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Provincial Income Tax Incentives for Research and Development
All provincial and territorial governments provide income tax deductions
for research and development. Manitoba, New Brunswick, Newfoundland, Nova
Scotia, Ontario and Quebec also offer various types of additional income
tax incentives for research and development conducted within their borders.
This annex reviews these provincial tax incentives; they are summarized
in Table A1.1.
The final section examines the relative incentive to invest in research
and development provided through the federal and provincial income tax
systems.
Income Tax Deductions
Provincial and territorial governments provide full deductibility for
eligible current and capital expenditures on qualifying research and development.
Provincial rules generally follow federal rules relating to the definitions
of qualifying work and expenditures, and the treatment of government assistance,
non-government assistance and the federal SR&ED tax credits. However,
in Quebec, expenditures eligible for the 100 per cent deduction are not
reduced by the amount of federal SR&ED tax credits or Quebec tax credits
for research and development (discussed below). Furthermore, the amount
of federal SR&ED tax credits claimed in a year is included in a taxpayer’s
income for Quebec tax purposes in the subsequent year.
Additional Income Tax
Incentives
Manitoba, New Brunswick, Newfoundland, Nova Scotia, Ontario and Quebec
each provide investment tax credits for research and development. Ontario
also has a bonus deduction for research and development. These provincial
incentives are described in this section.
The definitions of eligible work and expenditures for purposes of the
provincial tax credits for research and development are generally the same
as for the federal SR&ED tax credits. Eligible expenditures are also
generally reduced by the amount of any government or non-government assistance
except for purposes of the tax credits offered in Newfoundland and Nova
Scotia. Under federal rules, provincial investment tax credits are considered
to be government assistance and reduce the amount of expenditures eligible
for the federal SR&ED tax credits and deduction in the year in which
the provincial credits are receivable.
Similarly, expenditures qualifying for the bonus deduction for research
and development in Ontario are the same as those eligible for the federal
SR&ED tax deduction. However, the bonus deduction is not considered
to be government assistance and, therefore, does not reduce the amount
of expenditures eligible for the federal and Ontario tax credits and deductions
for SR&ED.
Summary of Provincial Research and Development Tax Incentives
Manitoba introduced a 15 per cent non-refundable Research and Development Tax Credit in its 1992 budget.51 Qualifying work and expenditures are those eligible for the federal SR&ED tax credit and incurred in Manitoba after March 11, 1992. Qualifying expenditures are reduced by the amount of any government or non-government assistance. The federal tax credit does not reduce the amount of qualifying expenditures for purposes of the Manitoba tax credit. However, the provincial tax credit reduces the amount of qualifying expenditures for the federal SR&ED tax credit and the 100 per cent deduction for both federal and provincial income tax purposes. The Manitoba Research and Development Tax Credit may be used to reduce provincial corporate income tax otherwise payable. Unused tax credits can be carried forward seven years or carried back three years. Non-taxpaying corporations may renounce their rights to the provincial credit in order to maximize their refund of federal SR&ED tax credits. The Manitoba Research and Development Tax Credit is administered by Revenue Canada. New Brunswick introduced a 10 per cent non-refundable Research and Development Tax Credit in its 1994 budget.52 Qualifying work and expenditures are those eligible for the federal SR&ED tax credit and incurred in New Brunswick after February 25, 1994. Qualifying expenditures are reduced by the amount of any government or non-government assistance. The federal tax credit does not reduce the amount of qualifying expenditures for purposes of the New Brunswick tax credit. However, the provincial tax credit reduces the amount of qualifying expenditures for the federal SR&ED tax credit and the 100 per cent deduction for both federal and provincial income tax purposes. The New Brunswick Research and Development Tax Credit may be used to reduce provincial corporate income tax otherwise payable. Unused tax credits can be carried forward seven years or carried back three years. Non-taxpaying corporations may renounce their rights to the provincial credit in order to maximize their refund of federal SR&ED tax credits. The New Brunswick Research and Development Tax Credit is administered by Revenue Canada. In its 1995 budget, Newfoundland announced that it would implement a Scientific Research and Experimental Development Tax Credit in 1996 following consultations with the business community. Effective for expenditures incurred after 1995, a fully refundable tax credit was introduced at a rate of 15 per cent for qualifying expenditures made on qualifying research and development work in the province.53 Qualifying work and expenditures are those eligible for the federal SR&ED tax credit except that government and non-government assistance are not deducted from the amount of expenditures qualifying for the provincial tax credit. The federal tax credit does not reduce the amount of qualifying expenditures for purposes of the Newfoundland tax credit. However, the provincial tax credit reduces the amount of qualifying expenditures for the federal SR&ED tax credit and the 100 per cent deduction for both federal and provincial income tax purposes. The Newfoundland