SR&ED Investment Tax Credit Policy

Carryback rules

Tax year	Part I tax otherwise payable in the year	ITC available in the year	Part I tax otherwise payable in excess of ITC available in the year	ITC allowed for carryback
Year 1 (previous year)	$10,000	$6,000	$4,000	N/A
Year 2 (current year)	$12,000	$15,000	Nil	Limited to $3,000 to Year 1

In this example the claimant may carry back up to the lesser of:

• $3,000 (the portion of ITC from Year 2 that was not deductible against Part I tax in Year 2)
• $4,000 (Part I tax otherwise payable in Year 1 in excess of ITC available in Year 1)

Thus, in this example, the claimant may carry back up to $3,000 from Year 2 to Year 1. The claimant may choose how they utilize the remaining $12,000 of ITC in Year 2 subject to any other applicable rules.

Legislative reference: Income Tax Act
Subsection 127(5) Investment tax credit

2.3.3 Carrying forward and expiry of investment tax credits

An ITC that is not applied, refunded, or carried back may be carried forward and applied to Part I tax otherwise payable in a subsequent year. The Income Tax Act applicable to 2008 and later tax years allows the ITC to be carried forward 20 tax years.

3.0 Determining the enhanced rate of 35%

An ITC at an enhanced rate of 35% may be earned by CCPCs on their qualified SR&ED expenditures incurred in the year. ECPCs are also eligible for this enhanced rate for tax years beginning after December 15, 2024. An ITC can be earned at the enhanced rate on a maximum of $6 million of qualified SR&ED expenditures (expenditure limit), up from $3 million. This change applies to tax years that begin after December 15, 2024. The current year qualified SR&ED expenditures in excess of the expenditure limit for the tax year earn an ITC at the basic rate (see section 2.2.1). For more information on qualified SR&ED expenditures refer to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

3.1 Determining the expenditure limit

The expenditure limit may vary depending on several factors, including the taxable capital for the previous year or the previous 3 fiscal years’ average annual revenue. Short tax years will also have an effect on calculating the expenditure limit (see section 3.1.2). 

A CCPC and its associated corporations (see section 3.2), or an ECPC and the members of the consolidated group, must allocate the annual expenditure limit for the purpose of calculating their ITCs earned at the enhanced 35% rate (see section 3.1.3). When associated CCPCs, or ECPCs that are members of a consolidated group, have multiple tax years in the same calendar year it will have an effect on calculating the expenditure limit (see section 3.1.4).

The Act provides a formula to determine the expenditure limit:

• For the expenditure limit formula for a CCPC that is not associated with any other corporation, refer to Schedule T2SCH31, Investment Tax Credit – Corporations for the applicable year and subsection 127(10.2) of the Act. 
• For the expenditure limit formula for a CCPC that is associated with 1 or more corporations, refer to Schedule T2SCH49, Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Expenditure Limit for the applicable year and subsection 127(10.21) of the Act. 
• For an ECPC, or a CCPC electing to calculate their expenditure limit based on the revenue method, the formula to calculate the expenditure limit is provided in subsection 127(10.6) of the Act. A separate schedule will be released in Fall 2026 to allocate the expenditure limit, under subsection 127(10.6) of the Income Tax Act, among:
  • Associated Canadian-controlled private corporations (CCPCs) electing under subsection 127(10.32) of the Act, or
  • Eligible Canadian public corporations (ECPCs) that are members of a consolidated group

In the interim, claimants should maintain copies of their working papers.

3.1.1 Reductions to the expenditure limit

Tax years that begin before December 16, 2024
The expenditure limit decreases based on the taxable capital employed in Canada of the CCPC for the previous tax year. Once the previous year’s taxable capital reaches $10 million, the expenditure limit begins to decrease. The expenditure limit becomes nil when the previous year’s taxable capital reaches $50 million. If the corporation has associated corporations, the expenditure limit is calculated using the taxable capital of all CCPCs in the associated group. 

The concept of taxable capital used in Canada by the corporation is defined in the Act. For more information, refer to IT-532 ARCHIVED – Part I.3 – Tax on Large Corporations.

