Are Concessional Loans Impacting Your SR&ED Claims? Here’s What You Need to Know

What is a Concessional Loan in Canada?

In Canada, a concessional loan refers to a loan provided by a government, municipality, or public authority with terms that are more favorable than those available from commercial lenders. These loans often feature lower interest rates, longer repayment periods, or more flexible conditions.

The Canadian government has enacted new measures to clarify the treatment of concessional loans under the Income Tax Act (ITA) and introduced the new term “excluded loans”.  These changes address a recent legal court decision and ensure fairness and consistency in tax treatment, particularly affecting businesses claiming Scientific Research and Experimental Development (SR&ED) tax credits. Additionally, these changes ensure that companies engaged in SR&ED can fully leverage their tax credits without unintended reductions.

Overview

Under the Income Tax Act, if a taxpayer receives government assistance in the course of earning income from a business or property, the amount of that assistance may reduce the amount of a related expense or the cost or capital cost of a related property or may be included in the taxpayer’s income. The amount of assistance may also reduce the amount of an expenditure on which an associated SR&ED Investment Tax Credit (ITC) is based.

Historically, non-forgivable loans from public authorities were generally not considered government assistance. This position extended to concessional loans (meaning loans that do not bear interest or that bear interest at below-market rates) from public authorities. However, in a 2021 decision, the Tax Court of Canada upheld that the full principal amount of a concessional loan was government assistance. This decision was affirmed by the Federal Court of Appeal in 2022.

This measure would amend the Income Tax Act to provide that bona fide concessional loans with reasonable repayment terms from a government, municipality, or public authority would generally not be considered government assistance.

This amendment would apply in respect of loans made on or after January 1, 2020. ¹

Background

In 2021, the Tax Court of Canada ruled that concessional loan principals constituted government assistance. This ruling, involving CAE Inc. CAE Inc. c. La Reine (2021),  the agreement did not possess the attributes of a “trade or commercial enterprise”, and did not constitute an “ordinary trade or commercial agreement”. The agreement was determined to be government assistance which should have been reported as such on the Appellants’ SR&ED claims. See our summary of the legal ruling here: https://www.sreducation.ca/legal-rulings-table-contents/cae-inc-c-la-reine-2021/

Under the ITA, taxpayers receiving government assistance related to earning income from business property must account for this assistance in specific ways. Generally, such assistance can:

• Be included in the taxpayer’s income; or
• Reduce the amount of expenditures used to calculate an investment tax credit.

To address the implications of the rulings mentioned above, the government introduced amendments to Bill C-69, which became law on June 20, 2024, upon receiving Royal Assent. This legislative change modifies the ITA to specify that “a bona fide concessional loan with reasonable repayment terms from the government, municipality, or public authority will generally not be classified as government assistance” ². This applies retroactively to loans issued on or after January 1, 2020.

The amendments aim to provide clarity for taxpayers who might otherwise face unintended income inclusions or expense reductions resulting from concessional loans. The new rules would ensure a fair approach that distinguishes genuine loans from grants or subsidies.

How Concessional Loans Impact Your SR&ED Claims?

The amendments ensure bona fide concessional loans are no longer treated as government assistance, provided they meet reasonable repayment terms. As a result, SR&ED claimants can maintain their eligibility for full SR&ED tax credits. See our article on Defining Government Assistance in SR&ED Projects.

The passage of Bill C-69 aligns with efforts to modernize tax legislation and address inconsistencies featured by judicial decisions. As noted in the official government release, the bill’s enactment furthers the principles of “Fairness for Every Generation“, a key priority in Budget 2024. Legal professionals and tax experts, have highlighted the importance of these changes for claimants involved in SR&ED activities, here are some impacts of this change:

• Increased SR&ED-Eligible Expenses: Companies can now claim a higher SR&ED tax credit since concessional loans will no longer reduce their eligible expenses.
• Retroactive Refunds: Businesses that have filed SR&ED claims since January 2020 may be entitled to additional tax credits or refunds, given the updated classification of concessional loans.
• Simplified Tax Treatment: The new rules provide greater clarity on the classification of concessional loans, ensuring fairness and reducing unnecessary administrative burdens for businesses.
• Encouraging a Shift Towards Sustainable Financial Support: The change signals a broader opportunity to move away from relying on concessional loans as a primary form of government assistance and explore other financial support models that may be more sustainable for both businesses and the government.

June 20, 2024 – Ottawa, Ontario – Department of Finance Canada

Today, Bill C-69, the Budget Implementation Act, 2024, No. 1, received Royal Assent. With the passage of this legislation, the government is advancing key priorities from Budget 2024: Fairness for Every Generation.

The passage of the Budget Implementation Act will further our plan to ensure that every generation has a fair chance at success. We are delivering on our economic plan to unlock the door to the middle class for more Canadians—and especially for younger Canadians. The measures enacted with the Budget Implementation Act are bold investments in housing, a stronger social safety net, and economic growth to ensure fairness for every generation.”

The Honourable Chrystia Freeland,
Deputy Prime Minister and Minister of Finance ³

Conclusion

The recent changes to the ITA address longstanding ambiguities around concessional loans and brings much needed clarity. This is impactful for industries that are reliant on innovations, such as those engaged in SR&ED. By excluding bona fide concessional loans from being treated as government assistance, it removes barriers that were previously in place. This could result in an increase to amounts received for SR&ED tax credits.

If you had concessional loans and have claimed SR&ED tax credits since 2020, review your submission to see if you are eligible for an increased refund. Speak with an SR&ED consultant or tax professional to ensure you maximize your claim under the new rules.

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