SR&ED Tax Credit may be used to reduce provincial income taxes otherwise payable or may be refunded in cash to companies that are not in a taxpaying position. The credit is administered by Revenue Canada. In its 1994 budget, Nova Scotia increased the rate of its Research and Development Tax Credit to 15 per cent from 10 per cent and made the credit fully refundable.54 Qualifying work and expenditures are those eligible for the federal SR&ED tax credit except that government and non-government assistance are not deducted from the amount of expenditures qualifying for the provincial tax credit. The federal tax credit does not reduce the amount of qualifying expenditures for purposes of the Nova Scotia tax credit. However, the provincial tax credit reduces the amount of qualifying expenditures for the federal SR&ED tax credit and the 100 per cent deduction for both federal and provincial income tax purposes. The Nova Scotia Research and Development Tax Credit may be used to reduce provincial corporate income tax otherwise payable or may be refunded in cash to companies that are not in a taxpaying position. Corporations can renounce the provincial tax credit for a specified taxation year to maximize the benefit from the federal SR&ED credit. The Nova Scotia Research and Development Tax Credit is administered by Revenue Canada. Ontario provides three provincial income tax incentives for SR&ED: the Research and Development Super Allowance, the Innovation Tax Credit and the Business-Research Institute Tax Credit. The Super Allowance is an additional (or bonus) deduction for qualifying research and development expenditures. Qualifying expenditures are those eligible for the federal income tax deduction for SR&ED and are reduced by the amounts of any government assistance, non-government assistance, the Ontario SR&ED tax credits and the federal SR&ED tax credit. The Super Allowance is not considered to be government assistance and, therefore, does not reduce the amount of expenditures for federal and provincial tax credits and deductions. Higher rates of Super Allowance are available for CCPCs and "incremental" SR&ED expenditures – i.e. qualifying expenditures in excess of their average level for the preceding three years. Rates of Super Allowance for non-incremental expenditures are 25 per cent for non-CCPCs and 35 per cent for CCPCs. For non-CCPCs, the rate of Super Allowance for incremental expenditures is 37.5 per cent; for CCPCs, 52.5 per cent. The amount of the Super Allowance must be fully deducted in the year earned and any resulting negative balance carried forward as a non-capital loss. The Innovation Tax Credit was announced in the 1994 Ontario budget.55 Effective January 1, 1995, this refundable 10 per cent investment tax credit is available to smaller CCPCs (i.e. those eligible for the enhanced rate of federal SR&ED tax credit) in respect of qualifying expenditures on SR&ED performed in Ontario. Ontario rules parallel federal SR&ED rules relating to: the definition of SR&ED, qualifying expenditures and qualifying CCPCs; and the $2 million expenditure limit and its reduction based on prior-year taxable income or taxable capital employed in Canada. However, only 40 per cent of qualifying capital expenditures are eligible for the Innovation Tax Credit. Government and non-government assistance reduce the amount of expenditures for the Innovation Tax Credit. This tax credit reduces, in the year that it is earned, the amount of expenditures for the federal SR&ED tax credit, the 100 per cent deduction for both federal and provincial income tax purposes and the Super Allowance. The Innovation Tax Credit may be used to reduce Ontario corporate income tax otherwise payable or may be refunded to smaller CCPCs that are not in a taxpaying position. The rate of refundability is 100 per cent for both current and capital expenditures. There is no carry-forward provision for that portion of the credit for capital that is not refundable. The Business-Research Institute Tax Credit (BRITC) was announced in the 1997 Ontario budget.56 Effective May 7, 1997, this fully refundable 20 per cent investment tax credit is available to corporations in respect of qualifying expenditures on SR&ED incurred under approved contracts with eligible research institutes. Ontario rules parallel federal SR&ED rules relating to the definition of SR&ED and qualifying expenditures. However, to be eligible for the BRITC, the SR&ED must be performed in Ontario and related to a business the corporation carries on in Canada, and there is an annual limit on qualifying expenditures of $20 million per associated group of corporations. Eligible research institutes are provincially assisted post-secondary institutions, such as universities and colleges of applied arts and technology, hospital research institutes, and prescribed Ontario non-profit research organizations. An institute may perform SR&ED directly on behalf of a corporation or a corporation must be entitled to exploit the results of an institute’s work. In the latter case, the institute must also be approved for purposes of the federal SR&ED legislation. Government and non-government assistance reduces the amount of expenditures for the BRITC. The BRITC reduces, in the year that it is earned, the amount of expenditures for the federal SR&ED tax credit, the 100 per cent deduction for both federal and provincial income tax purposes, and the Super Allowance. The BRITC may be used to reduce Ontario corporate income tax otherwise payable or may be fully refunded to companies that are not in a taxpaying position. Expenditures qualifying for the BRITC are also eligible for the Innovation Tax Credit – the combined credit rate for smaller CCPCs is 30 per cent. The 100 per cent deduction for SR&ED expenditures in Quebec is not reduced by the amount of federal or Quebec tax credits for research and