Canada: innovation incentives overview

R&D tax credits are available both federally (i.e. covering the whole of Canada) and provincially. Other innovation incentives are available in addition to R&D tax credits. These vary between provinces and sectors.

Federal and provincial R&D tax credits are available for eligible applicants.

Are there specific industries that qualify or are there reliefs that require a particular industry focus?

All industries can claim for R&D tax credits. There are also other incentive schemes that focus on specific sectors. These vary between provinces and include incentives for:

• Cultural industries and multimedia (gaming)
• eBusiness development
• Film production
• Manufacturing (all sectors)
• Life sciences
• Cleantech and related sectors
• Aerospace and military
• Innovation and investment credits (capital expense credits)
• Financial services
• Natural resources

Do you have to apply for incentives prior to conducting the research or claiming the benefit?

No, R&D claims are filed with the annual corporate tax return.

Are there specific documentation or reporting requirements for claiming incentives?

There are specific R&D tax forms to complete. Claimants must provide one technical description per eligible project claimed. There is normally a 6 to 12-month delay before the tax credits are received.

• Federal: 35% rate (refundable under certain conditions) for Canadian-controlled private corporations (CCPC) and 15% (non-refundable) for other corporations, including non-resident held.
• Provincial credits are available, and rates vary between 10% to 30%, refundable in some jurisdictions.

Applicants can claim as much as they are eligible for, based on their qualifying R&D spend by eligible project.

SR & ED claims must be filed no later than 18 months after for each taxation year.

Only companies can apply. There are no company size or investment requirements.

Scientific or technological advancement, uncertainty and content. No approval required prior to claiming. Claims are subject to review by taxation authorities, both technically and financially.

Do the R&D activities have to be performed within the country to qualify? If not, is there a distinction made between the country where the claimant company is resident, EU countries, and non-EU countries?

• Inbound: none. As long as the claimant operates through a permanent establishment in Canada and a given Canadian province. Claimants must have the right to exploit the results of R&D activities it performs.
• Outbound: 10% of total Canadian R&D payroll can be claimed for portion of work conducted outside Canada (federally).

Does the intellectual property need to reside in the country granting the incentives or in the company claiming the incentives?

No. 

Does the tax authority have to review the resultant developments to allow a deduction or credit?

There is no mandatory review. But tax authorities do have the right to review claims if they choose.

Salaries, contractors, materials, overheads. Capital expenditure cannot be claimed.

Are the incentives temporary or permanent?

Permanent.

How is the benefit obtained?

Reduction in corporate taxes, but sometimes balances can also be refunded or offset against previous and future taxes owing. In latter cases, carry-back 3 years, carry-forward period is 20 years.

Are the incentives incremental in nature or volume-based?

No. They are based on the actual expenses incurred.

Are there general rules for estimating the value of the incentives?

The value must be directly related or in support of the R&D activities conducted.

• Determine qualifying projects
• Quantify related expenditures
• Prepare detailed R&D project descriptions
• Submit the final R&D report / claim to the relevant tax jurisdiction upon filing corporate tax returns.t.

Is there a cap on the maximum level of benefit that can be received per year, per company, or for all the qualifying taxpayers together?

No cap.

Are tax credits refundable?

• Federal: refundable under certain conditions for CCPCs. Non-refundable for other corporations, including non-resident held.
• Provincial credits: refundable in some jurisdictions.

Can surplus incentives be carried back or forward and used in years other than the origination years?

Federal and certain provinces: unused credit balances can be carried back three years to reduce corporate tax owing, or forward 20 years.

Are there any other types of limitations?

CDN$ 3 million expense limit vs refundability, where applicable. Certain provinces (including Quebec) have asset cap limitations on the applicable credit rate.

Are the R&D costs deductible when deriving taxable income? Are costs required to be capitalized for tax purposes?

All R&D expenses incurred can be deducted to reduce taxable income.

Patent box regime available in Quebec (only) for commercialising Quebec patent registered technology (deduction from normal applicable taxation rate to 2%).