Tax years that begin after December 15, 2024
For tax years beginning after December 15, 2024, the expenditure limit of a CCPC begins to decrease when the taxable capital employed in Canada during the previous tax year reaches $15 million. The expenditure limit becomes nil when the previous year’s taxable capital reaches $75 million. If the corporation has associated corporations, the expenditure limit is calculated using the taxable capital of all CCPCs in the associated group. 

The concept of taxable capital used in Canada by the corporation is defined in the Act. For more information, refer to IT-532 ARCHIVED – Part I.3 – Tax on Large Corporations. 

For tax years that begin after December 15, 2024, CCPCs may elect to use the same method for calculating the expenditure limit as ECPCs. When calculating the eligible expenditure limit using the revenue method, the expenditure limit decreases based on the corporation’s average annual revenue over the previous 3 fiscal years. The expenditure limit starts to decrease when the average annual revenue reaches $15 million, and it becomes nil at $75 million or greater.

CCPCs that choose this method must calculate their average annual revenues of the preceding 3 fiscal years which is then used to determine the expenditure limit. The CCPCs must complete a prescribed form to make this choice. 

If the CCPC is part of a group of associated corporations and they want to choose the revenue method to calculate their expenditure limit, all CCPCs in the group must jointly elect to use that method to calculate the expenditure limit. The calculated expenditure limit must then be allocated using the prescribed form by all CCPCs in the group. To calculate the average annual revenues for the 3 preceding fiscal years, the Act: 

• Requires using the total of all amounts of average annual revenue reflected in the financial statements: 
  • For each corporation that is a member of the group for the tax year in question
  • For the preceding 3 fiscal years, and
  • Regardless of whether corporations were associated during the entirety of that period
• Requires that the average annual revenue must include each corporation's reasonable share of annual revenue reflected in the financial statements of any partnership or trust in which the corporation held an interest
• Allows reasonable adjustments , such as for intra-group sales of goods or services, so that the annual revenue of the group reflects that of a single economic entity

For ECPCs, the expenditure limit is shared among members of a consolidated group that prepare consolidated financial statements. If the corporation is part of a consolidated group, the annual revenue reflected in the consolidated financial statements of the group is used to calculate the average annual revenue and the expenditure limit. If an entity leaves or joins the group during the year, the average annual revenue used is that of the consolidated group as reflected in the consolidated financial statements, for the year in question. The consolidated financial statements of a group present the assets, liabilities, income, expenses and cash flows of the group members as if they were a single economic entity. 

3.1.2 Effect of short tax years on the expenditure limit

When the tax year of a corporation is less than 51 weeks, the expenditure limit for the tax year-end must be prorated to the number of days in the tax year divided by 365. The same calculation applies if a CCPC is part of an associated group or if an ECPC is part of a consolidated group.

3.1.3 Allocation of the expenditure limit for associated CCPCs and ECPCs that are members of a consolidated group

A CCPC and its associated corporations (associated group), or an ECPC and the members of a consolidated group (see section 3.2), must allocate the annual expenditure limit for the purposes of calculating their ITCs earned at the enhanced 35% rate. The amount of a corporation’s expenditure limit that is not allocated to itself may be allocated to another corporation in the group, up to the corporation’s expenditure limit determined under the Act (see the example below). The expenditure limit allocated to each particular corporation cannot exceed the expenditure limit determined for the group for the applicable tax year.

All CCPCs in an associated group, and all ECPCs that are part of a consolidated group, must file an agreement to allocate the expenditure limit on the prescribed form, otherwise the CRA will determine the expenditure limit to be nil.

For CCPCs, the expenditure limit for the applicable tax year may be allocated among the associated corporations by filing Schedule T2SCH49, Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Expenditure Limit. For ECPCs, and CCPCs electing to calculate their expenditure limit based on the revenue method, a separate form will be published in Fall 2026. In the interim, corporations should maintain copies of their working papers to demonstrate how the expenditure limit was calculated and allocated. 

The Act allows the CRA to allocate the expenditure limit among the group of associated CCPCs or ECPCs if the group does not file the agreement allocating the expenditure limit within 30 days of when the CRA requested such information. For more information about the filing requirements refer to the SR&ED Filing Requirements Policy.

Example: Allocation of the expenditure limit when 1 CCPC has a short tax year, is associated with other CCPCs, and their tax years begin before December 16, 2024

Corporations X, Y, and Z are associated corporations. There is no reduction to the expenditure limit due to the previous year’s taxable capital employed in Canada. 

