On August 15, 2025, the Department of Finance Canada released draft legislation implementing the most substantial overhaul of the Scientific Research and Experimental Development (SR&ED) tax credit program in over a decade. The expansion increases the maximum annual refundable credit from $1.05 million to $1.575 million—a 50% boost—and dramatically extends eligibility by opening the enhanced 35% refundable credit to Canadian public corporations for the first time while restoring capital expenditures eliminated in 2014. This represents a $1.9 billion investment over six years aimed directly at addressing Canada's persistent innovation scale-up problem, where successful companies have historically been acquired by foreign entities or relocated precisely when they needed R&D support most. The changes take effect for taxation years beginning after December 15, 2024, with the consultation period having closed September 12, 2025. For business leaders navigating Canada's innovation landscape, these reforms fundamentally reshape the economics of R&D investment, particularly benefiting mid-sized companies, public corporations, and capital-intensive industries from manufacturing to cleantech to artificial intelligence.
The draft legislative proposals released August 15, 2025 implement changes originally announced in the December 16, 2024 Fall Economic Statement. The government structured the expansion around four major enhancements, each addressing specific limitations that had constrained the program's effectiveness.
The expenditure limit jumped from $3 million to $4.5 million annually, enabling Canadian-Controlled Private Corporations (CCPCs) to claim the enhanced 35% fully refundable investment tax credit on an additional $1.5 million in qualifying expenses. This translates to a maximum refundable credit of $1.575 million per year, up $525,000 from the previous $1.05 million ceiling. For companies operating at the upper range of R&D spending, this represents a dramatic improvement in cash flow that can fund additional researchers, accelerate development timelines, or preserve equity that would otherwise be diluted through venture financing.
The phase-out thresholds expanded substantially, moving from $10-50 million in taxable capital to $15-75 million, effectively providing companies 50% more runway before enhanced credits begin diminishing. This addresses what industry advocates called the "CCPC cliff"—the phenomenon where successful Canadian companies lost critical R&D support precisely as they scaled into mid-sized enterprises. Under the new structure, companies can grow significantly larger while maintaining access to the most generous credits. Additionally, CCPCs gained the option to elect a gross revenue-based phase-out test instead of the taxable capital test, particularly beneficial for capital-intensive businesses with substantial assets but lower revenue profiles.
Perhaps the most transformative change extends the enhanced 35% refundable credit to a newly defined category: Eligible Canadian Public Corporations (ECPCs). To qualify, a corporation must be Canadian resident, have shares listed on a designated stock exchange, and remain free from control by non-resident persons. These ECPCs can now access the same $4.5 million expenditure limit with full refundability that was previously exclusive to private companies. The phase-out for public corporations operates differently, using a gross revenue test ranging from $15-75 million in average gross revenue over the preceding three years rather than taxable capital. For consolidated corporate groups, the gross revenue figure comes from the highest level of financial statement consolidation presented to shareholders. This change eliminates the long-standing penalty for going public—companies can now raise growth capital through IPOs without sacrificing their primary source of R&D funding.
The restoration of capital expenditure eligibility reverses one of the most criticized aspects of the 2012 budget reforms that took effect in 2014. Equipment, machinery, and specialized R&D infrastructure acquired after December 16, 2024 now qualify for both income deductions and investment tax credits under rules similar to the pre-2014 framework. To be eligible, property must be new or used depreciable assets (excluding buildings and leasehold interests) that the claimant intends to use 90% or more of operating time for SR&ED activities in Canada, or consume 90% or more of its value in R&D work. Shared-use equipment utilized between 50-90% for SR&ED can qualify for proportional credits. The distinction between capital and current expenditures matters significantly for refundability: while current expenditures generate 100% refundable credits for qualifying CCPCs, capital expenditure credits are only 40% refundable. A $100,000 equipment purchase generates a maximum $35,000 ITC at the 35% rate, but only $14,000 returns as cash while $21,000 remains as non-refundable credit to offset taxes. Recapture rules apply if companies sell or repurpose SR&ED capital property, requiring recovery of previously claimed benefits—a crucial consideration for equipment lifecycle planning.
