Maximum SR&ED refund: Federal & Provincial ITCs (Ontario)

June 27, 2023 Janette Conway

Maximum SR&ED refund: Provincial level — Maximum SR&ED refund: Federal & Provincial ITCs (Ontario) Photo Credit: Kindel Media via Pexels.com

We are often asked by our clients if there is a maximum Scientific Research and Experimental Development (SR&ED) refund that can be claimed. This is a great question and like most topics related to SR&ED, the answer is not straightforward. This article will explain the maximum federal SR&ED refund, the maximum related provincial tax credits for Ontario companies, and how they may affect the investment tax credits (ITCs) your organization receives.

Federal Refund Rates for SR&ED

The federal refund rate available to SR&ED claimants depends on what type of corporation the claimant corporation is as well as the amount of eligible expenditures they are claiming for the tax year:

 “Canadian-controlled private corporations: Generally, a Canadian-controlled private corporation (CCPC) can earn a refundable ITC at the enhanced rate of 35% on qualified SR&ED expenditures of $3 million. You can also earn a non-refundable ITC at the basic rate of 15% on an amount over $3 million. However, if you are a CCPC that also meets the definition of a qualifying corporation, you also earn a refundable ITC at the basic rate of 15% on an amount over $3 million, and 40% of the ITC can be refunded.”¹

If the $3M expenditure limit is exceeded only qualifying CCPCs are eligible to earn refundable ITCs over that limit. Other corporations may only earn non-refundable ITCs over the $3M expenditure limit.

The term refundable refers to the credit that is reimbursed directly to the claimant, whereas non-refundable credit is applied to the taxpayers’ Part I tax or carried back to a previous year and applied to the Part I tax in the previous year. Non-refundable tax credits are used only to reduce the amount of tax the claimant owes and are not returned in any monetary form to the claimant². To learn how refundable and non-refundable ITCs differ, and when they may be received, see our article A Closer Look at Refundable and Non-refundable SR&ED Tax Credits.

Maximum Federal SR&ED Refund: Running the Numbers

To see these calculations in practice we have included examples below. If the company is a CCPC using the Proxy method and has $3M of eligible salary expenditures for the tax year, then it will receive the enhanced rate (35%) on the initial $3M and the basic rate (15%) on the remaining amount of eligible expenditures, which includes the Prescribed Proxy Amount (PPA):

Sch. 31 – Investment Tax Credit – Corporations

In the example above line 420 includes the full $3M of salary expenditures made through the year (This also happens to be the expenditure limit for the enhanced ITC rate).
- 35% of $3M = $1,050,000
Any expenditures over the $3M are placed in line 430.
In this example, the expenditures over the $3M limit is $1,255,650 (In this example the overage consists entirely of the PPA that has been calculated) and only 15% of this amount is eligible as an ITC.
- 15% of $1,255,650 = $188,348

The $1,050,000 and $188,348 are combined and the full amount ($1,238,348) is transferred to Part 14 – Refund of ITC for qualifying corporations – SR&ED.

As mentioned, only 40% of the eligible “overage” (15%) is refundable. This means, in the example posed, the claimant would receive $75,339 back at the end of the year, while the remaining eligible “overage” amount would be considered non-refundable and may be applied in a few ways as laid out in the SR&ED Investment Tax Credit Policy:

The claimant may apply in the current year, carry back, or carry forward their ITC to reduce their Part I tax otherwise payable according to the rules in sections 2.3.1 to 2.3.3. For certain entities, their ITC at the end of the tax year may be refunded (see section 4.0). ³

The calculations above detail how the refundable ITC is calculated:

40% of the eligible “overage” (15% of $1,255,650 = $188,348) is refundable.
- 40% of $188,348 = $75,339
The ITCs earned on the $3M at the 35%  enhanced rate, are added to the 40% of $188,348. The sum of these two amounts is the total ITCs to be refunded.
- $1,050,000 + $75,339= $1,125,339

Maximum Provincial Refund – Ontario’s Related Provincial Tax Credits

In this section, we will address the province of Ontario’s SR&ED-related tax credit programs. In Ontario, there is a limit on the Ontario Innovation Tax Credit (OITC) but there is no cap on the tax credits in the Ontario Research and Development Tax Credit (ORDTC) program.

Example: Ontario – Maximum Related Provincial Tax Credits

Ontario’s OITC program includes a refundable credit of 8% and Ontario’s ORDTC program includes a non-refundable credit of 3.5%. Non-refundable tax credits still count towards the claimant’s total refund even though they can only be applied to reduce the taxpayer’s Part 1 tax owing for the tax year or be carried over to other years for the same purpose.

OITC: Refund Restrictions

The limit placed on the refundable OITC program involves the application of an overall expenditure limit:

Based on an expenditure limit of $3 million:

for taxation years that commence after May 31, 2016, the maximum tax credit amount is $240,000.

the maximum tax credit amount is prorated for taxation years straddling June 1, 2016, and

for taxation years that end before June 1, 2016, the maximum tax credit amount is $300,000.

