SR&ED Updates: Who will benefit from the proposed changes to the SR&ED program?

Update November 17, 2025: The proposed changes to the SR&ED program discussed within this article have been successfully passed as part of the Federal Budget 2025.

The SR&ED program has been a major source of funding for Canadian corporations for many decades. Since it is an investment tax credit, a company can claim back approximately $1 for every $3 it has already spent on qualified R&D and re-invest it into their growth (and for very large or foreign owned companies the ratio is $1 for every $8 spent in Canada). This ensures that the SR&ED program is ALWAYS a net benefit to the Canadian taxpayer, with many indirect benefits that are not as well known, but that’s a topic for a future post. For many years (in our direct experience) this program has secured local jobs, driven innovation, and retained critical knowledge within Canadian corporations. This backbone of non-dilutive funding for many branches of industry is finally getting updates that the Canadian economy urgently needs in these uncertain times.

The long-anticipated changes that the federal government had proposed to the SR&ED program (among other tax measures) in it’s draft legislation on August 15^th, could be one step closer to implementation in November 2025. Once the budget has been tabled and approved, a bill can be introduced which must then pass through the entire legislative process to become law. However, these tax measures could apply for fiscal periods starting after December 15, 2024 and could be a substantial stimulus to the manufacturing and clean tech industry if implemented.

The main changes are:

Allowing the 35% enhanced refund rate for a new class of public corporations (“eligible Canadian public corporation” ECPC) with fiscal year ends after December 15, 2025 if they meet specific requirements (resident in Canada, class of shares listed on a designated stock exchange, not controlled by non-resident person). Previously, public corporations with subsidiaries in Canada could only apply for a 15% non-refundable credit.
Including capital expenditures and lease costs for equipment as eligible costs at a partial refund rate of 40%. This applies to new equipment exclusively used for research purposes such as, but not limited to, microscopes, LC-MS/HPLC machines, centrifuges, 3D printers, robotic arms, or other research and prototyping tools. A shared-use category will also be available.
Increase of the expenditure limit from $3M to $6M which would raise the maximum cash refund from $1M to ~$2.1M. This includes an increase of the taxable capital minimum threshold from $10M to $15M and a phase-out of between $15M and $75M (previously $50M).
An election to use gross revenue instead of taxable capital to determine the phase-out of the expenditure limit for Canadian controlled private corporations (CCPCs).

Who benefits from these changes?

This will directly benefit existing PubCos that are doing R&D in Canada, but also reduce barriers for private companies that have been delaying an IPO due to the reduction in the credit rate and conversion to non-refundable credits once becoming a public entity. PubCos will be able to earn a refundable tax credit at the preferred rate and also claim capital expenditures (with 40% refundability) . This puts money back into their pockets a few months after it has been spent and not just being applied against payable taxes up to 20 years in the future depending on when a business begins to earn revenue. CCPCs thinking about an IPO might now have an incentive to do so and take the next step on their growth journey, providing investors more liquidity and bridging the growth gap.

Bringing capital expenditures back into the program, could also have a significant positive impact on the oil & gas sector that has been adversely affected since the 2014 elimination of capital expenses. Likewise, cash-strapped CCPCs in life science, clean tech, and manufacturing have potentially shied away from investments into research equipment, large tools, or pilot plants for those past years. Adding those expenses back into the SR&ED program, could mean that purchasing or leasing new equipment can make economic sense again for many ventures that use them exclusively (>90%) for R&D.

A higher expenditure limit and taxable capital limit for refundable credits means more cash that can directly be invested back into the business and R&D efforts especially for pre-revenue ventures that might not be revenue positive in the next 20 years. The executives often don’t see any benefit in claiming any expenses beyond the expenditure limit when the credits become non-refundable at a rate of only 15% just to be applied towards future payable taxes. It has been more practical to forego investment tax credits to minimize the administrative costs rather than keeping the credits until future profitability.

Being able to elect gross revenue instead of taxable capital to determine the phase-out of the expenditure limit will help companies with higher capital properties (e.g., retained earnings, assets) than revenue to still be eligible for the higher refund rate.

Overall, these changes will benefit PubCos as well as CCPCs conducting high quality and innovative research in Canada from manufacturing, engineering, software/AI, life sciences, med tech, to agritech and oil & gas.

Do these changes apply to you?

Are you a PubCo with headquarters and R&D activities in Canada that meets the gross revenue requirements?
Are you a CCPC or PubCo that has incurred capital expenses after December 15, 2024 or is planning to purchase equipment in the near future?
Is your gross revenue lower than your taxable capital?

You might be eligible to claim SR&ED for FY2025 or amend your already submitted T2 to claim the additional expenses. Speak to your tax accountant or a trusted advisor to clarify your situation.

Consider a seasoned company with deep knowledge of public companies, like Manning Elliott LLP, to make sure that you meet the new definitions and can have confidence in your approach with estimating and compiling your claims. With our extensive knowledge of the SR&ED program for over 18 years, we know what those changes mean for the people on the ground to meet eligibility requirements. Contact our team now to pro-actively plan for these changes and ensure you identify all eligible expenses, thereby maximizing your claim.

Final Note

Times are uncertain and nobody has a crystal ball. The budget approval might be on shaky legs with a confidence vote, and these tax proposals are not yet law. It is important to watch for new political developments and final enactment can take some time. We recommend being prepared to take advantage of these investment tax credits for your company growth.

Reference:

Tax Measures: Supplementary Information | 2024 FES

Explanatory Notes to Legislative Proposals Relating to the Income Tax Act and Regulations

Government releases draft legislation for previously announced tax measures

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NOTE: Canadian tax laws are complex and subject to frequent changes. The contents of this Manning Elliott blog are not intended to represent legal or tax advice. Please consult your tax adviser before employing any strategies that may have been discussed