Federal SR&ED legislative proposals status

As at June 30, 2019

The following table tracks the progress of outstanding federal draft legislation amending the Income Tax Act that impacts on the Scientific Research and Experimental Development (SR&ED) program.

Legislation receiving royal assent will be maintained in this table for up to one year from the date of assent unless coming into force provisions warrant otherwise.

Legislative proposals relating to the Income Tax Act and the Income Tax Regulations and to related legislation

Bill C-97

On April 8, 2019, the Government introduced Bill C-97, an Act to implement certain provisions of the budget tabled in Parliament on March 19, 2019, and other measures and it received second reading on April 30, 2019.

Bill C-97 received royal assent on June 21, 2019, and became law.

History:

The 2019 federal budget and Notice of Ways and Means Motion to amend the Income Tax Act and Other Related Legislation were announced March 19, 2019.

Under the current SR&ED program, expenditures are generally deductible in the year they are incurred and eligible for an investment tax credit (ITC). This credit is larger and refundable for corporations that are Canadian-controlled private corporations (CCPCs) for the first $3 million in qualifying expenditures. However, the amount eligible for the enhanced credit is reduced once a CCPC’s taxable income for the previous year reaches $500,000 (before being eliminated at $800,000) and once a CCPC’s taxable capital employed in Canada reaches $10 million (before being eliminated at $50 million).

Budget 2019 proposes to eliminate the use of taxable income as a factor in determining a CCPC's annual expenditure limit for the purpose of the enhanced SR&ED tax credit. As a result, small CCPC’s with taxable capital of up to $10 million will benefit from unreduced access to the enhanced refundable SR&ED investment tax credit regardless of their taxable income. As a CCPC's taxable capital begins to exceed $10 million, this access will gradually be reduced.

Provisions
Provision Description
127(10.2)

Subsection 127(10.2) of the Act determines a corporation’s expenditure limit for the purpose of the additional Investment Tax Credit provided in subsection 127(10.1). The expenditure limit of a corporation for a particular taxation year is an amount from nil to $3 million, as determined by a formula set out in subsection 127(10.2). The formula has the effect of reducing the expenditure limit to the extent that the taxable income of the corporation and any associated corporations exceeds a threshold amount and to the extent the taxable capital employed in Canada of the corporation and any associated corporations exceeds a threshold amount.

Subsection 127(10.2) is amended to remove taxable income as a factor in the determination of a corporation’s expenditure limit. As a consequence, a corporation’s expenditure limit will be reduced based only on the extent to which the taxable capital employed in Canada of the corporation (and any associated corporations) exceeds $10 million, being fully eliminated where it reaches $50 million.

This amendment applies to tax years ending on or after March 19, 2019 (Budget day).

Note, for tax year ends:

Before March 19, 2019, the formula for determining the expenditure limit is:

($8 million - 10A) × [($40 million - B)/$40 million]

where

A is the greater of

(a) $500,000, and

(b) the amount that is […] the corporation’s taxable income for its immediately preceding taxation year

B is

  1. nil, if  […] its taxable capital employed in Canada is less than or equal to $10 million;
  2. in any other case, the lesser of $40 million and the taxable capital employed in Canada […] that exceeds $10 million.

On or after March 19, 2019, the formula for determining the expenditure limit is:

$3 million × ($40 million – A)/$40 million

Where

A is

(a)  nil, if its taxable capital employed in Canada is less than or equal to $10 million […];

(b)  in any other case, the lesser of $40 million and the taxable capital employed in Canada that exceeds $10 million […].

127(10.6)(c)

Subsection 127(10.6) of the Act provides various application rules for determining a corporation’s expenditure limit in subsection 127(10.2)Paragraph 127(10.6)(c), which provides a special rule for determining taxable income in the event of a short taxation year, is repealed as a consequence of the removal of taxable income as a factor in determining a corporation’s expenditure limit under subsection 127(10.2).

This amendment applies to tax years ending on or after March 19, 2019 (Budget day).

87(2)(j.6)

Subsection 87(2) of the Act provides rules that apply where two or more corporations amalgamate to form a new corporation.

Paragraph 87(2)(j.6) of the Act provides continuity rules for the purposes of a number of provisions of the Act. Specifically, it provides, for certain enumerated purposes, that the corporation formed as the result of an amalgamation is considered to be the same corporation as, and a continuation of, each predecessor corporation. Because of paragraph 88(1)(e.2), these continuity rules also apply in the context of a winding-up to which subsection 88(1) applies.

Paragraph 87(2)(j.6) is amended to add a reference to subsection 127(10.2), which establishes a corporation’s expenditure limit for the additional Investment Tax Credit provided under subsection 127(10.1).

This amendment is consequential on the amendment to subsection 127(10.2) and the repeal of paragraph 87(2)(oo).

This amendment ensures that an amalgamated corporation must take into account the taxable capital employed in Canada of its predecessor corporations in determining its expenditure limit under subsection 127(10.2).

For more information, see the commentary on subsection 127(10.2).

This amendment applies to tax years that end on or after March 19, 2019 (Budget day).

87(2)(oo)

Paragraph 87(2)(oo) of the Act provides a specific continuity rule for an amalgamated corporation in respect of the expenditure limit of the corporation under subsection 127(10.2) for the purpose of determining its Investment Tax Credits.

Due to the amendment to subsection 127(10.2), the specific rule in paragraph 87(2)(oo) is unnecessary and is replaced with a more general reference to subsection 127(10.2) in paragraph 87(2)(j.6). As such, paragraph 87(2)(oo) is repealed. For more information, see the commentary on subsection 127(10.2).

This amendment applies to tax years that end on or after March 19, 2019 (Budget day).

88(1)(e.8)

Winding-up Subsection 88(1) of the Act provides various rules that apply to certain wind-ups of a subsidiary corporation into its parent corporation.

Paragraph 88(1)(e.8) of the Act provides a continuity rule for the purpose of determining the parent corporation’s expenditure limit under subsection 127(10.2) following a qualifying wind-up. For more information, see the commentary on subsection 127(10.2).

Paragraph 88(1)(e.8) is repealed consequential on the amendment to subsection 127(10.2), which eliminates the taxable income factor in the determination of a corporation’s expenditure limit.

This amendment applies to tax years that end on or after March 19, 2019 (Budget day).


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