Proposed SR&ED Enhancements in Canada’s Federal Budget 2025

Canada’s Federal Budget 2025 introduces several important updates to the Scientific Research and Experimental Development (SR&ED) program. The changes, if enacted, expand eligibility, increase funding capacity, and modernize program administration. However, claimants should not assume full eligibility until the implementing legislation is finalized and receives Royal Assent.

Increase to the SR&ED Expenditure Limit: $6 Million

The expenditure limit for the enhanced 35% refundable SR&ED credit will increase from $3 million to $6 million, applicable to taxation years beginning on or after December 16, 2024.

	1	2	(2-1)	(2-1/1)
	Previous Limit Example	New Limit Example	Delta ($)	Delta (%)
SR&ED qualified expenditures	$6,000,000	$6,000,000	-	-
Refundable (cash) ITCs	$1,050,000	$2,100,000	+$1,050,000	+100%
Non-refundable ITCs	$1,050,000	-	-$1,050,000	-100%
Total ITCs	$2,100,000	$2,100,000	-	-

The expanded limit is beneficial for companies with SRR&D qualified expenditures already exceeding the prior $3M threshold, as well as for corporations who share in the expenditure limit across their associated group of companies.

Enhanced Phase-Out Thresholds

Federal Budget 2025 increases the taxable-capital range over which the enhanced 35% SR&ED credit is phased out. Under the revised rules, the phase-out will apply to taxable capital employed in Canada between $15 million and $75 million, replacing the previous range of $10 million to $50 million.

The expanded thresholds allow larger CCPCs, and certain ECPCs, to retain access to at least a portion of the enhanced credit for a longer period of their growth cycle. Companies whose taxable capital previously exceeded the upper limit and therefore received only the basic 15% non-refundable credit may now be able to claim, in part or in full, at the 35% refundable rate.

Practical Implications:

• Companies with taxable capital between $50 million and $75 million may now qualify for enhanced credits @ 35% refundable.

• Mid-sized firms approaching the former $50 million cutoff will retain access to the enhanced 35% rate for additional years.

• Organizations planning expansion or capital investment should model the impact of the new ranges, as the phase-out now declines gradually over a wider span of taxable capital.

The broader thresholds are designed to better align SR&ED access with the scale of modern R&D-intensive businesses and reduce abrupt transitions from refundable to non-refundable credits.

Expanded Eligibility for Public Corporations

Budget 2025 extends access to the 35% enhanced refundable SR&ED credit to certain Canadian public corporations through a newly defined eligibility category. This adjustment allows public entities meeting specific criteria to earn the enhanced 35% rate previously limited to Canadian-Controlled Private Corporations (CCPCs).

An “Eligible Canadian Public Corporation” (ECPC) is a Canadian-resident taxable corporation that meets certain criteria, including having a class of shares listed on a designated stock exchange and not being controlled, directly or indirectly, by non-resident persons.

For such corporations, the benefit is significant in that they can access the enhanced 35 % refundable credit rate under SR&ED (on up to the annual expenditure limit) rather than being restricted to the basic non-refundable 15% rate.

Reinstatement of Capital Expenditure Eligibility

Budget 2025 restores the ability to claim SR&ED credits on capital expenditures. This reverses the earlier removal (2014) of capital-claim eligibility.

For qualifying CCPCs (earning the enhanced 35 % ITC rate), capital-expenditure ITCs will only be refundable up to 40 % of the credit amount, with the remaining 60% coming in the form of non-refundable ITCs.

Claimants may now earn SR&ED ITCs on the following:

• Machinery and equipment used in R&D

• Testing and prototyping equipment

• Specialized research tools

• Property acquired specifically for SR&ED purposes

• Lease and rental expenses (see below*)

Planning considerations and practical implications:

• SR&ED treatment depends on intent: >90% earns full credits, 50–90% provides partial or deferred credits, and <50% restricts credits to allocable SR&ED-use only.

• Items must be purchased from an arm’s-length supplier and must be new to qualify.

• The item must be "available for use" in the tax year in which the expenditure is claimed.

• Purchase orders for capital equipment intended for SR&ED should indicate that the items are for “R&D purposes” and, where possible, be assigned a distinct accounting code.

• Enables the ability to fully write-off / expense eligible capital expenditure within the SR&ED pool.

*Budget 2025 also aims to reinstate SR&ED eligibility for lease and rental expenses. Lease payments qualify when the leased asset is used primarily for SR&ED, including operating leases for machinery, tools, and other equipment, and potentially on data/cloud compute costs. This change is relevant for industries that rely on temporary or flexible access to equipment. In these cases, leasing reduces upfront capital requirements while still allowing the related costs to be recognized as SR&ED expenditures, provided documentation supports the asset’s primary use in experimental work

Ultimately, the reinstatement improves credit outcomes for capital-intensive industries such as manufacturing, clean technology, advanced hardware development, and applied research organizations.

Introduction of an Elective Pre-Claim Approval Process

The CRA will introduce a voluntary pre-claim approval system designed to confirm SR&ED project eligibility before expenditures are incurred. The target processing time for these reviews will be 90 days, compared to the existing average of approximately 180 days.

