Planning Ahead For Next Year’s SR&ED
Managing your company’s taxable income can more than double your SR&ED benefit by accessing enhanced investment tax credits that are available to small to medium sized Canadian Controlled Private Corporations (“CCPC”) based on certain size and income thresholds. The basic federal SR&ED credit is 15% and is only refunded to the extent that a company paid tax. For qualifying CCPCs, the enhanced rate is 35% and the credit is fully refundable whether the company paid tax or not. That’s a difference of 20%!
How does the enhanced credit work?
The enhanced credit is available to CCPCs on up to $3 million of expenditures – the “expenditure limit” – after which the basic credit is earned. The expenditure limit is reduced when a company’s (or corporate group’s) prior year taxable capital and taxable income exceed certain thresholds. The factor that is manageable in many cases is taxable income. The expenditure limit starts at $3 million. It is reduced at a 10:1 ratio when the prior year taxable income exceeds $500,000 and eliminated when taxable income reaches $800,000. So every $1 of last year’s income over $500,000 reduces this year’s expenditure limit by $10. Or we can look at it from the other side: $10 of expenditure limit (up to $3 million) is created next year for every $1 that this year’s income is below $800,000. A company with income of $700,000 would have an expenditure limit of $1 million the following year.
What can I do to get the enhanced credit?
In many cases, it is possible to “bonus down” to reduce taxable income by paying bonuses to owner operators. Every $1 of bonus paid potentially creates $10 of expenditure limit and an extra $2 of SR&ED ITC. You’ll need to have a general idea of your expected SR&ED expenditures to know how much expenditure limit you’re likely to need so you should consult with your SR&ED advisors. At BeneFACT, we frequently assist clients with this estimate. You’ll also need to coordinate with your accountants so that they can plan for the targeted income number and consider any other factors such as the owners’ personal tax situations and the timing of the bonus declaration and payment.
What about provincial credits?
Only a few provinces are impacted by the expenditure limit. The Ontario Innovation Tax Credit (“OITC”) is a 10% refundable credit that is also tied to the expenditure limit, while the Ontario Research & Development Tax Credit (“ORDTC”) is available to all claimants. In British Columbia and Saskatchewan, refundable vs non-refundable status is impacted (not amount) and Quebec’s Labour Tax Credit (“QLTC”) rate is based on a size test (assets), not income.