The fall economic statement provided some positive news for businesses, with new money to boost the scientific research and experimental development (SR&ED) tax incentives and to renew the accelerated investment incentive.
“There were a couple of material business changes” in the statement, said Brian Ernewein, senior advisor with KPMG LLP in Ottawa, in an interview. Assuming legislation is enacted, the proposed measures are “constructive” for productivity, he said.
The government plans to spend $1.1 billion over five years to boost the SR&ED program, with proposed changes to encourage more companies to invest in research and development.
Currently, SR&ED tax incentives give Canadian-controlled private corporations (CCPCs) an enhanced 35% refundable tax credit on their first $3 million of qualified research and development–related expenses. Public and foreign companies get a 15% non-refundable credit for research and development within Canada.
The proposed changes would increase the expenditure limit to $4.5 million, allowing a CCPC to claim up to $1.575 million per year of the enhanced refundable tax credit. The proposed changes would also extend the enhanced credit to Canadian public corporations.
“Growing companies that invest significantly in SR&ED may not be profitable in their first years,” BDO Canada LLP said in an article posted on Tuesday. “Therefore, this change in the [investment tax credit] available to Canadian public companies could accelerate the timing of claiming [investment tax credits].”
Currently, the credit’s expenditure limit is gradually reduced when taxable capital for the previous tax year is between $10 million and $50 million. The fall economic statement proposes increasing the taxable capital limit to between $15 million and $75 million.
It also proposes to restore eligibility of capital expenditures for both the deduction against income and the investment tax credit components of the SR&ED program. (The rules would generally align with those prior to 2014, the fall economic statement said.)
The proposed changes would apply for tax years beginning on or after Monday.
Ernewein noted a remaining challenge for foreign-owned multinational corporations that conduct research and development in Canada. “Non-refundable tax credits [i.e., the SR&ED 15% non-refundable credit for foreign companies] reduce your tax payable, which can leave you exposed to paying [global] minimum tax,” Ernewein said. “That issue remains to be addressed.”
Productivity agenda
The government also proposed spending $17.3 billion over five years to reinstate the accelerated investment incentive as well as immediate expensing for manufacturing or processing equipment, clean energy generation and energy conservation equipment, and zero-emission vehicles.
Ernewein described the investment as “meaningful” and “highly relevant to the productivity agenda.”
The incentive provides enhanced first-year capital cost allowance for most depreciable capital property and was set to be fully eliminated after 2027.
“After the U.S. Tax Cuts and Jobs Act 2017, Canada responded by instituting this suite of measures to try to provide faster writeoffs for new investment and help improve what’s called our marginal effective tax rate,” Ernewein said.
“Temporary accelerated depreciation measures are an effective way of promoting business investment,” the fall economic statement said. “The government is taking steps now to support Canada’s competitiveness while continuing to monitor developments on tax reform in the United States.”
Under the proposed reinstatement, the incentive would apply to qualifying property acquired on or after Jan. 1, 2025 (and available for use before 2030). The measures would be phased out between 2030 and 2033.
The government also proposed expanding the capital gains rollover on business investment — though the measure is less significant, as reflected by its cost of $5 million over five years.
As things stand, eligible small business shares can be rolled over if disposition proceeds are reinvested in other eligible small business shares, subject to certain conditions.
Measures proposed in the fall economic statement include allowing preferred shares to qualify for the rollover and increasing the asset limit of eligible small business corporations that qualify for investment to $100 million from $50 million. The period to acquire replacement shares would also be expanded to the calendar year after the disposition year, from up to 120 days after the disposition year.
The measure will “provide some greater flexibility” for those disposing of preferred shares to reinvest in a new venture, Ernewein said, or for companies with assets in the $50 million to $100 million range.
Changes would apply to qualifying dispositions that occur on or after Jan. 1, 2025.
In a statement on Monday, CPA Canada welcomed the new investments in entrepreneurship. However, “we stand by our call for stronger fiscal anchors to ensure sound budgeting practices and effective deficit management,” John Oakey, CPA Canada’s vice-president of taxation, said in the statement.
The fall economic statement projected a deficit of $61.9 billion for 2023–24, up significantly from the deficit target of $40.1 billion.
Tax evasion, outstanding measures
The feds also proposed giving the Canada Revenue Agency (CRA) more money — $451.5 million over five years — to crack down on tax evasion. The funds would be used to, among other things, enhance “compliance coverage over non-filers with a high likelihood of tax owing, particularly in the high-net-wealth population and those active in the underground economy,” the fall economic statement said.
Ernewein said the measure reflects the objectives, as in previous years, of greater tax compliance and revenue generation: “It’s giving CRA more money to conduct its work, but it also appears to be ascribing a revenue collection number to that.”
The feds projected $2.8 billion in revenues from the measure over the next five years.
The fall economic statement also stated the government will proceed with many previously announced tax-related measures, such as the proposed capital gains changes.
While CPA Canada said it appreciated the government’s commitment to improving the certainty and integrity of Canada’s tax system, it also called attention to slow progress on specific measures.
“We are concerned about the lack of substantial progress on key tax initiatives such as trust reporting, capital gains inclusion rates and clean economy investment tax credits,” it said in its statement. “We continue to stress the importance of certainty in our tax system, as long delays in legislative approval erode taxpayers’ confidence.”