Process Characteristics

• Up-front technical review of proposed SR&ED work

• CRA confirmation of eligibility prior to commencing activities

• Reduced uncertainty during project execution

• Shortened processing times for approved claims (90 days down from 180 days)

• Lower risk of post-filing disputes or claim adjustments

The process may be particularly useful for large or long-term R&D initiatives, projects in new or emerging technical fields, and first-time SR&ED claimants who are heavily vested in the outcome of SR&ED. Note: companies confident in their eligibility may continue using the traditional process.

AI-Supported Administration

Budget 2025 includes measures to integrate artificial intelligence into SR&ED administration. AI systems will be used to:

• Identify low-risk claims

• Reduce unnecessary audit intervention

• Accelerate refund timelines

• Allocate CRA resources more efficiently

These updates do not alter eligibility rules but are intended to streamline the claim-handling process.

Additional Administrative Improvements

Effective April 1, 2026, the CRA will also implement changes intended to improve processing efficiency:

• Removal of redundant review steps

• Reduction in excessive documentation requests

• Faster determinations on claim adjustments

• Simplified internal workflows for CRA officers

These changes do not impact the technical requirements for eligibility.            

Implementation Updates:
Time Period	Key Features
Before April 1, 2026	Current SR&ED processes remain in place. Typical processing time remains ~180 days.  Existing documentation requirements continue.
After April 1, 2026	Pre-claim approval becomes available. AI systems used for low-risk screening. Targeted 90-day processing for approved claims. Streamlined documentation and review processes.

The transition period allows claimants to prepare systems and documentation practices ahead of the administrative changes.

Proactive Planning Considerations

The proposed 2025 SR&ED measures introduce several changes that may influence how organizations plan and track their research and development activities. While the full impact will depend on the final legislation and CRA administrative guidance, companies can begin preparing by reviewing internal processes and documentation practices to align with the updated program structure.

1. Review Fiscal Year-End Implications

Because most measures apply to taxation years beginning on or after December 16, 2024, companies should evaluate whether their current year-end aligns with the timing of the proposed changes. Organizations with flexibility may consider whether altering their year-end could accelerate access to the enhanced limits or new administrative options.

2. Assess Capital Investment Timing

With capital expenditures and lease costs proposed to regain eligibility, businesses should begin cataloging upcoming equipment purchases and reviewing whether these assets could qualify once the new rules take effect. Early identification of R&D-related capital needs supports better timing, documentation, and cost allocation.

3. Evaluate Suitability of Pre-Claim Approval

The upcoming pre-claim approval process will provide upfront eligibility confirmation. Organizations undertaking large, high-cost, or novel R&D projects may want to determine whether this option could reduce uncertainty or support internal budgeting. Preparing preliminary technical descriptions in advance may ease future submissions and enhance visibility for future budgeting.

4. Update Internal Cost Allocation Processes

With changes to expenditure limits, thresholds and capital expenditure eligibility, early process updates help ensure accurate tracking from the start of affected fiscal years.

Finance teams should consider updating the following:

• Cost centers related to R&D

• Methods for identifying and allocating SR&ED-eligible capital, lease and rental expenditures

• Internal controls for tagging R&D-specific purchases or equipment usage

5. Model Financial Impacts of New Limits and Thresholds

Companies previously capped at $3 million or restricted by taxable-capital limits may benefit from recalculating potential SR&ED outcomes under the proposed $6 million limit and expanded phase-out thresholds. Preliminary modelling supports investment decisions, project timelines, and budgeting.

6. Monitor Legislative and CRA Guidance

Because the Budget 2025 measures are still proposals, companies should continue monitoring:

• Progress of enabling legislation and Royal Assent

• CRA updates outlining audit expectations, usage thresholds, and documentation requirements

Planning should incorporate these developments to avoid assumptions that may not align with the finalized rules.

Summary

The SR&ED measures in Canada’s Federal Budget 2025 introduce several substantive improvements:

Proposed SR&ED Enhancements	Details from Budget 2025	Implications
Increased SR&ED Expenditure Limit	Proposed to be further increased from the previously announced from $3 million to $6 million.	Enables access to a higher refundable ITC rate of 35% on qualifying expenditures.
Increased Taxable Capital Thresholds	Increased the prior-year taxable capital phase-out thresholds from $10 million and $50 million to $15 million and $75 million.	Extends eligibility for refundable ITCs to larger CCPCs and increases the amount of expenses eligible for the 35% rate.
Expanded Eligibility to Public Corporations	Extended enhanced ITCs (35% refundable rate) to eligible Canadian public corporations (ECPCs).	Extends refundable ITC entitlements to publicly traded Canadian corporations.
Reinstatement of Capital Expenditures	Restored eligibility for SR&ED capital expenditures, including lease and rental costs.	Allows companies to claim ITCs on machinery, equipment, and other costs associated with SR&ED.
Administrative Reforms	The CRA will implement an elective pre-claim approval process, use AI to streamline audit risk assessments, and review Form T661.	Reduces uncertainty, increases processing speed, and enhances predictability.

Final Thoughts

These changes aim to increase the value of SR&ED incentives and improve program accessibility and predictability, and claimants conducting R&D activities may benefit from reassessing project planning, capital investment timing, claim strategies, and documentation practices as further details become available.

However, as previously noted, claimants should not assume full eligibility until the implementing legislation is finalized and receives Royal Assent, and until the CRA publishes detailed administrative guidelines, including audit positions, usage thresholds, and documentation requirements. Stay tuned for more updates.