• Corporation X has a short tax year of 273 days ending on January 31, 2023. 
• The expenditure limit for the 2023 tax years of the associated group is calculated to be $3,000,000.
• Corporation Y has an April 30, 2023 year-end. Corporation Y shares the expenditure limit of $3,000,000.
• Corporation Z has a December 31, 2023 year-end. Corporation Z also shares the expenditure limit of $3,000,000.

Corporations X, Y and Z agree to allocate the $3,000,000 expenditure limit to Corporation X on T2 Schedule 49. After the adjustment for the short tax year of 273 days, Corporation X would have an expenditure limit of $2,243,836. The allocations to Corporations Y and Z would be $0.

Conversely, if Corporations X, Y and Z had agreed to allocate the $3,000,000 expenditure limit equally to Corporations Y and Z, each would have an expenditure limit of $1,500,000. In this case, the allocation to Corporation X would have been $0.

Example: Allocation of the expenditure limit when 1 CCPC has a short tax year, is associated with other CCPCs, and their tax years begin after December 15, 2024

Using the previous example, but changing the tax year-end dates to 2026, for all of them, results in an expenditure limit of $6,000,000 that must be allocated on the prescribed form. Any allocation to Corporation X by agreement would again result in the reduction to its allocated expenditure limit due to its short tax year of 273 days. 

If Corporations X, Y and Z agree to allocate the $6,000,000 expenditure limit to Corporation X on the applicable schedule, Corporation X would have an expenditure limit of $4,487,671 after adjustment for the short tax year of 273 days. The allocations to Corporations Y and Z would be $0.

If Corporations X, Y and Z agree to allocate the $6,000,000 expenditure limit equally to Corporations Y and Z, each would have an expenditure limit of $3,000,000. In this case the allocation to Corporation X would be $0.

This example would also be applicable if Corporations X, Y, and Z were ECPCs that are members of a consolidated group instead of associated CCPCs.

3.1.4 Determining the expenditure limit for associated corporations with multiple tax years in a calendar year

Specific rules apply to determine the expenditure limit if:

• A CCPC (the first corporation) has more than 1 tax year ending in a calendar year, and 
• It is associated in 2 or more of those tax years with another CCPC which has a tax year ending in the same calendar year

or

• An ECPC (the first corporation) has more than 1 tax year ending in a calendar year, and 
• In 2 or more of those taxation years it is a member of a consolidated group in which another ECPC has a taxation year ending in that same calendar year 

In these situations, the expenditure limit of the first corporation for each tax year ending in the calendar year is equal to the expenditure limit for the first tax year. However, if a tax year has less than 51 weeks, the limit is prorated depending on the number of days in the year.

For most ECPCs, the period to be considered to calculate the average annual revenue corresponds to the last 3 fiscal years. However, if the ECPC has fewer than 3 fiscal years, the average annual revenue must be calculated based on the actual number of fiscal years.

For CCPCs electing to use the revenue method to calculate their expenditure limit, similar rules apply for short years and when there are fewer than 3 previous fiscal years.

Example for associated CCPCs

Corporations P and Q are associated CCPCs.

Corporation P has a tax year-end of June 30. Corporation Q has a tax year-end of December 31. In 2027, Corporation P changes its tax year-end to December 31. 

As a result, in 2027, corporation P has 2 tax years:

• The 12-month period ending on June 30, 2027
• The 6-month period ending December 31, 2027

From then on, the tax year-end of corporation P is December 31.

Year 2026

Corporation	Tax year-end	Expenditure limit
P	June 30, 2026	$3,000,000
Q	December 31, 2026	$3,000,000

Year 2027

Corporation	Tax year-end	Expenditure limit
P	June 30, 2027	$3,000,000
P	December 31, 2027	$ 1,512,328*
Q	December 31, 2027	$3,000,000

Year 2028

Corporation	Tax year-end	Expenditure limit
P	December 31, 2028	$3,000,000
Q	December 31, 2028	$3,000,000

