The SR&ED program has seen several changes at the provincial level in the last six months. In keeping with this theme, the Saskatchewan province has brought in another R&D credit change with their 2015-16 budgetary declaration released on March 18th 2015: as of April 1st 2015, the provincial SR&ED tax credits provided to Canadian-Controlled Private Corporations (CCPCs) and other organizations have been reduced from 15% to 10%1, with the credits being made non-refundable across the board.
This article briefly discusses what these changes entail, beginning with a general overview of how provincial and federal tax credits are administered.
Quick Refresher on Provincial and Federal Tax Credits
All SR&ED-qualified expenditures form a “pool” of expenditure against which the SR&ED (federal) tax credit is calculated. SR&ED is calculated as:
- 35% of the “pool” amount for CCPCs keeping within the Federal qualifying expenditure threshold of $3 million,
- 15% Input Tax Credit (ITC) for CCPCs spending above the threshold limit, and
- the same 15% for other corporate entities or trusts regardless of expenditures2
The state of refundability (or lack thereof) of these tax credits depends on the make-up of the organization as well as the nature of the expenses upon which the claims were based.
Provincial R&D credits are also calculated using this amount, and they “grind” (i.e. reduce) the “pool” in the year within which they are received – unless there are options to carry them forward or backward. So, while provincial tax credits often represent an increase to the total (consolidated) tax credits received, they reduce the federal tax credit.
Implications of R&D Credit Changes for Saskatchewan in 2015
As of April 1st 2015, all refundable provincial R&D tax credits have been abolished across the board in Saskatchewan. Instead, all corporate entities — except for partnerships held by individuals — are eligible for 10% non-refundable tax credits, which can either be carried back over the three previous or carried forward over to the next ten taxation years.3 This change at the provincial level does diminish the net benefits received through the SR&ED program for organizations with permanent establishments within Saskatchewan.
Verdict On R&D Tax Credit Changes in Saskatchewan
In Saskatchewan, the previous system in place had:
a) given rise to an atmosphere which propagated the growth and development of smaller to medium CCPCs, and
b) enabled these CCPC’s to compete against larger conglomerates.
The new system tax credit system negates that effect by nullifying any inbound income into a company’s working capital through tax refunds. Although this alteration may provide a level playing field for all corporate entities in Saskatchewan, the fact of the matter is that this “level field for all” itself creates an imbalance in favour of larger CCPCs which would rely less upon incoming tax refunds for further growth and expansion than smaller ones.
However, given that SR&ED is a rather complicated tax incentive program, it offers just as many opportunities for capitalization — despite the occasional obstacles it presents. The fact of the matter still remains that staying updated and preparing ahead for any possible ripple effects of alterations within the Canadian R&D tax credit system, whether on a federal or provincial scale, is a top priority.
This article is based on CRA policy documents and Government of Saskatchewan policy documents available at the date of publication. Please consult the CRA website and the Government of Saskatchewan website for the most recent versions of these documents.
- Krawetz, K. (2015). Saskatchewan Provincial Budget 2015-16: Keeping Saskatchewan Strong. (PDF document). Retrieved June 20, 2015, from Government of Saskatchewan web site: http://finance.gov.sk.ca/budget2015-16/201516Budget.pdf ↩
- Canada Revenue Agency. (2014, December 18). Rates for earning an SR&ED investment tax credit In SR&ED Investment Tax Credit Policy (Chapter 2.2). Retrieved June 20, 2015, from http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/srdnvstmnttxcrdt-eng.html ↩
- (2015). Research and Development Tax Credit. Retrieved June 20, 2015, from http://www.finance.gov.sk.ca/Default.aspx?DN=7210d60f-4263-4bf8-9f59-dbbbd8d64f7a ↩