Innovate, Baby, Innovate? Key Enhancements to Canada’s SR&ED Program in Budget 2025
In the April 2025 federal election, the Liberal Government emphasized innovation as a cornerstone for economic growth, particularly in emerging sectors like artificial intelligence, quantum computing, biotechnology, and advanced manufacturing. Among the anticipated measures were a “patent box” regime and tax-favourable flow-through shares for high-tech industries, both of which are policies aimed at retaining intellectual property and boosting financing for innovative companies.
While the federal budget released on November 4, 2025 (“Budget 2025”) did not deliver on these headline promises, it did revive and expand previously announced enhancements to the Scientific Research & Experimental Development (SR&ED) program (retroactive to December 16, 2024), reaffirming its role as Canada’s primary innovation-focused tax incentive.
Background: Public Consultations on SR&ED Reform and Trudeau’s Liberals’ Proposals
In response to declining participation in the SR&ED program, the federal government launched two public consultations in 2024:
- First Consultation: Focused on cost-neutral strategies to improve the SR&ED program’s effectiveness and accessibility.
- Second Consultation: Centered on deploying a proposed $600 million investment over four years to modernize and expand the program.
These consultations culminated in several proposals announced in the December 2024 Fall Economic Statement, with draft legislation released in August 2025. Although these proposals were scrapped following Prime Minister Trudeau’s resignation, Budget 2025 revives them, along with a few new additions.
Key Enhancements to the SR&ED Program
1. Increased Refundable Enhanced Credit Limit
Currently, a fully refundable tax credit at an enhanced rate of 35 percent (“Enhanced Refundable Credit”) is available on up to $3 million of qualifying SR&ED expenditures annually for Canadian-controlled private corporations (CCPCs).
Budget 2025 confirms the previously announced intention to increase the Enhanced Refundable Credit expenditure limit to $4.5 million and introduces a further increase to the expenditure limit to $6 million. As a result, qualifying CCPCs would be able to claim up to $2.1 million per year as refundable cash back on the first $6 million of a CCPC’s research and development spend.
The Enhanced Refundable Credit expenditure limit is shared between associated corporations. This means that businesses with multiple corporate entities that have shared ownership and control will share the limit.
2. Extended Eligibility for Scaling Businesses
The phase-out thresholds for the Enhanced Refundable Credit have been raised to $15 million and $75 million in taxable capital. This change allows growing businesses to retain access to the Enhanced Refundable Credit for longer, with full eligibility below $15 million and partial eligibility up to $75 million.
The expenditure limit is gradually reduced where taxable capital employed in Canada for the previous taxation year is between $15 million and $75 million. Simplified, taxable capital is calculated as the sum of a corporation’s shareholders’ equity, retained earnings, indebtedness, and reserves, minus its investments. To determine the portion employed in Canada, the business multiplies its total taxable capital by the ratio of Canadian taxable income to worldwide taxable income.
Importantly, this calculation is done on a consolidated basis for associated corporations, like the Enhanced Refundable Credit expenditure limit.
3. Extended Eligibility to Eligible Canadian Public Companies
Currently, public companies are not eligible for the Enhanced Refundable Credit that is available to CCPCs. Budget 2025 extends eligibility for the enhanced credit to eligible Canadian public corporations, subject to the same phase-out thresholds discussed above.
Generally, an “eligible Canadian public corporation” will be a corporation that is resident in Canada, has a class of shares listed on a designated stock exchange (most foreign and Canadian exchanges are designated) and meets certain control and ownership requirements designed to ensure that the company is not controlled by non-residents. Subsidiaries of such public corporations will also be eligible.
The ownership and control requirements will mean that public corporations will have to determine if a non-person (or a related group) controls the company, either under de jure control (by law) or de facto (by factual means). To assess these, corporations must review publicly available information about significant shareholders and operational control. This can involve complex legal analysis.
Additionally, corporations must apply the “hypothetical person” test to determine whether all non-resident shareholders, if treated as a single person, would control the corporation. Because public corporations do not know the identity of all shareholders, the draft legislation allows them to rely on public information from the prior year, unless they have actual knowledge of shareholder residency. This provides a practical way to assess eligibility at the start of the tax year.
In Canada, public filings typically disclose shareholders holding more than 10% of shares and insider holdings. Foreign exchanges may offer more detailed disclosures, which may create a larger compliance burden. The actual knowledge standard means that corporations cannot ignore known shareholders even if their details are not publicly disclosed, such as those from equity incentive plans, private placements, or pre-listing investors.
A similar concept exists in the mutual fund trust context, where trusts must not be established or maintained primarily for the benefit of non-residents unless they avoid holding certain Canadian property. In practice, mutual funds often (1) require declarations of residency from unit holders, (2) impose limits on non-resident ownership, and (3) include redemption mechanisms to stay compliant.
Public corporations may need to evaluate whether the Enhanced Refundable Credit is valuable enough to justify adopting procedural safeguards to monitor non-resident ownership and shareholder residency tracking systems or other mechanisms to maintain eligibility, potentially leveraging artificial intelligence to streamline compliance.
4. Restored Eligibility of Capital Expenditures to the SR&ED Program
Budget 2025 proposes to restore the eligibility of capital expenditures related to equipment, machinery, or facilities used directly in research and development for both components of the SRED program: (1) the deduction against income and (2) the tax credit. In addition, current expenditures relating to the lease of equipment, machinery, or facilities used directly in research and development now also qualify.
Eligible capital expenditures will be those incurred to acquire new or used depreciable property that the claimant intends to either: (1) use all or substantially all of the operating time in its expected useful life in the performance of SR&ED in Canada, or (2) consume all or substantially all of its value in the performance of SR&ED in Canada. Eligible property would be eligible for expensing once it becomes available for use.
If these criteria are met, the expenditure could be fully deducted for the purpose of determining taxable income in the year the eligible property becomes available for use or carried forward to the extent it is not deducted in the tax year (i.e., as part of a pool of deductible SR&ED expenditures).
Qualifying capital expenditures would also generally be eligible for the SR&ED tax credit, with some differences from those eligible for immediate expensing, including: (1) the acquisition of property that had been used or acquired for use or lease before it was acquired by the claimant would not be eligible for a tax credit, and (2) an SR&ED-related capital expenditure ineligible for a full deduction against income because it does not meet one of the all-or-substantially-all tests noted above could still be considered “shared-use equipment,” meaning that part of the cost of the property would be eligible for the tax credit.
5. Streamlined Claims Process
To improve predictability and streamline the administration of the SR&ED program, Budget 2025 introduced several operational enhancements effective April 1, 2026:
- An elective pre-claim approval process for upfront technical validation (reducing processing time from 180 to 90 days);
- Increased use of artificial intelligence in program administration; and
- Simplified review procedures and reduced documentation requirements.
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