* The 2 corporations have been allocated the expenditure limit equally ($3,000,000 to each corporation) for each year. The allocation of the expenditure limit for 2027 is between corporation P for its June 30, 2027 tax year-end and corporation Q for its December 31, 2027 tax year-end. Where there are multiple tax years in a calendar year, the Act requires that the expenditure limit for Corporation P for the tax year ending December 31, 2027, be equal to its expenditure limit for the tax year ending June 30, 2027 (in this instance, $3,000,000), subject to any proration for a short tax year. Since the tax year ending December 31, 2027 is less than 51 weeks, the Act requires that the expenditure limit be prorated for the number of days in the year (see section 3.1.2). The expenditure limit for corporation P's December 31, 2027 tax year-end is determined under subsection 127(10.5) of the Act.

Corporation P's expenditure limit for tax year ended December 31, 2027: 

$3,000,000 x [184 days (from July 1 to December 31, 2027) ÷ 365 days] = $1,512,328

3.2 Determining associated corporations

Determining whether a corporation is associated with another relies on determining the control of the corporation that is exercised directly or indirectly in any manner whatever. For more information on the concept of control refer to Interpretation Bulletin IT-64R4 (Consolidated Archived) – Corporations: Association and Control.

For more information on situations where corporations are associated see "When is a corporation associated?" in the Guide T4012, T2 Corporation – Income Tax Guide.

Corporations deemed to be associated
If 2 otherwise unassociated corporations are associated with the same third corporation, the Act deems the 2 corporations to be associated with each other. There are exceptions, but they only apply for the purposes of the small business deduction.

2 or more corporations are deemed associated with each other if 1 of the main reasons for the separate existence of those corporations is to reduce the amount of income tax otherwise payable or to increase the amount of refundable ITCs available (see section 4.0).

Corporations deemed not to be associated
As a result of the group of persons definition, CCPCs may be considered to be associated when the same group of otherwise unconnected investors, such as venture capital investors, have invested in each of them. To ensure the receipt of SR&ED tax incentives by small businesses is not hindered in these situations, the Act provides relief provisions. The provisions deem that corporations will not be associated for the purposes of calculating the expenditure limit and refundable ITC, if the only reason 1 corporation is associated with another is because 2 or more investors own shares in each corporation. These relieving provisions are subject to all the following conditions:

• The corporations must not be otherwise associated under the Act
• There is at least 1 shareholder of 1 of the corporations who is not a shareholder of the other corporation
• The existence of 1 or more shareholders of 1 of the corporations who is not a shareholder of the other corporation, is not for the purpose of satisfying these relieving provisions

This relief for the particular corporations is for SR&ED ITC purposes only and does not extend to shareholding structures intended to multiply the expenditure limit of corporations.

3.3 Specified future tax consequences

A specified future tax consequence is defined in the Act. The expression means the consequence of a deduction, exclusion, reduction, or adjustment under different provisions of the Act that are specified in the definition itself. The relevant consequence for the purpose of calculating a qualifying corporation's taxable income is an amount deducted in the current year for a loss in a subsequent tax year (in other words, a loss carryback).

The consequence of a loss carryback to a particular year is that the taxable income for the year is reduced. See section 4.2 for more information on qualifying corporations. 

4.0 Refundable investment tax credit

The investment tax credit (ITC) of certain claimants (see section 4.1) that is not applied in the year to Part I tax, or carried back to a previous year and applied to Part I tax in the previous year, may be refundable. In this context, the term refundable goes beyond a reimbursement of Part I tax already paid and refers to the credit that is reimbursed to the claimant.

Any SR&ED ITC that is refunded in the year is deemed to be ITC applied to reduce Part I tax otherwise payable in the year. As a result, SR&ED ITC that is refunded in the year reduces the ITCs available to carry forward or carry back.

Generally, an SR&ED ITC refund may only be claimed in the year for an expenditure incurred that qualifies for an SR&ED ITC. Some circumstances (for example, the rules related to unpaid current expenditures) may deem the expenditure to have been made in a future year. An SR&ED ITC refund cannot be claimed in respect of repayments of assistance or a contract payment.

For more information on unpaid salaries or wages or unpaid amounts refer to the SR&ED Salary or Wages Policy and the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy, respectively.

