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A company’s ability to claim refundable Scientific Research and Experimental Development  (SR&ED) credits and the amount of both federal and provincial credits available tothe company depends on its prior year’s taxable capital.  

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SR&ED is one of the tax incentives affected by taxable capital. For a Canadian Controlled Private Corporation (CCPC), the prior year’s taxable capital in excess of $15 million will erode the expenditure limit, potentially reducing the amount of refundable federal SR&ED credits that can be claimed. When the prior year’s taxable capital exceeds $75 million, the CCPC will no longer be eligible to claim refundable federal SR&ED credits. From province to province the rules differ, but the mechanics are the same.

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Taxable capital is defined in section 181.2 of the Income Tax Act and can be found at https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-181.2.html?txthl=181.2.

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In simple terms, taxable capital is the sum of a company's equity and debt, less qualifying investments in other entities at the end of its fiscal period.

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Raising equity financing affects taxable capital. Other, less obvious actions can inadvertently reduce a company’s SR&ED credits.  For example, borrowing from a bank or a third-party increases taxable capital, as does capitalizing intellectual property on intangible assets, such as goodwill.  There are many other accounting decisions that often make sense from a business perspective, but can drastically reduce SR&ED benefits.

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There are strategies that can mitigate the impact of taxable capital on SR&ED. These strategies are highly time-sensitive and must be implemented in the same fiscal year the taxable capital changes occur. Changes in taxable capital affect the following year’s SR&ED claim, and at that time, the SR&ED impact will already be locked in.

We have experience in addressing taxable capital matters and can provide assistance to your tax and/or legal teams. For more information, contact us.