The December 16, 2024 Fall Economic Statement provided the policy framework and fiscal commitment that the August 2025 draft legislation operationalized. Released by the Department of Finance Canada amid considerable political turbulence—Finance Minister Chrystia Freeland resigned as Deputy Prime Minister just hours before the statement's scheduled presentation—the document nevertheless contained a robust innovation chapter committing $1.9 billion over six years (with $1.864 billion in net new funding after accounting for $750 million previously provisioned in Budget 2024).
The Fall Economic Statement articulated clear policy objectives rooted in Canada's competitiveness challenges. "Cutting-edge technologies are a key driver of growth for businesses," the document stated, positioning the SR&ED expansion within a broader productivity agenda. The government explicitly acknowledged that the program currently supports over 22,000 businesses operating in Canada, with approximately 75% of SR&ED credits claimed by Canadian-controlled businesses. The rationale emphasized addressing the U.S. Tax Cuts and Jobs Act's 2017 erosion of Canada's R&D tax advantage while supporting the transition to capital-intensive industries like clean technology, advanced manufacturing, and artificial intelligence.
The fiscal profile demonstrates sustained commitment rather than front-loaded spending. The investment ramps from $44 million in fiscal 2024-25 to a steady state of $365-405 million annually by 2026-27 and beyond. This spending pattern reflects the mechanics of SR&ED claims, which flow through the tax system with an 18-month lag after fiscal year-end. The government characterized these changes as "the first of further reforms" related to the SR&ED program, explicitly promising additional details on program administration and updates to qualified expenses in Budget 2025. Consultations held throughout 2024 explored complementary measures including a Patent Box regime—providing preferential tax treatment for income from intellectual property developed in Canada—and potential expansion of flow-through share financing beyond mining to include sectors like AI, quantum computing, and biotech.
The timeline established in the Fall Economic Statement set December 16, 2024 as the effective date for all measures, applicable to taxation years beginning on or after that date. This means companies with January 1, 2025 fiscal years already operate under the new rules, pending final legislative passage. The August 15, 2025 release of draft legislation initiated a consultation period that closed September 12, 2025, allowing stakeholders to provide technical feedback before the government finalizes the legislation for introduction in Budget 2025.
The structural changes to SR&ED eligibility create distinct winners across the business landscape, with implications varying dramatically by company size, ownership structure, and capital intensity. For CFOs modeling the financial impact, the new framework introduces complexity around refundability rates, phase-out calculations, and the interplay between capital versus current expenditures.
Small startups with annual R&D spending below $3 million see minimal direct benefit from the expenditure limit increase, as they were already operating comfortably within the previous ceiling. However, this cohort gains significantly from capital expenditure restoration if their R&D involves equipment or infrastructure. A pre-revenue AI startup purchasing $200,000 in GPU computing equipment for model training can now claim a 35% credit of $70,000, with $28,000 refundable in cash (40% of the credit). The remainder offsets future tax liabilities or carries forward up to 20 years. For companies in the challenging venture capital environment—the Canadian Venture Capital Association reported a 26% year-over-year decline in H1 2025 investment—this non-dilutive funding becomes increasingly strategic.
Mid-sized companies between $3-10 million in annual R&D spending emerge as the expansion's most significant beneficiaries. These firms can now access enhanced credits on an additional $1.5 million in qualifying expenditures annually, translating to $525,000 more in refundable credits. Consider a manufacturing technology company with $7 million in R&D costs: previously, only $3 million qualified for the enhanced 35% rate ($1.05 million refundable) while the remaining $4 million generated 15% credits ($600,000, partially refundable based on prior-year taxable income). Under the new rules, $4.5 million qualifies for enhanced treatment ($1.575 million refundable) with only $2.5 million at the lower rate ($375,000 partially refundable). The company's total federal credits increase from approximately $1.65 million to $1.95 million, with substantially more coming as cash refunds rather than non-refundable credits requiring taxable income to utilize.