 

4.1 Refundable investment tax credit for various entities

According to the definition of refundable ITC in the Income Tax Act, and other supporting provisions, the following types of claimants can earn a refundable ITC: 

1) For a CCPC that is a qualifying corporation (see section 4.2), other than an excluded corporation (see section 4.3), the refundable ITC is:

• 100% of the unclaimed balance of the ITC earned in the year at the enhanced ITC rate of 35% for its qualified SR&ED expenditures of a current nature and its prescribed proxy amount (PPA)
• 40% of the unclaimed balance of the ITC earned in the year at the enhanced ITC rate of 35% for its qualified SR&ED expenditures of a capital nature
• 40% of the unclaimed balance of the ITC earned in the year at the basic ITC rate of 15% for its qualified SR&ED expenditures

2) For a CCPC, other than 1 that is a qualifying corporation or an excluded corporation, the refundable ITC is:

• 100% of the unclaimed balance of the ITC earned in the year at the enhanced ITC rate of 35% for its qualified SR&ED expenditures of a current nature and its PPA
• 40% of the unclaimed balance of the ITC earned in the year at the enhanced ITC rate of 35% for its qualified SR&ED capital expenditures

An ITC earned at the basic ITC rate by a CCPC, that is not a qualifying corporation or an excluded corporation, is not refundable.

3) For ECPCs whose tax year begins after December 15, 2024: 

• 100% of the unclaimed balance of the ITC earned at the enhanced ITC rate of 35% in the current year for qualified SR&ED current expenditures and its PPA
• 40% of the unclaimed balance of the ITC earned for their capital expenditures in the taxation year, at the enhanced rate of 35%

4) For a CCPC that is a qualifying corporation, but is also an excluded corporation, the refundable ITC is 40% of the unclaimed balance of the ITC earned in the current year for qualified SR&ED expenditures.

5) Generally, for an individual (other than a trust), the refundable ITC is 40% of the unclaimed balance of ITC earned in the current year for qualified SR&ED expenditures.

6) Generally, for a trust, each beneficiary of which is either a qualifying corporation or an individual (other than a trust), the refundable ITC is 40% of the unclaimed balance of ITC earned in the current year for qualified SR&ED expenditures.

To learn more about the ITC for members of a partnership, consult the SR&ED Claims for Partnerships Policy. For more information on qualified SR&ED expenditures refer to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

SR&ED claims made by large corporations that earn an ITC at the basic rate (see section 2.2.1) are for the non-refundable ITC. This category also includes corporations that are not a CCPC or an ECPC.

The table in Appendix A contains the refundable ITC rates for various entities.

4.2 Qualifying corporation

"Qualifying corporation" is defined in the Act and means either:

• A corporation that is a CCPC throughout a particular tax year, whose taxable income in the previous tax year is not more than the corporation's qualifying income limit (see section 4.2.1) for the particular tax year, or
• A corporation that is a CCPC in a particular tax year and is associated (see section 3.2) with 1 or more corporations, the total of the taxable incomes of the corporation and the associated corporations for their last tax year ending in the preceding calendar year that is not more than the corporation’s qualifying income limit for the particular tax year.

The taxable income in the previous tax year or in the last tax year ending in the preceding calendar year is calculated before taking into consideration the specified future tax consequences (see section 3.3) for that previous year.

The definition of qualifying corporation relies upon the corporation's qualifying income limit. 

4.2.1 Qualifying income limit

The qualifying income limit of a corporation for a particular tax year is the amount determined in the Act according to the following formulas:

Formula for tax years beginning before December 16, 2024

$500,000 x [($40,000,000 – A) ÷ $40,000,000]

In this formula, A is either:

• Nil, if the taxable capital amount* is less than or equal to $10 million, or
• The lesser of $40 million and the amount of taxable capital that exceeds $10 million

Formula for tax years beginning after December 15, 2024

$500,000 x [($60,000,000 – A) ÷ $60,000,000] 

In this formula, A is:

• Nil, if the taxable capital amount* is less than or equal to $15 million, or
• The lesser of $60 million and the amount of taxable capital that exceeds $15 million

*The taxable capital amount is the total of:

• The corporation’s taxable capital employed in Canada for its immediately preceding tax year, and 
• The taxable capital employed in Canada of all associated corporations (if applicable) for the last tax year ending in the preceding calendar year that ended before the end of the particular tax year of the corporation

Taxable capital employed in Canada by the corporation has the meaning provided in the Act. For more information on taxable capital, refer to Interpretation Bulletin IT-532, Part I.3 – Tax on Large Corporations.