development. However, effective for expenditures made after the 1996 Quebec budget57, federal SR&ED tax credits claimed are included in a taxpayer's income for Quebec tax purposes in the year after they are claimed. In addition, Quebec provides fully refundable tax credits for research and development performed by, or on behalf of, both large and small firms located in the province. Eligible expenditures for purposes of the tax credits are reduced by the amount of any government or non-government assistance; the provincial and federal tax credits are not considered forms of government assistance. Where research and development is performed by a corporation, a tax credit is available for research and development salaries. Rates of tax credit are 20 per cent generally and 40 per cent for the first $2 million of these expenditures incurred by Canadian-controlled corporations that, effective for taxation years commencing after May 9, 1996, have assets of less than $25 million in the preceding taxation year. Effective for research and development salaries paid after May 9, 1996, the enhanced rate is phased down for firms with assets in the preceding taxation year of between $25 million and $50 million, specifically, by 4 percentage points for every $5 million by which the assets exceed $25 million. Where research and development is performed under contract either:
Where research and development is performed on behalf of a corporation under any other type of contract, a tax credit is also available for eligible research and development expenditures. The rules distinguish between arm’s length and non-arm’s length contracts. For both types of contract, the tax credit rates, including the phase down from 40 per cent to 20 per cent, are identical to those applicable to research and development performed by a corporation. For arm’s length contracts, eligible expenditures equal 50 per cent of the amount actually paid under the contract in a taxation year to a maximum of the total amount of the contract. For non-arm’s length contracts, eligible expenditures equal the portion of the remuneration paid to the related person that is attributable to research and development salaries paid by the related person. A 40 per cent refundable tax credit is also granted to member corporations that pay fees or dues to a research consortium in regard to the portion of the fees or dues that can be attributed to the research and development that the consortium carries out in Quebec. Foreign researchers can also claim an exemption from Quebec income tax on their research and development salaries for a maximum of two years. The Relative Tax Incentive to Invest in Research and Development The relative incentive to invest in research and development provided through the income tax system by the federal and provincial governments is compared in Table A1.2 by province and type of firm. The comparison uses the minimum benefit-cost ratio methodology.58 This methodology yields the present value of before-tax income necessary to cover the cost of an initial research and development investment and to pay the applicable income taxes. The minimum benefit-cost ratio explicitly takes account of federal and provincial income tax incentives for research and development and corporate income tax rates. The lower the ratio, the greater the incentive for a firm to invest in research and development. A ratio less than unity implies that research and development investments are subsidized by the income tax system. Table A1.2 reveals that, among provinces and territories, the combined income tax support provided by the federal and Quebec governments yields the relatively greatest incentive for investment in research and development for each category of firm type. This is followed by the combined research and development support in Manitoba, Newfoundland and Nova Scotia. In addition, the federal SR&ED tax incentives provide a relatively greater incentive for investment in research and development than the support offered by any of the provinces. The table also reveals that, among types of firms, smaller CCPCs are the relatively most tax advantaged. The tax system treats manufacturing and processing (M&P) firms and "other firms" comparably, except in Ontario and Quebec. Other firms are tax advantaged in Ontario and Quebec because higher tax rates for these firms increase the benefit associated with SR&ED tax deductions. Table A1.2
b Assumes non-incremental expenditures only and excludes the Business-Research Institute Tax Credit (effective May 7, 1997). Minimum benefit-cost ratios for incremental expenditures only are: 0.551 for smaller CCPCs (rank = 2); 0.737 for M&P firms (rank = 4); and 0.716 for other firms (rank = 3). c Assumes research and development salaries account for 35 per cent of current expenditures; contracts with eligible university entities, public research centres and research consortia, 30 per cent; and other contracts, 8 per cent. d Alberta, British Columbia, the Northwest Territories, Prince Edward Island, Saskatchewan and the Yukon do not provide tax credits credits or bonus deductions for research and development. End Notes: Missing footnotes are relevant for the purposes of reviewing the material presented on this site. 6. See OECD (1994), Chapter 2, pp. 29-45. The OECD defines research and development as creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications. This work may take the form of basic research, applied research or experimental development. The OECD also discusses (see Chapter 1, pp. 18-21) the distinction between research and development and other closely related activities that can be grouped more broadly under the headings of scientific and technological activities (STA) and scientific and technological innovation (STI). STA comprise systematic activities which are closely concerned with the generation, advancement, dissemination and application of scientific and technical knowledge in all fields of science and technology. These include such activities as research and development, scientific and technical education and training, and scientific and technological services. STI may be considered as the transformation of an idea into a new or improved product introduced on the market or a new or improved operational process used in industry or commerce. Innovations involve a series of scientific, technological, organizational, financial and commercial activities. Research and development is only one of these activities and may be carried out at different phases of the innovation process. 