Calculating Rate Limit: Guide for Canadian R&D Tax Credits

In Canada, the rate limit for R&D tax credits varies: it’s 15% for firms not qualifying as Canadian-controlled private corporations (CCPCs) and jumps to 35% for those that do. But, there’s a catch. When a company’s taxable capital hits $50 million, this rate drops to zero.

In this blog, we’ll show you the steps on calculating rate limit for your company. Additionally, we’ll explain how the allocation of this limit affects your overall tax strategy. At the end, we’ll introduce you to our services at G6 Consulting, and on how we can help you further. Whether you’re diving into R&D credits for the first time or need a refresher, this post has you covered.

What Is the SR&ED Expenditure Limit? 

The SR&ED (Scientific Research and Experimental Development) program offers tax incentives to encourage businesses to conduct research and development. The rate at which companies can claim these incentives varies depending on their type. 

Specifically, Canadian-controlled private corporations (CCPCs) enjoy a preferential rate of 35% on qualifying expenditures, while other types of organizations, such as public companies or foreign-owned corporations, are eligible for a 15% rate. This difference underscores Canada’s focus on supporting small and medium-sized businesses in their innovation efforts.

However, there’s a notable rule regarding the size of the business and its impact on SR&ED incentives. Once a company’s taxable capital exceeds $50 million, the enhanced rate gradually decreases, eventually reaching zero. This is designed to ensure that the SR&ED tax incentives primarily benefit smaller businesses, which are typically more sensitive to the costs associated with R&D activities.

Examples of Calculating the Rate Limit

To better understand the steps for calculating the rate limit, consider a CCPC with $200,000 in eligible SR&ED expenditures. At the 35% rate, this company could receive $70,000 in tax credits. Conversely, a non-CCPC with the same expenditures would receive $30,000 in credits at the 15% rate.

If a CCPC’s taxable capital begins to approach $50 million, the benefit they can claim starts to reduce. For instance, if a CCPC has $45 million in taxable capital and $200,000 in SR&ED expenditures, it might only be eligible for a portion of the 35% rate before the rate starts to taper off.

How Limit Allocation Works

The process of limit allocation involves calculating the rate limit and determining how much of the SR&ED expenditure limit applies to each associated corporation within a corporate group. This is particularly relevant for businesses that are part of a larger group of companies, as the $3 million expenditure limit and the taxable capital thresholds apply to the group as a whole, not just individual companies.

For example, if two associated CCPCs each have $150,000 in eligible SR&ED expenses, and the group’s total taxable capital is under $50 million, they can both claim the SR&ED credit at the 35% rate. However, if the group’s total taxable capital exceeds this threshold, they’ll need to allocate the reduced expenditure limit between them, potentially reducing the rate at which each can claim tax credits.

This allocation is crucial for maximizing the benefit across the corporate group. It requires a strategic approach to distribute the expenditure limit in a way that optimizes the overall tax credit the group can receive.

Understanding these nuances can help businesses navigate the SR&ED program effectively, ensuring they leverage available incentives to support their innovation and growth. The key is to keep abreast of your company’s financial thresholds and plan your R&D investments accordingly to maximize the benefits you receive.

SR&ED Credits Eligibility

Eligibility for the SR&ED credits is quite broad, supporting a wide range of businesses engaged in research and development. Here are the industries who can benefit from these credits: 

  • Canadian-controlled private corporations (CCPCs): These businesses benefit the most, with access to enhanced tax credits. For example, a small tech startup developing new software could claim up to 35% in tax credits for its R&D expenses.
  • Other corporations that are not CCPCs: While they don’t qualify for the enhanced rate, these corporations can still claim SR&ED credits at a 15% rate. A foreign-owned company operating in Canada, investing in R&D, would fall into this category.
  • Individuals (proprietors): Solo entrepreneurs conducting R&D can apply for SR&ED credits. An independent inventor working on a new environmental technology might be eligible.
  • Trusts: Trusts conducting R&D activities can also be eligible. This could include a family trust investing in agricultural research to improve crop yields.

Understanding who is eligible helps ensure that businesses and individuals involved in advancing science and technology can benefit from the SR&ED program. This support encourages innovation and growth across the Canadian economy, from small startups to larger, established companies.

Your Partner to Maximizing SR&ED Claims in Canada

Calculating the rate limit of your company can be tricky, but you don’t have to do it alone. At G6 Consulting Inc, we specialize in making the SR&ED claim process straightforward and successful. With over a decade of expertise, we’re the trusted partner for businesses across Canada, ensuring you get the maximum credit you’re entitled to.

Why choose our firm? Our focus is singular: helping you maximize your SR&ED tax credits. We’re committed to your success – if you don’t get a credit, we don’t get paid. That’s how confident we are in our ability to support your claims. 

We handle everything in-house, from building your claim to coordinating with your accountant and submitting your claim to the government. Trust in G6 Consulting, the market leader in SR&ED claims, to be your partner in innovation and financial success. Contact us today to learn how we can help your business thrive.

Get your SR&ED done right with G6 Consulting Inc – Canada’s R&D Tax Credit Experts!

G6 Consulting can work with you to build your claim, co-ordinate with your accountant, submit your claim and get you your cheque. No cost until you get paid

Check out our SR&ED overview page to learn more about SR&ED and how to qualify

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