Don’t get us wrong. We love the SR&ED program. But, the program has been going down over the past few years. By that, we mean, the rates of return on eligible expenditures have almost all been diminished.
The SR&ED program has been around since the 80s. In the 90s, the program expanded to include Experimental Development, which now constitutes the vast majority of the claims submitted. Experimental Development claims are often found within commercial or industrial facilities, as opposed to purely scientific institutions.
The program was largely unchanged for a long time, until 2013. The categories of eligible expenditures were: Labour, Overhead or Proxy, Subcontractors, Materials, Capital, Shared-Use Equipment.
Labour means Canadian taxable labour expenses that are paid on an official T4. This category hasn’t changed, except that many years ago a provision was added to include up to 10% of Canadian labour conducted outside of Canada.
Overhead is most commonly calculated through the PROXY calculation, which provides the claimant with a blanket percentage mark-up on labour. The rate used to be 65%. Now it’s 55%. At least 95% of claimants rely on this method to account for the overhead of their business. If you relied on what’s called the “traditional” method, then that tabulation hasn’t changed, but it’s quite tedious and rarely advantageous.
Materials has remained unchanged.
Subcontractors is the category for Canadian taxable suppliers that do SR&ED on behalf of the claimant; that hasn’t changed. But instead of including 100% of the expense now, CRA only allows the claimant to enter 80% of the expense. This change took effect for expenditures incurred after January 2013.
The Capital category has been eliminated as of January 2014. This category was for newly-purchased depreciable equipment needed in order to conduct SR&ED in Canada. Typical examples included laboratory equipment and computers needed by dedicated computer programmers.
Shared-Use Equipment has also been eliminated. This category was for newly-purchased depreciable equipment that was used both for SR&ED and commercial activities over its reasonable business lifecycle.
The ITC rate for corporations well above the small business limit (ie. $800,000 in net profits), or public or foreign companies of any size, has been reduced from 20% to 15%.
In Ontario, the OITC rate has been reduced from 10% to 8% (a 20% reduction) as of 2016.
In Ontario, the ORDTC rate has been reduced from 4.5% to 3.5% as of 2016.
With the following scenario of costs, you can see how the changes have affected R&D corporations between 2012 to present day in 2016.
The total tabulations below represent combined ITC, OITC and ORDTC (where eligible) on the above illustration of expenditures.
2012 – CCPC* below the small business limit in Ontario: $109,400 <- THEN
2016 – CCPC below the small business limit in Ontario: $86,701 <- NOW
21% reduction in tax credits on the same expenditures
*CCPC is a Canadian controlled private corporation
2012 – CCPC above the small business limit in Ontario, no OITC: $59,000 <- THEN
2016 – CCPC above the small business limit in Ontario, no OITC: $36,849 <- NOW
37.5% reduction in tax credits on the same expenditures
There are many different mathematical scenarios. Large corporations above the small business limit (the threshold is actually $800,000 in net profits) they don’t qualify for the OITC, but they still qualify for the ORDTC. However, foreign owned or public companies below the small business limit do qualify for the OITC.
And don’t forget, tax credits are always taxable in Canada.