Alberta upgrades its support for SR&ED with its new Innovation Employment Grant

As in a familiar joke, there is bad news and good news for SR&ED in Alberta:

The bad news: since January 1, 2020, companies can no longer claim SR&ED tax credits from the Alberta government. The province previously offered a 10% refundable tax credit calculated on eligible R&D expenses.

The good news: on July 22, 2020, Alberta’s premier, Jason Kenney, announced a new provincial program effective as of January 1, 2021: the Innovation Employment Grant (IEG). Created to encourage innovation and economic growth in the province, the IEG provides small and medium-sized businesses with a refundable tax credit of up to 20% on their SR&ED expenses.

The IEG is calculated in two steps:

  1. First, an 8% refundable tax credit on the SR&ED expenses for the current taxation year, PLUS:
  2. An incremental 12% refundable tax credit on the portion of the SR&ED expenses that exceeds the “base spending level” for the company. That base level is defined as the average spending calculated over the two preceding years: (Y1 + Y2) / 2

Eligible expenses are identical to those that qualify for the federal SR&ED program. Expenses must be incurred after December 31, 2020, up to a maximum of $4M.

First time SR&ED claimants, for example startups, automatically benefit from the 20% tax credit. The maximum 20% rate also applies to claimants that have not submitted SR&ED claims in the preceding two years.

Conditions

Companies with a taxable capital of $50M or more are not eligible for this tax credit. Those between $10M and $50M will receive a lower percentage of the tax credit rate. That percentage is calculated based on the corporation’s prior year taxable income: [$40M – (prior year taxable capital – $10M)] / $40M.

Examples :

Year SR&ED Expenses
2019 $0
2020 $0
2021 $200,000
Company “StartupCo Inc.”

This company will benefit from a tax credit based on this calculation:

Current year eligible R&D expenses X 8%:
= 200,000 X 8% = 16,000

Plus: current year eligible R&D expenses minus the average R&D spending calculated over the two previous years X 12%:
= {200,000 – [(0 + 0) / 2]} X 12%
= {200,000 – 0} X 12% = 24,000

Total credit to be received = 16,000 + 24,000 = $40,000 (20% of the 200,000 in expenses)

Year SR&ED Expenses
2019 $50,000
2020 $100,000
2021 $200,000
GrowingCo Inc.

Current year eligible R&D expenses X 8%:
= 200,000 X 8% = 16,000

Plus: current year eligible R&D expenses minus the average calculated over the two previous years X 12%:
= {200,000 – [(50,000 + 100,000) / 2]} X 12%
= {200,000 – 75,000} X 12%
= 125,000 X 12% = 15,000

Total credit to be received = 16,000 + 15,000 = $31,000 (15.5% of 200,000 in expenses)

Year SR&ED Expenses
2019 $200,000
2020 $150,000
2021 $100,000
MatureCo inc.

Current year eligible R&D expenses X 8%:
= 100,000 X 8% = 8,000

Plus: current year eligible R&D expenses minus the average calculated over the two previous years X 12%:
= {100,000 – [(200,000 + 150,000) /2]} X 12%
= {100,000 – (350,000 / 2)} X 12%
= 100,000 – 175,000 = (75,000)

Since the current year expenses are lower than the average of the two preceding, there will not be any additional grant tax credit.

Total credit to be received = 8,000 + 0 = $8,000 (8% of 100,000 in expenses)

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