SR&ED recovery rates not impacted by loss carry backs
January 2001 Updated March 2006
The Income Tax Act allows a company that incurs losses, to apply those losses to retroactively decrease the taxable income that it reported in any of the three prior years. This provision can allow a company to claim a refund of some prior years’ tax payments.
The level of taxable income of a Canadian controlled private corporation (CCPC) that meets a certain size test, affects its tax credit rate. In the past, certain CCPCs were able to retroactively increase their federal SR&ED tax credit rates for a particular year from 20% to 35%, by carrying back subsequent years’ losses. Some of these companies received substantial additional refunds of investment tax credits by doing this. The ability to raise the investment tax credit rate by applying loss carry backs was blocked for taxation years ending after 1996.
Companies that are CCPCs are eligible for an additional 15% credit, over and above the standard 20% rate on some of their SR&ED expenditures, if they meet a certain size test, and if the total of their and all associated companies’ combined taxable incomes in their last taxation year of the preceding calendar year, is not $500,000 or more. When determining taxable income for the purpose of the rules, a taxpayer is to ignore “specified future tax consequences”. The definition of specified future tax consequences includes the effect of loss carry backs.
CCPCs that follow a regular policy of calculating their taxable income within 180 days of year end, and paying wage bonuses to shareholder managers within that same time period, to keep income below $300,000, will generally not be affected by these rules. However, companies that wait beyond 180 days may find that when they calculate taxable income, they are over the threshold amount, and that their rate for the following year will be reduced from 35% to 20%, on all or part of their expenditures.
The Strategy
Calculate taxable income within a short period following your year-end. If you have taxable income over $300,000 consider paying bonuses within 180 days of year-end to reduce it. Consider the amount of anticipated SR&ED expenditures in the following year in making such a decsion.