The extended phase-out thresholds create particular advantages for scaling companies approaching previous limits. A CCPC with $40 million in taxable capital previously faced complete elimination of enhanced credits at the $50 million threshold. Under the new framework, this company maintains partial access to enhanced credits until reaching $75 million in taxable capital. The straight-line phase-out formula calculates the expenditure limit as $4.5 million multiplied by ($75 million minus taxable capital) divided by $60 million. At $40 million taxable capital, the limit equals $2.625 million—enabling $918,750 in refundable credits at 35% versus zero under the old system. For companies in rapid growth phases, this extended runway can span multiple years of additional eligibility.
Canadian public corporations experience the most transformative shift, gaining access to a credit structure they were entirely excluded from previously. A public cleantech company listed on the Toronto Stock Exchange with $30 million in average gross revenue over three years would have received only 15% non-refundable credits on all R&D spending under the old regime. Now, as an Eligible Canadian Public Corporation, it qualifies for the enhanced rate on expenditures up to $2.25 million (calculated using the gross revenue phase-out formula). On $5 million in total R&D spending, this generates $787,500 in refundable credits on the first $2.25 million (at 35%) plus $412,500 in non-refundable credits on the remaining $2.75 million (at 15%), for total credits of $1.2 million compared to $750,000 previously—and with $787,500 now refundable versus zero. This cash flow improvement can represent the difference between sustaining R&D through the pre-profitability scale-up phase or cutting programs to conserve capital.
Administrative and compliance implications multiply with the added complexity. Companies must now choose between taxable capital and gross revenue phase-out tests, requiring sophisticated financial modeling to determine the optimal election. The capital expenditure restoration demands robust documentation systems tracking equipment usage to substantiate the 90% SR&ED-use threshold. Firms need contemporaneous records showing systematic investigation, technological uncertainty, and advancement—the three pillars of SR&ED eligibility—alongside detailed tracking of operating time for mixed-use equipment. Tax professionals consistently emphasize that documentation failures remain the primary reason for claim rejections during Canada Revenue Agency reviews. The 40% versus 100% refundability distinction between capital and current expenditures necessitates strategic tax planning, as companies may need to prioritize salary-based R&D over equipment purchases to maximize cash returns, despite equipment potentially offering greater technical capability.
The expansion's impact varies dramatically across industries based on capital intensity, equipment requirements, and typical company structures. Manufacturing and industrial sectors, which led opposition to the 2014 capital expenditure elimination, stand to regain significant ground. Equipment-heavy R&D in manufacturing—specialized machinery, prototyping systems, testing apparatus, and automation infrastructure—becomes partially recoverable for the first time in over a decade. An advanced manufacturing company developing Industry 4.0 robotics systems can now claim both the engineering salaries for R&D personnel and the robotic equipment itself. With manufacturing companies representing one of the largest segments of SR&ED claimants nationally, the capital restoration addresses a structural disadvantage that had pushed innovation toward less capital-intensive approaches or offshored equipment-heavy development.
The technology and software development sector maintains its position as the largest SR&ED claimant group while gaining new capabilities around hardware infrastructure. AI and machine learning companies, previously unable to claim computing equipment purchases, can now recover 40% of ITCs on GPUs, training clusters, and edge computing devices used predominantly for R&D. However, professionals emphasize that vanilla integration of off-the-shelf AI tools remains ineligible—systematic investigation into novel voice interaction patterns, industry-specific adaptations requiring domain expertise, or technical challenges around real-time processing qualify, but simply deploying existing foundation models does not. The distinction requires careful documentation of technological uncertainty and experimental methodology beyond routine implementation.
Biotechnology and pharmaceutical companies benefit from enhanced support across both current and capital expenditures. Clinical trial costs—patient recruitment, data collection, testing protocols—qualify at higher limits, while laboratory equipment and specialized testing apparatus become claimable as capital expenditures. Canada's R&D tax treatment for clinical trials ranks among the world's most favorable when combining federal and provincial programs, with total credits reaching 15-32% of eligible expenses in some jurisdictions. A biotech firm conducting Phase 2 trials can combine enhanced federal credits on the first $4.5 million in qualifying costs with provincial programs, creating a substantial offset against the significant expenses of clinical development. The public company eligibility proves particularly valuable here, as many biotech firms go public to finance late-stage trials and commercialization but previously sacrificed enhanced credits in the process.
