For more than a decade, capital expenditures were excluded from Canada's SR&ED tax incentive program. That changed with the 2024 Fall Economic Statement and Budget 2025. If your company invests in equipment or machinery for R&D, the rules have shifted meaningfully in your favour.

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At MCN, we've filed over 1,500 SR&ED claims for Canadian companies. Here's our breakdown of the restored capital expenditure rules based on the CRA's updated policy.

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Federal Budget 2012 phased out capital expenditures from SR&ED. Starting January 1, 2014, businesses could no longer claim depreciable property — lab equipment, dedicated research hardware, pilot plant machinery — for either the SR&ED income tax deduction or investment tax credits (ITCs). The rationale was simplification, but the impact was felt hardest in capital-intensive sectors like manufacturing, clean tech, and life sciences.

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Capital expenditures are now eligible again for property acquired on or after December 16, 2024. The CRA's capital expenditures policy outlines the restored framework, which closely mirrors the pre-2014 rules with some important updates tied to Budget 2025 enhancements.

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What Changed: Capital Restored After December 15, 2024

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Capital expenditures are now eligible again for property acquired on or after December 16, 2024. The CRA's capital expenditures policy outlines the restored framework, which closely mirrors the pre-2014 rules with some important updates tied to Budget 2025 enhancements.

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What Qualifies as an Eligible Capital Expenditure

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Under the restored rules, a capital expenditure qualifies for SR&ED if the property meets specific use criteria. The property must be depreciable property that was intended, at the time of acquisition, to be used all or substantially all (generally interpreted as 90% or more) for SR&ED carried on in Canada. Alternatively, property that has all or substantially all of its value consumed in the prosecution of SR&ED in Canada also qualifies.

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Eligible capital can include specialized testing equipment, custom-built laboratory instruments, prototype tooling, and dedicated research hardware. However, certain categories remain excluded: buildings, leasehold interests in buildings, and land are not eligible capital expenditures under the program.

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Used property has a narrower path. While it can qualify for the SR&ED income tax deduction, used equipment is generally not eligible for investment tax credits. This distinction matters — the ITC is often the most valuable component of a claim.

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ITC Rates and Refundability

The Budget 2025 enhancements amplified the value of capital claims. Canadian-controlled private corporations (CCPCs) can earn the enhanced 35% ITC rate on the first $6 million in qualifying SR&ED expenditures — double the previous $3 million threshold. Capital ITCs for qualifying CCPCs are 40% refundable, compared to 100% refundability for current expenditures like salaries and materials.

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For other claimants, the base 15% ITC rate applies to qualifying capital, and these credits are non-refundable but can be carried forward.

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Documentation and Compliance

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The CRA's policy underscores that intent at the time of acquisition drives eligibility. Businesses should document the intended SR&ED purpose of any capital purchase at the point of acquisition — not retroactively. Recapture rules also apply: if property is later converted away from SR&ED use or sold, previously claimed benefits may be recaptured.

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What This Means for Your Claim Strategy

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For companies whose R&D involves significant equipment investment, the restored capital rules can substantially increase claim value. But the 90% use threshold and documentation requirements demand careful planning from day one.

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MCN can help you navigate these changes. Whether you're filing your first SR&ED claim or reassessing your strategy in light of the new rules, our team ensures every eligible dollar is captured — including newly restored capital expenditures.

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