How Federal Budget SR&ED Changes for 2019 May Impact Your Business
By Sarah Hall
FOR IMMEDIATE RELEASE
Toronto, Canada – September 2019
If you’re reading this article, then it’s likely that you have a Canadian-controlled private corporation (CCPC) and that you are engaged in Scientific research & Experimental Development (SR&ED). If that’s the case, then you’re also likely aware of the various tax benefits offered in Canada for SR&ED.
There are a few incentives offered, with the most generous of them being the federal investment tax credit (ITC). To help increase the cash flow needed to support the SR&ED activities undertaken by your business you can apply up to 35% of your qualifying CCPC’s eligible expenditures towards federal ITC. When approved, this cash can be refunded to you and offer significant tax relief. If you’re unsure whether your company has eligible expenditures or how you can maximize your federal ITC, connect with our team who can give you a complimentary assessment.
The 2019 federal budget has announced a change to the enhanced federal ITC that makes it more accessible to companies. In this article we will be reviewing the federal ITC rules prior to the newly implemented changes, and how tax planning has been structured in order to maximize the benefits for CCPC’s to receive ITC. Following this, we will explain how to implement changes to tax planning in order to adjust to the changes for the 2019 federal ITC.
How did the federal ITC work prior to budget change?
A corporation can earn a non-refundable tax credit at a basic rate of 15% on all qualified SR&ED expenditures for federal tax purposes. As the tax credit is non-refundable, it’s only eligible to be applied to reduce income tax that is payable. However, a CCPC may be entitled to earn a refundable tax credit at an enhanced rate of 35% on qualified SR&ED, capping off at a maximum annual limit on expenditures of $3 million. This annual cap on expenditures is based on two factors; taxable income and taxable capital employed in Canada in the previous tax year.
Those factors are applied as follows:
Taxable income: The $3 million expenditure limit is decreased when taxable income in the previous tax year exceeds $500,000 and it is eliminated when an income level of $800,000 is attained.
Taxable capital: The $3 million expenditure limit is likewise decreased if taxable capital employed in Canada in the previous tax year exceeds $10 million and is eliminated when it attains $50 million.
It’s important to note that the reduction factors for taxable income and taxable capital must be determined on an associated group basis, and expenditure limits must be shared by all CCPCs in an associated group.
For some CCPCs, there has often been implemented a strategy called ‘bonusing down’, which avoids having the annual expenditure limit reduced where the CCPC could benefit from it. This strategy involves planning ahead and reducing the taxable income by paying the owner-manager of the CCPC a bonus. This strategy is often used by businesses that are actively scaling and growing.
What is the new federal budget change?
The government proposed to remove the use of prior year taxable income as a determining factor of the annual expenditure limit in the 2019 federal budget. This is great news for companies in the growth and scaling stages, as they can greatly benefit from the added capital and cash flow associated with the enhanced refundable federal ITC.
This change will apply to tax years that end on or after March 19, 2019. The expenditure limit mentioned in the previous section that is based on prior year taxable capital will continue to apply as normal.
In recent years, there have been many companies who have opted to drop out of the SR&ED incentives altogether due to tightened compliance requirements implemented by the federal government. Many of these companies were in the manufacturing sector and include companies who did not exceed the threshold of taxable capital employed in Canada.
Now that the prior year taxable income factor has been removed, this gives a new opportunity for companies who previously opted out to re-consider participation in SR&ED programs. For assistance with this, please contact your advisor at Invennt.
How does this impact tax planning moving forwards?
This federal budget proposal gets rid of the need to decrease taxable income through payments of bonuses to owner-managers for the objective of benefiting from the 35% ITC rate for CCPCs. By retaining income in the CCPC, it allows a deferral of the personal taxes which would have been payable by the owner-manager had a bonus been issued to them.
That being said, there are still restrictions in expenditure limits on SR&ED tax credits offered by most provinces, including the Yukon Territories. Most jurisdictions follow the federal rules for the calculation of expenditure limits, but not all of them. Ontario provides its own rules on the expenditure limit calculations, meaning that the tax planning strategy of ‘bonusing down’ we talked about above may still make sense for Ontario based CCPCs. Keeping an eye open for individual provincial announcements is essential, as Ontario has already announced a review of the Ontario SR&ED support, so future changes to this are highly plausible.
Finally, even though the strategy of ‘bonusing down’ is no longer necessary for purposes of the enhanced federal refundable ITC for CCPCs, it’s still a significant consideration in determining an inclusive owner-manager remuneration plan. Developing an ideal owner-manager remuneration plan could potentially be more complicated where bonusing down for purposes of the enhanced federal ITC is not an option anymore. Our team at Invennt can help you devise an owner-manager remuneration plan that works for your CCPC with the recent change taken into consideration.
For Press Inquiries contact Sarah Hall- +44(0)7498494064