Where a CCPC’s income limit is reduced to zero, it is not a qualifying corporation. This occurs when the CCPC’s taxable capital for the previous year has reached:

• $50 million or greater for tax years beginning before December 16, 2024
• $75 million or greater for tax years beginning after December 15, 2024

In this case, the CCPC would also have a nil expenditure limit and would not be entitled to any refundable ITC.

4.3 Excluded corporation

"Excluded corporation" is defined in the Act. An excluded corporation is a corporation that is, at any time in the year, either controlled by (directly or indirectly, in any manner whatever), or is related to:

• 1 or more persons exempt from tax under section 149
• Her Majesty in right of a province, a Canadian municipality or any other public authority, or
• Any combination of the above persons

For more information on the concept of control refer to Interpretation Bulletin IT-64R4 (Consolidated Archived), Corporations: Association and Control. For more information on related persons refer to Income Tax Folio S1-F5-C1, Related persons and dealing at arm's length.

4.4 Eligible Canadian Public Corporation

The definition of an ECPC can be found in subsection 127(9) of the Act. An ECPC is a corporation that meets the following criteria:

• It is resident in Canada
• It is a public corporation, or would be a public corporation if the words “designated stock exchange in Canada” in paragraph (a) of the definition of “public corporation” in subsection 89(1) were read as “designated stock exchange”
• It is not controlled, directly or indirectly in any manner whatever, by 1 or more non-resident persons
• It would not be controlled by a particular person, if each share of its capital stock that is owned by a non resident person (as determined, absent actual knowledge, based on publicly available information, including information filed pursuant to applicable securities laws before the year) was owned by that particular person

An ECPC is also an eligible subsidiary. 

An eligible subsidiary is a corporation:

• That is resident in Canada, and
• At least 90% of the issued shares of each class of the capital stock of which is owned, directly or indirectly, by 1 or more corporations that are ECPCs

4.5 Assignment of a refundable SR&ED investment tax credit

The Income Tax Act (Act) states that a corporation may assign an amount payable to it under the Act. However, the Act also states that such assignments are not binding on the CRA. Where an assignment has been made, the CRA will continue to issue the refund cheque in the name of the claimant. Under no circumstances will CRA refund cheques be made payable to an assignee.

C/o address option

The CRA may send a refund cheque to a different address than the claimant’s usual address if it receives a written request.

A claimant who wishes to use this option must perform 1 of the following actions:

• Attach their request to their T2 return
• Send their request directly to their tax centre

The claimant should clearly state that only this refund cheque is to be sent to the c/o address. If this is not specified, the CRA will send all refunds, notices of assessment and any other correspondence to this address.

5.0 Special situations

5.1 Acquisition of control: effect on investment tax credits

If control of a corporation has been acquired by a person or group of persons resulting in a loss restriction event, the availability of the corporation's investment tax credit (ITC) is restricted. When there is an acquisition of control of a corporation there is a deemed year-end.

ITCs earned by a business of a corporation before an acquisition of control may be carried forward to a tax year ending after control was acquired if:

• The ITC is applied to Part I tax on the income for the year where the income is from the same business carried on by the corporation before the acquisition of control, or
• The ITC is applied to Part I tax on the income from any other business of the corporation where substantially all the income of which is from activities (for example, the sale, leasing, rental, or development of properties or the rendering of services) similar to those of the particular business carried on by the corporation before the acquisition of control

ITCs earned by a business of a corporation after an acquisition of control may be carried back to a tax year ending before control was acquired if:

• The ITC is applied to Part I tax on the income for the year where the income is from the same business carried on by the corporation; or
• The ITC is applied to Part I tax on the income from any other business of the corporation where substantially all the income of which is from activities (for example, the sale, leasing, rental, or development of properties or the rendering of services) similar to those of the business carried on by the corporation

These rules also apply to trusts.

