Provincial Tax Credits – Making the Most of SR&ED
Updated to Reflect New Policies (2022)*** Some of the policies referenced were updated 2021-08-13. This article has been updated and is accurate as of 2022. *** |
Summary of Provincial and Territorial R&D Tax Credit Rates
The provincial tax credits for SR&ED vary across Canada, and they are yours for the taking!
In addition to the generous federal tax credits for SR&ED, many provinces and territories have their own tax credits that can increase the overall amount of your refund. Depending on a) the province in which the organization is based, and b) where the tax returns are filed (usually the same location), your claim can be given quite an impressive “boost” that can then be put toward research and development work.
Provincial and Territorial Investment Tax Credits
Based on our knowledge of existing provincial and territorial investment tax credit programs, these are the current provincial SR&ED tax credit amounts.
| Province | Tax Credit | Rate/ Percentage | Maximum Refund |
|---|---|---|---|
| Alberta | Innovation Employment Grant | The Innovation Employment Grant provides qualified corporations with: An 8% payment for eligible R&D spending carried out in Alberta, up to the corporation’s base level of spending. An enhanced 20% payment for eligible R&D spending that exceeds the corporation’s base spending level. A firm’s base level of spending is determined by calculating the corporation’s average qualifying R&D spending over the previous 2 years. The grant provides benefits on up to $4 million in annual R&D spending. The Innovation Employment Grant is delivered through the corporate tax system and does not follow a formal application process. Eligible corporations will be able to claim the grant when they file their annual corporate tax returns. More can be found on the Government of Alberta website. | Maximum credit of $800,000. |
| British Columbia | British Columbia (BC) Scientific Research and Experimental Development Tax Credit | Refundable at the rate of 10% on up to $3 million in eligible expenditures, and a non-refundable credit at a rate of %10 for the portion of eligible expenditures in excess of the $3 million annual limit is available to CCPC's. Non-refundable at the rate of 10% for Non-CCPC's. | No maximum credit. |
| Manitoba | Manitoba Research and Development Tax Credit (2017 and later tax years) | Refundable at the rate of 15% on eligible expenditures made under an R&D contract with a qualifying institution. For expenditures not made under an R&D contract with a qualifying institution the tax credit is Refundable at the rate of 7.5%, and non-Refundable at the rate of 7.5%. | No maximum credit. |
| Newfoundland and Labrador | Newfoundland and Labrador Research and Development Tax Credit (2004 and later taxation years) | Refundable at the rate of 15% | No maximum credit. |
| New Brunswick | New Brunswick Research and Development Tax Credit (2011 and later tax years) | Refundable at the rate of 15% | No maximum credit. |
| Northwest Territories | No provincial SR&ED ITC program available | ||
| Nova Scotia | Nova Scotia Research and Development Tax Credit (2002 and later taxation years) | Refundable at the rate of 15% | No maximum credit. |
| Nunavut | No provincial SR&ED ITC program available | ||
| Ontario | Ontario Research and Development Tax Credit (2016 and later tax years) | Non-refundable at the rate of 3.5% | No maximum credit. |
| Ontario | Ontario Innovation Tax Credit (2016 and later tax years) | Refundable at the rate of 8% on up to $3 million in eligible expenditures. | Maximum credit of $240,000. |
| Ontario | Ontario Business-Research Institute Tax Credit (2009 and later tax years) | Refundable at the rate of 20%. Only for work performed in Ontario under contract with eligible research institutes. | Qualified expenditures are capped at $20 million annually. The maximum annual tax credit is $4 million. |
| Prince Edward Island | No provincial SR&ED ITC program available | ||
| Québec | Tax credit for salaries and wages (R&D) | The base rate of this refundable tax credit is 14%. The rate may be increased to 30% if the corporation is a CCPC whose total assets for the preceding taxation year are $50 million or less. When the company's total assets range from $50 million to $75 million, the 30% rate is reduced on a straight-line basis. The increased rate applies to expenditures limited to $3 million. | No maximum credit on the base rate, however there is a maximum credit of $900,000 at the increased rate. |
| Saskatchewan | Saskatchewan Research and Development Tax Credit (2017 and later tax years) | CCPC's may receive a refundable credit at a rate of 10% up to $1 million in eligible expenditures, and a non-refundable credit at a rate of %10 for the portion of eligible expenditures in excess of the $1 million annual limit. Other types of corporations may receive a non-refundable tax credit at the rate of 10% on eligible expenditures. | CCPC's have a maximum refundable credit of $100,000, and no maximum non-refundable credit. Non-CCPCs have no maximum credit, but are only eligible for non-refundable credits. |
| Yukon | Yukon Research and Development Tax Credit (2011 and later taxation years) | Refundable at the rate of 15%. An additional 5% is available on amounts paid or payable to the Yukon College. | No maximum credit. |
In addition to the amounts listed above, provinces and territories may offer additional, alternative or supplemental investment programs. For example:
- Alberta offers funding through its science and research investments grant program.