Clean energy and climate technology sectors may see disproportionate benefits relative to fossil fuel industries despite the program's technology-neutral design. Bryan Watson of CleanTech North observed that while the changes don't discriminate by sector, "there are more [cleantech] companies" in the innovation pipeline, leading to asymmetric impact. A cleantech company developing novel battery storage technology or carbon capture systems can now claim pilot plant equipment, testing infrastructure, and specialized manufacturing systems as capital expenditures. The case of CHAR Technologies illustrates the transformation: this Ontario-based company converting wood waste to metallurgical coal alternatives lost SR&ED eligibility upon going public despite continuing substantial R&D. CEO Andrew White stated the restoration of public company eligibility means "we can scale up our research again...really start to accelerate" rather than choosing between development spending and revenue generation. The program helps "domesticate the supply chain for clean technologies" by supporting Canadian manufacturing and development infrastructure.
Mining and natural resources companies gain access through capital expenditure restoration and public company eligibility, though important limitations persist. Mineral exploration, prospecting, drilling, and routine production remain explicitly excluded from SR&ED—these activities should utilize the Mineral Exploration Tax Credit (METC) instead. However, genuine R&D in extraction methods, processing innovations, environmental remediation, and automation technologies fully qualifies. David Douglas of Ryan noted the changes "open doors for industries in Canada previously unable to benefit from the SR&ED incentive because of their legal structure." A mining company developing new sensor technologies for ore body mapping, innovative tailings treatment for environmental compliance, or process improvements for critical mineral extraction can claim both the development costs and the pilot equipment. With Canada's mining sector contributing $117 billion (4% of GDP) and employing 430,000 people, even small percentage improvements in R&D economics can yield millions in reinvestment capacity.
Strategic opportunities extend beyond direct tax savings to competitive positioning and business model implications. Companies can now pursue more capital-intensive innovation pathways without facing disproportionate tax disadvantages compared to salary-focused approaches. This levels the playing field between hardware and software companies, between manufacturing and services, and between established industries and emerging technologies. The public company eligibility removes the innovation penalty for going public, potentially encouraging more Canadian IPOs rather than acquisition by foreign entities. Enhanced credits provide longer runway during the scale-up phase when companies transition from startup survival mode to sustainable mid-sized enterprises—historically the stage where Canadian companies most frequently relocated or sold. For multinational corporations with Canadian operations, the improved SR&ED treatment for Eligible Canadian Public Corporations strengthens the business case for locating R&D centers and IP development in Canada rather than other jurisdictions.
Business leaders face immediate action items to capitalize on these changes while managing implementation complexity. The effective date of December 16, 2024 means companies with calendar-year fiscal periods already operate under the new framework, though final legislative passage through Budget 2025 remains pending. This creates a planning window where companies should act as though the rules apply while maintaining flexibility for potential modifications during the legislative process.
CFOs should immediately model financial impacts under multiple scenarios. Companies operating near phase-out thresholds need analysis comparing taxable capital versus gross revenue tests to determine which produces more favorable treatment. A company with $18 million in taxable capital but $50 million in gross revenue would see dramatically different outcomes: the taxable capital test yields an expenditure limit of $4.05 million, while the gross revenue test produces $1.875 million. The election becomes irrevocable for the taxation year, requiring accurate forecasting. Public companies must verify ECPC eligibility by confirming Canadian residency, designated stock exchange listing, and absence of non-resident control—the latter potentially complex for companies with substantial foreign institutional ownership. Legal review of control structures may be necessary.
