competitive internationally, retain valuable IP domestically, and generate highly skilled jobs. In essence, the alignment of tax policy with real-world innovation needs could curb investment flight and spark stronger long-term economic growth.
This article was written by the NVS Professional Corporation team, your knowledgeable Barrie and Markham accountants. The content is intended as a general guide for informational purposes only. For specialist advice tailored to your specific situation, please reach out to our expert team.
