The criteria for obtaining SR&ED credits for SMEs have been modified. This was announced with the release of the March 2019 federal budget.
Profitable SMEs have always been at a disadvantage with respect to federal scientific research and experimental development (SR&ED) tax credits because of the famous taxable income test. When taxable income reached a threshold of $800,000, all of the tax credits earned by an SME were then at the same rate as for large businesses.
The March 19 federal budget proposes to correct this injustice. As a result, for all year ends ending after that day, the taxable income test will be removed from the relevant provisions of the SR&ED program. A company would therefore be able to obtain SR&ED credits at the increased rate of 35% on the first $3M of qualified expenditures when it meets the following conditions:
- Be a Canadian-controlled private company (CCPS);
- Have taxable capital less than or equal to $10M at the end of the previous fiscal year. Remember that the taxable capital of all associated companies must be considered.
When taxable capital is between $10M and $50M, there will be a linear reduction in the expenditure limit for the first $3M. For all expenditures exceeding this reduced limit, the credits granted will be at the rate of 15%.
Furthermore, don’t forget that SR&ED credits earned at a rate of 35% are fully refundable when the federal tax is not sufficient for an SME to use them in full.