Capital expenditure planning demands new strategic thinking. Equipment acquired after December 15, 2024 qualifies, but timing considerations matter. A $500,000 investment in R&D machinery generates $175,000 in ITCs at 35%, but only $70,000 comes back as cash for a CCPC (40% refundability). Companies should evaluate whether accelerating planned equipment purchases into 2025 makes financial sense given the partial refundability, or whether leaning toward salary-intensive approaches maximizes cash recovery. The 90% SR&ED-use requirement necessitates dedicated equipment or meticulous tracking. Shared-use equipment between 50-90% utilization faces proportional treatment requiring complex allocation methodologies. Installation of contemporaneous tracking systems—usage logs, booking systems for shared equipment, project codes linking expenditures to specific R&D initiatives—should begin immediately rather than attempting retroactive documentation.
Documentation standards remain the primary compliance risk despite the expanded generosity. The five-question test established in Northwest Hydraulic Consultants v. The Queen (1997) still governs eligibility: Was there scientific or technological uncertainty? Did the work involve formulating hypotheses to reduce that uncertainty? Was the approach consistent with systematic investigation? Was it undertaken for technological advancement? Were adequate records kept? CRA reviews reject claims most frequently on documentation failures—vague descriptions of technological uncertainty, lack of systematic investigation evidence, insufficient proof of experimentation, or confusion between routine engineering and genuine experimental development. Professional services firms emphasize implementing real-time documentation systems including engineering logs, laboratory notebooks, project management software with traceability, meeting minutes discussing technical challenges and approaches, and repositories of failed experiments alongside successes.
The Canada Revenue Agency increased its audit budget for 2025, with focus on high-claim industries, repeated filers, and claims substantially larger than prior years. Historical data shows 90% of claims accepted as filed, 6% accepted after modifications during review, and 4% denied. However, amended returns face rejection rates up to 40%, and late filing separate from tax returns increases scrutiny. Gross negligence penalties, though rare (0-80 cases annually), can reach significant amounts—up to $5.2 million in annual penalty assessments across all cases. Companies should assume eventual review and prepare accordingly, maintaining organized work files, technical documentation proving technological advancement, and financial records segregating SR&ED from routine activities.
Provincial program coordination offers additional value but adds complexity. Ontario, Quebec, British Columbia, and Atlantic provinces provide supplementary credits ranging from 3.5-30% of qualified expenditures, stackable with federal SR&ED. Combined federal-provincial support can reach 64-69% in optimal scenarios, particularly for small companies in provinces with generous programs. Each province maintains unique eligibility criteria, documentation requirements, and filing deadlines. Quebec's system operates independently with its own claim forms and review process. Companies operating in multiple provinces must allocate expenditures by location and comply with each jurisdiction's requirements. Integration with other federal programs like the Industrial Research Assistance Program (IRAP)—which provides grants covering up to 80% of labor costs and 50% of contractor expenses for small businesses—requires coordination to avoid duplication while maximizing coverage.
The August 2025 draft legislation represents "the first of further reforms" according to government statements, with significant announcements expected in Budget 2025. The Patent Box regime, extensively consulted on throughout 2024, aims to provide preferential tax treatment for income derived from intellectual property developed in Canada. Nineteen OECD countries already operate patent box systems offering reduced corporate tax rates on qualifying IP income—typically patents, but sometimes including copyrighted software and other intangibles. The objective aligns with SR&ED enhancement: encouraging companies to develop and retain IP domestically rather than transferring it offshore or selling to foreign acquirers. Combined, the two measures would support both the R&D investment phase (through SR&ED) and the commercialization phase (through Patent Box), addressing the "missing middle" that previous policy focused primarily on early-stage support.
Budget 2025 may also advance the flow-through share concept beyond mining. Currently available only for mineral exploration, flow-through shares allow investors to deduct eligible expenses on their personal taxes, effectively crowdfunding R&D through the retail investment market. Expanding this to AI, quantum computing, biotechnology, and advanced manufacturing could create new capital formation mechanisms for R&D-intensive sectors. The government indicated interest in updates to qualified expense definitions—potentially including categories of expenditures currently excluded or clarifying gray areas that generate disputes during CRA reviews. Administrative simplification remains a persistent request from stakeholders, with 84% of businesses in a 2024 KPMG survey wanting SR&ED both simplified and expanded.