- Ontario also offers a non-refundable 4.5% Ontario Research and Development Tax Credit.
- Prince Edward Island offers grants (non-repayable contributions) under various funds.
- Across Canada, the Industrial Research Assistance Program is available to research and development companies.
How do provincial and federal tax credits work together?
This is where most organizations get confused as, at first glance, the numbers just don’t seem to add up. How can the 35% enhanced federal refund rate1 plus the 10% provincial refund rate (see map above for your province specific rate) result in a 65% refund? Furthermore, if the traditional method is used, how does 35% + 10% result in 41.5%? These questions are best answered using simple examples.
First, select your method: proxy or traditional. There are pros and cons to what can be claimed under both methods. In short:
proxy method is best for organizations where the majority of the expenses are salaries, whereas
traditional method is best when there are many other expenses, such as equipment, materials, and recruiters fees.
For more information regarding the proxy and traditional methods see our article Proxy vs Traditional SR&ED Claim: Which Method to Choose?
Proxy Method – 35% +10% = 65%!
Step 1: For the sake of simplicity, imagine that you have an employee whose salary is $100. When using the proxy method, multiply this salary amount of $100 by 0.55, which represents the 55% proxy “top up”.
This “top up” theoretically includes non-eligible administrative and support costs (salaries, rent, equipment, etc.) that are required to support SR&ED-eligible work.
You now have $155 ($100 + $55).
Step 2: Next, work out your provincial tax credit refund. As an example, in British Columbia, this amount would be 10%. It is important to note that provincial tax credits are always applied first and deducted from the total eligible amount.
Under the proxy method, the portion of the provincial or territorial R&D tax credit that relates to the PPA reduces the qualified SR&ED expenditures, because it is assistance in respect of SR&ED regardless of whether the credit is refundable or non-refundable.2
You now have $155 – $15.5 (provincial refund) = $139.5
Step 3: Finally, apply the federal tax credit.
You now have $139.5 x 35% = $48.825
The total provincial + federal tax credits:
$48.825 + 16.5 = $65.325
Thus, if you use the proxy method, of the $100 you spent on salaries, ~$65 of that total amount is eligible for a refund.
Traditional Method – 35% + 10% = 41.5%!
Step 1: If using the traditional method, work out your exact direct and indirect costs. The Government of Canada’s policy on SR&ED Salary or Wages may give you more information.3 For simplicity, it will remain $100.
Step 2: Next, work out your provincial tax credit refund. In British Columbia, this would be 10%.
You now have $100 – $10 (provincial refund) = $90
Step 3: Finally, apply the federal tax credit.
You now have $90 x 35% = $31.5
The total provincial + federal tax credits:
$31.5 + $10 = $41.5
Thus, if you use the traditional method, of the $100 you spent, you are eligible for a ~$41.5 refund.
Proxy vs. Traditional: What is the better option?
“Context is everything.”
Use this as your mantra when selecting the best method for your project.
While it may seem tempting to use the proxy method of calculation given that it yields a larger return, it is often more beneficial to use the traditional method as the eligibility criteria are much more forgiving. More forgiving eligibility criteria mean that you can claim more project expenses such as hiring a recruiter to find employees who will do SR&ED work.
Typically, labour-intensive development (such as software) will best benefit from the proxy method, whereas resource-intensive development (engineering prototyping) will best benefit from using the traditional method.
This article is presented only for informational purposes and does not constitute legal advice. You should retain legal counsel if you require legal advice regarding your individual situation.
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