The expenditure limit is gradually reduced if:

federal taxable income of the prior tax year exceeds $500,000 and is totally eliminated at $800,000, or

the prior year’s taxable capital exceeds $25 million and is totally eliminated at $50 million. ⁴

OITC: Running the Numbers

The Ontario provincial eligible expenditure limit is $3M. This means at the OITC rate of 8%, $240,000 is the maximum refund of ITCs available through the OITC program to any claimant per tax year:

ON Sch. 566 - Innovation Tax Credit — ON Sch. 566 – Innovation Tax Credit

In the example above, Line 707 shows the eligible expenditure limit ($3M) has been applied.
The OITC ITCs calculate in Line 712 as 8% of $3,000,000 = $240,000

ORDTC: No Credit Restrictions

The non-refundable ORDTC program does not have an expenditure limit imposed on it, and therefore the entirety of the claimant’s eligible expenditures is used to calculate these credits. The CRA describes the Ontario Research and development tax credit (ORDTC) as:

It is a non-refundable tax credit based on eligible expenditures incurred by a corporation in a tax year. The ORDTC rate is:

4.5% for tax years that end before June 1, 2016

3.5% for tax years that start after May 31, 2016

prorated for a tax year that ends on or after June 1, 2016, and includes May 31, 2016.⁵

ORDTC: Running the Numbers

The ORDTC program, which has a rate of 3.5%, does not have an expenditure limit imposed on it. This means there is no maximum refund of ORDTC ITCs available to any claimant per tax year:

ON Sch. 508 - Research and Development Tax Credit — ON Sch. 508 – Research and Development Tax Credit

In the example above, the calculation resulting in the amount on Line 202 shows there is no expenditure limit applied.
The ORDTC ITCs calculate in Line 232 as 3.5% of the total eligible expenditures, which in this case is $4,410,000. The total ORDTC amount in this case is $154,350.

For details of provincial R&D tax credit rates across Canada please visit our Provincial R&D Tax Credits – Interactive Map page. We have also summarized all the provincial R&D tax credit programs side-by-side for our readers in our article Provincial Tax Credits – Making the Most of SR&ED. 

Total Anticipated Tax Credits: Running the Numbers

In the image below the refundable, non-refundable, and total tax credits that would be received in the example we have discussed are shown:

The full amount of Federal ITCs available to the claimant in the above example is $1,238,348, the OITC available is $240,000, and the ORDTC available is $154,350. All these amounts together equal the total refund of $1,632,698 (pictured in green above).

The total refundable ITCs include the OITC amount ($240,000), and the federal ITCs earned on the $3M at the 35%  enhanced rate ($1,050,000) added to the 40% of the basic rate which is applied to the expenditures over the $3M limit (40% of $188,348=$75,339). The sum of these amounts is $1,365,339 the total refundable ITCs (pictured in yellow above).

The total non-refundable ITCs include the ORDTC amount ($154,350), added to the remaining 60% of the Federal ITCs calculated at the basic rate which is applied to the expenditures over the $3M limit (60% of $188,348=$113,009). The sum of these amounts is $267,359 and is the total non-refundable ITCs (pictured in red above).

Other Scenarios:

In order to provide a visual of how the ITC amounts are impacted by an increase in SR&ED expenditures, we have outlined the expected refund for three different amounts of SR&ED expenditures, $4M, $5M, and $6M, in the table below. Keep in mind these scenarios are round numbers, and therefore are unlikely to occur. These scenarios also do not account for the PPA which constitutes as an SR&ED expenditure, nor any other extenuating circumstances which may impact the return:

SR&ED Expenditures	$4,000,000	$5,000,000	$6,000,000
Federal ITCs
(Expenditures over $3M limit)	$1,000,000	$2,000,000	$3,000,000
35% ITC rate	$1,050,000	$1,050,000	$1,050,000
15% ITC rate	$150,000	$300,000	$450,000
40% (Refundable)	$60,000	$120,000	$180,000
60% (Non-Refundable)	$90,000	$180,000	$270,000
Provincial ITCs
OITC	$240,000	$240,000	$240,000
ORDTC	$140,000	$175,000	$210,000
Total ITCs
Refundable Total	$1,350,000	$1,410,000	$1,470,000
Non-refundable Total	$230,000	$355,000	$480,000
Total	$1,580,000	$1,765,000	$1,950,000

Conclusion

In conclusion, the rate of return on refundable expenditures drops dramatically over the $3M expenditure limit for ITCs at the Federal level but there are still available credits for those with expenditures that exceed that limit. Certain related provincial tax credits programs include strict maximum ITCs that a company may receive. However, not all related provincial tax credits are limited to the $3M expenditure limit. Some provincial ITC programs, such as the Ontario Research and Development Tax Credit program, are applied to the entirety of the claimants’ eligible expenditures. Keep in mind that these examples do not account for every variable. Corporate taxes are intricate and at times convoluted. For example, we have not accounted for the taxable income of the claimant in the prior year, nor any carry-forward amounts, both of which will impact the final SR&ED refund. For more information on rates for earning an SR&ED investment tax credit and how the expenditure limits are determined and allocated for Canadian corporations please review the SR&ED Investment Tax Credit Policy.