CCPC’s (Canadian Controlled Private Companies) can earn a refundable tax credit of up to 35% of qualified Scientific Research and Experimental Development (SR&ED) expenditures regardless of taxable income.
Currently, they can earn this credit on expenditures up to $3 million depending on their taxable income and taxable capital in their prior fiscal year. This expenditure limit is subject to the following:
- For every dollar of taxable income in the prior year over $500,000, the qualified expenditure limit is reduced by $10
- For every dollar of taxable capital in the prior year over $10 million, the qualified expenditure limit is reduced by $0.075
ITC’s on qualified expenditures in excess of the company’s expenditure limit will be earned at a rate of 15%.
Proposed changes per Budget 2019: Is it good?
The government has put forth a new mandate for tax credit calculation in the new budget which will considerably benefit Canadian companies.
Budget 2019 will phase out the use of taxable income in determining eligibility for the 35% tax credit for CCPC’s with taxation year ends on or after March 19, 2019.
As a result, more small and medium-sized companies can be eligible for the 35% investment tax credit. They are still subject to meeting the test for taxable capital employed in the prior business year.
Example: Investment Tax Credit Study
Let’s compare the impact of the proposed budget on the potential tax credit a CCPC can earn under various scenarios. Table 1 shows what Company A could earn as a tax credit under the current system using different taxable income and taxable capital scenarios in the prior year. Table 2 shows what Company A could earn as a tax credit under the proposed budget using different taxable capital scenarios in the prior year. You notice that taxable income is held constant as it has no impact on the tax credit.
It is assumed that Company A has $ 3 million in eligible SR&ED expenditures to claim. Under the current rules, if for example Company A had $500,000 in taxable income and less than $ 10 million in the capital in the prior year, the total ITC would be $1.05 million. However, if they had $650,000 in taxable income in the prior year instead with no change to the taxable capital, the total ITC would be $ 750,000.
Under the rules proposed by the new budget, Company A would be eligible for a $ 1.05 million tax credit regardless of their taxable income in the prior year, as long as, their taxable capital in the prior year was below $ 10 million. The level of taxable capital in the prior year would still impact the amount of tax credit earned under the new rules.
Table 1: Current System – Prior to Budget 2019 (CCPC’s with Fiscal Year ends before March 19, 2019)
|Taxable Capital in the prior year||Taxable Income in the prior year|
Prior to Budget 2019: The total tax credits claimable decreases as the taxable income and taxable capital increases.
Table 2: New system – Proposed in Budget 2019 (CCPC’s with Fiscal Year ends after March 19, 2019)
|Taxable Capital in the prior year||Any Taxable Income in the prior year|
Post Budget 2019: The total tax credits claimable decreases with increasing taxable capital but isn’t affected by taxable income
At EVAMAX, we can assess your financial situation and determine how the new Budget will affect your current or future claim. We can advise if your company qualifies for the 35% investment tax credit including how much your potential benefits could be.
For assistance in maximizing your SR&ED claim, contact EVAMAX Group to help you with the process. You may also email us at email@example.com or call 1-877-711-7733