Political considerations introduce uncertainty despite broad support for innovation investment. The Liberal government's platform included a promise to further increase the expenditure limit to $6 million (beyond the $4.5 million in current draft legislation), though no official announcement has materialized. Parliamentary dissolution after the 2024 Fall Economic Statement created questions about implementation timing, though the subsequent government maintained the proposals largely intact. Conservative opposition indicated general support for SR&ED expansion while suggesting potential revisions around program administration and accountability. The August 15 draft legislation's survival through consultation and continued advancement toward Budget 2025 suggests strong political consensus, but final passage remains subject to legislative process.
The August 2025 SR&ED expansion marks a decisive inflection point in Canadian innovation policy—not merely incremental improvement but fundamental restructuring that reverses the restrictive 2012-2014 reforms and extends support to previously excluded categories. The 50% increase in expenditure limits, restoration of capital expenditure eligibility after 11 years, and opening of enhanced credits to public corporations collectively address the three most significant constraints that had limited the program's effectiveness as companies scaled beyond startup phase.
The scale-up problem receives particular focus, as higher phase-out thresholds and public company eligibility remove barriers precisely where Canadian companies historically stumbled. The data tells a sobering story: successful Canadian tech companies routinely sold to foreign acquirers or relocated headquarters to maintain R&D competitiveness when crossing the thresholds that eliminated enhanced credits. This expansion provides an alternative pathway—companies can now scale from startup through mid-sized enterprise to public company without sacrificing their primary source of non-dilutive R&D funding. Whether this suffices to stem the outflow of innovative companies remains an empirical question for the coming years, but the structural barrier has been materially reduced.
Capital-intensive industries regain access to a level playing field after a decade of disadvantage. The 2014 elimination of equipment eligibility tilted innovation toward software and services, advantaging salary-intensive models over hardware development. Manufacturing, cleantech, mining, and AI hardware companies can now pursue capital-intensive innovation pathways with partial cost recovery. The 40% refundability on capital credits versus 100% on current expenditures preserves some disadvantage, but represents dramatic improvement over zero eligibility. This should encourage domestic development of physical infrastructure, pilot plants, and production technologies rather than offshoring equipment-intensive work.
The $1.9 billion fiscal commitment over six years—representing roughly 10% increase atop the program's current $3.4-4.2 billion annual cost—signals sustained policy commitment rather than temporary stimulus. The steady-state investment of $365-405 million annually beginning in 2026-27 suggests permanence, though future governments could modify the structure. The government's explicit framing of these changes as "first of further reforms" indicates ongoing evolution, with Budget 2025 expected to advance complementary measures around intellectual property retention, commercialization support, and program administration.
For business leaders navigating implementation, the imperative centers on immediate assessment and strategic planning. Companies must model financial impacts under new rules, evaluate capital investment priorities given partial refundability constraints, implement robust documentation systems before year-end to support 2025 claims, and engage specialized advisors to optimize across federal-provincial programs. The window between draft legislation and final passage creates opportunity for feedback but also planning uncertainty—companies should proceed as though the measures will pass largely intact while maintaining flexibility for modifications.
The expansion's ultimate success depends less on the technical design—which professional consensus views as generally sound—than on execution details: CRA's approach to capital expenditure reviews after a decade hiatus, the administrative burden of new complexity around elections and phase-outs, the documentation standards for equipment usage, and the interaction with forthcoming Patent Box and other complementary programs. These operational questions will determine whether the expansion delivers on its promise of supporting Canadian innovation through the entire growth lifecycle, or whether implementation challenges and compliance complexity undermine the policy's theoretical advantages. Early evidence and stakeholder engagement through 2025-26 will prove crucial in answering that question.
We use cookies to improve user experience. Choose what cookie categories you allow us to use. You can read more about our Cookie Policy by clicking on Cookie Policy below.
These cookies enable strictly necessary cookies for security, language support and verification of identity. These cookies can’t be disabled.
These cookies collect data to remember choices users make to improve and give a better user experience. Disabling can cause some parts of the site to not work properly.
These cookies help us to understand how visitors interact with our website, help us measure and analyze traffic to improve our service.
These cookies help us to better deliver marketing content and customized ads.