7. Total federal support for science and technology (or STA; see previous footnote) was about $7.0 billion in 1996-97. Revenue Canada data indicates that investment tax credits for SR&ED performed by, or on behalf of, businesses accounted for $1.25 billion of this amount. Statistics Canada (1997) indicates that non-tax assistance for science and technology was $5.7 billion of which $2.3 billion was for activities related to research and development (e.g., education and training, data collection and information) and $3.4 billion was for research and development per se. The non-tax funding was directed to science and technology performed by federal government employees (60.8 per cent), Canadian businesses (15.7 per cent), Canadian universities (15.5 per cent), other Canadian performers such as private non-profit institutions, other levels of government and provincial research councils and foundations (3.6 per cent), and foreign performers (4.3 per cent). 8. See, for example, Warda (1997). This work is also not generally in accordance with the internationally accepted OECD definition. 10. There are special rules for salaries or wages paid to a "specified employee" – a person who does not deal at arm’s length with their employer or who has a significant interest (i.e. 10 per cent or more) in the shares of their employer. These rules place a ceiling on the amount of salaries or wages paid to these employees who are eligible for the SR&ED tax incentives. Salaries or wages of specified employees directly engaged in SR&ED are limited to a maximum of five times the year’s maximum pensionable earnings for purposes of the Canada Pension Plan and exclude any remuneration based on profits or bonuses. 11. Where SR&ED is performed under contract between non-arm’s length parties, expenditures eligible for the SR&ED tax credits are restricted to those incurred by the SR&ED performer. The performer can transfer these expenditures to the payor up to a maximum of the contract amount. The contract payment itself is not an eligible expenditure for tax credit purposes and does not reduce the eligible expenditures of the performer. In addition, where goods or services for SR&ED are purchased by an SR&ED performer from a person with whom the performer does not deal at arm’s length, expenditures eligible for SR&ED tax credits are limited to the cost to the non-arm’s length person of providing the goods or services. 12. Eligible third parties are corporations resident in Canada including tax exempt non-profit SR&ED corporations and approved associations, universities, colleges, research institutes and organizations. In addition, tax-exempt non-profit SR&ED corporations resident in Canada are eligible third parties if the taxpayer is a corporation and the SR&ED is basic or applied research that relates to other SR&ED being undertaken by the taxpayer and which has the technological potential for application to other unrelated businesses. 13. Current expenditures that are not paid within 180 days of year end are deemed to have been incurred for SR&ED tax credit purposes in the year the amount is paid. 14. For purposes of the overhead proxy, salaries or wages of specified employees (see footnote 7) are limited to a maximum of two-and-one-half times the year’s maximum pensionable earnings for purposes of the Canada Pension Plan and exclude any remuneration based on profits or bonuses. 15. These third parties are approved associations, universities, colleges, research institutes or other similar institutions which undertake SR&ED outside Canada. 16. This regional tax credit was generally eliminated for SR&ED expenditures incurred after 1994. 17. Thus, the maximum amount of SR&ED tax credit available for smaller CCPCs at the enhanced rate is $700,000, which corresponds to eligible expenditures of $2 million. 18. These credits are only available to equipment that is used primarily in SR&ED during the initial period – i.e. the time between acquisition and the end of the first taxation year that is at least 12 months after acquisition. Equipment not used primarily in SR&ED during the initial period would never be eligible for partial tax credits. 19. Other than for corporations controlled by tax-exempt entities, provincial or municipal governments, or other public authorities. 20. Technical consultants may be employed on a temporary basis either to provide specialized knowledge or to assist with large work loads. 21. Information for Businesses that Conduct SR&ED in Canada: Claiming Scientific Research and Experimental Development Expenditures, Guide to Form T661. 22. Smaller CCPCs refer to Canadian-controlled private corporations with prior-year taxable income under $400,000 and prior-year taxable capital employed in Canada under $15 million. 51. See Manitoba (1992), p. 3. 52. See New Brunswick (1994), p. 35. 53. See Newfoundland and Labrador (1995), p. 8 and (1996). 54. See Nova Scotia (1994), p. 12. 55. See Ontario (1994), pp. 24-26. 56. See Ontario (1997), pp. 88-91. 57. See Quebec (1996), p. 13 and pp. 31-37. 58. See McFetridge and Warda (1983) and Warda (1994) for further information on the minimum benefit-cost ratio (or B-Index) methodology.
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