5.2 Amalgamation and windup: continuation of predecessor corporations

When there has been an amalgamation of 2 or more corporations, as defined in the Act, for the purposes of calculating the ITC of the newly amalgamated corporation at the end of any particular tax year, the corporation is deemed to be the same corporation as, and a continuation of, any predecessor corporation. This provision allows the amalgamated corporation to claim any carryforward of ITC of the predecessor corporations.

Similarly, when there has been a windup of a taxable Canadian corporation, the Act provides that the parent corporation is deemed, for SR&ED purposes, to be the same corporation as, and a continuation of, its subsidiary. These deeming provisions only apply for the purpose of calculating the parent’s ITC at the end of any tax year ending after the subsidiary was wound up. Where a subsidiary is wound up into its parent, the parent cannot claim the subsidiary’s ITC carried forward against the Part I tax otherwise payable by the parent for a tax year preceding the year in which the subsidiary was wound up.

Such claims are subject to the time limits described in the definition of ITC (see section 2.1).

For more information on amalgamations and windups, refer to Income Tax Folio S4-F7-C1, Amalgamations of Canadian Corporations, and Interpretation Bulletin IT-126R2 ARCHIVED - Meaning of "Winding-up".

Appendix A: SR&ED ITC rates and ITC refund rates on qualified SR&ED expenditures for various entities

Type of claimant	ITC rate on SR&ED expenditures up to expenditure limit (a,b)	Refund rate of ITC earned on current expenditures up to expenditure limit	Refund rate of ITC of ITC earned on capital expenditures up to expenditure limit (c)	ITC rate on SR&ED expenditures over expenditure limit (a,b)	Refund rate of ITC obtained on capital expenditures and current expenditures over expenditure limit (c)
CCPC that is a qualifying corporation (see section 4.2) other than an excluded corporation	35%	100%	40%	15%	40%
CCPCs that are excluded corporations (see section 4.3)	35%	40%	40%	15%	40%
CCPCs other than qualifying or excluded corporations	35%	100%	40%	15%	0%
ECPCs (d)	35%	100%	40%	15%	0%
All other corporations not included above	15% non-refundable	N/A	N/A	15% non-refundable	N/A
Individuals, certain trusts and unincorporated businesses	15%	40%	40%	15%	40%
Member of a partnership	15%	40%	40%	15%	40%

Notes

a) For tax years that begin before December 16, 2024, the maximum expenditure limit is $3 million per year.

b) For tax years that begin after December 15, 2024, the maximum expenditure limit is $6 million per year.

c) Capital expenditures made before December 16, 2024, are not eligible for SR&ED. This rule also applies to capital expenditures deemed to have been made before that date under the lay-off rule. Capital expenditures made after December 15, 2024, are eligible for SR&ED tax incentives.

d) For tax years that begin after December 15, 2024, ECPCs can earn an ITC at the rate of 35%.

Appendix B: References

B.1 Legislative references

List of provisions

Income Tax Act	Description
Subsection 37(11)	Filing requirement
Section 87	Amalgamations
Paragraph 87(2)(j.6)	Continuing corporation
Paragraph 87(2)(l)	Scientific research and experimental development activities
Paragraph 87(2)(qq)	Continuation of a corporation
Section 88	Winding-up
Paragraph 88(1)(e.2)	Winding-up: application of amalgamation provisions
Paragraph 88(1)(e.3)	Winding-up: investment tax credit
Section 111	Deductible losses
Subsection 125(7)	Definition of "Canadian-controlled private corporation"
Subsection 127(5)	Investment tax credit
Subsection 127(8)	Investment tax credit of partnership
Subsection 127(9)	Definition of "eligible Canadian public corporation"
Subsection 127(9)	Definition of "eligible subsidiary"
Subsection 127(9)	Definition of "investment tax credit"
Subsection 127(9)	Definition of "investment tax credit", paragraph (a.1)
Subsection 127(9)	Definition of "investment tax credit", paragraph (b)
Subsection 127(9)	Definition of "investment tax credit", paragraph (c)
Subsection 127(9)	Definition of "investment tax credit", paragraph (e)
Subsection 127(9)	Definition of "investment tax credit", paragraphs (e.1) and (e.2)
Subsection 127(9)	Definition of "investment tax credit", paragraph (f)
Subsection 127(9)	Definition of "investment tax credit", paragraph (h)
Subsection 127(9)	Definition of "investment tax credit", paragraph (j)
Subsection 127(9)	Definition of "investment tax credit", paragraph (k)
Subsection 127(9)	Definition of "investment tax credit", paragraph (l)
Subsection 127(9)	Definition of "investment tax credit", paragraph (m)
Subsection 127(9)	Definition of "specified percentage"
Subsection 127(9.01)	Transitional application of investment tax credit definition
Subsection 127(9.02)	Transitional application of investment tax credit definition
Subsection 127(9.1)	Loss restriction event before end of year
Subsection 127(9.2)	Loss restriction event after end of year
Subsection 127(10.1)	Additions to investment tax credit
Subsection 127(10.2)	Expenditure limit – CCPC
Subsection 127(10.21)	Expenditure limits – associated CCPCs
Subsection 127(10.22)	Deemed non-association of corporations
Subsection 127(10.23)	Application of subsection 127(10.22)
Subsection 127(10.3)	Associated corporations – associated CCPCs
Subsection 127(10.31)	Revenue election for single CCPC
Subsection 127(10.32)	Revenue election for CCPC having associated corporations
Subsection 127(10.4)	Failure to file agreement
Subsection 127(10.5)	Expenditure limit determination in certain cases
Subsection 127(10.6)	Expenditure limit – ECPCs
Subsection 127(10.61)	Expenditure limits – Consolidated ECPCs
Subsection 127(10.62)	Consolidated ECPCs
Subsection 127(10.63)	Failure to file agreement – ECPCs
Subsection 127(10.64)	Determinations in certain cases
Subsection 127(10.7)	Further additions to investment tax credit
Subsection 127(10.8)	Further additions to investment tax credit
Subsections 127(27) to (36)	Recapture of investment tax credit
Section 127.1	Refundable investment tax credit
Subsection 127.1(1)	Refundable investment tax credit
Subsection 127.1(2)	Definition of "excluded corporation"
Subsection 127.1(2)	Definition of "qualifying corporation"
Subsection 127.1(2)	Definition of "qualifying income limit"
Subsection 127.1(2)	Definition of "refundable investment tax credit"
Subsection 127.1(2.01)	Additions to refundable investment tax credit
Subsection 127.1(2.2)	Refundable investment tax credit – associated CCPCs
Subsection 127.1(2.3)	Application of subsection 127.1(2.2)
Subsection 127.1(3)	Deemed deduction
Subsection 149(1)	Miscellaneous exemptions
Paragraph 161(7)(a)	Effect of a carryback of loss
Section 181.2	Taxable capital employed in Canada
Section 181.3	Taxable capital employed in Canada of financial institution
Section 181.4	Taxable capital employed in Canada of non-resident
Subsection 220(6)	Assignment by corporation
Subsection 220(7)	Effect of assignment
Subsection 233.8(1)	Definition of "consolidated financial statements"
Subsection 248(1)	Definition of "specified future tax consequences"
Subsection 249(4)	Loss restriction event – Year end
Subsection 251.2(2)	Loss restriction event
Subsection 256(1)	Associated corporations
Paragraph 256(1.2)(a)	Extended definition of "group of persons"
Subsection 256(2)	Corporations associated through a third corporation
Subsection 256(2.1)	Anti-avoidance

List of regulations

Income Tax Regulations	Description
Section 4800	Status of corporations and trusts
Section 6700	Prescribed venture capital corporation
Section 7100	Prescribed Federal Crown Corporations

Appendix C: Revisions

C.1 Explanation of changes

The following is the explanation of changes to the SR&ED Investment Tax Credit Policy as part of the revision of October 7, 2026.

The following changes have been made to reflect legislative amendments in Budget 2025:

• Capital expenditures are reinstated as both allowable and qualified SR&ED expenditures
• The 35% ITC rate on qualified SR&ED expenditures is extended to certain ECPCs
• For tax years beginning after December 15, 2024, the maximum expenditure limit increases to $6 million for CCPCs and ECPCs
• The gradual reduction of the expenditure limit begins at $15 million* and the expenditure limit becomes nil when it is $75 million or more*

*of taxable capital employed in Canada in the previous year or the average annual revenue for the 3 preceding fiscal years depending on the type of corporation and whether an election was made.

Minor changes and formatting adjustments have been made to the entire document.