Foreign-Controlled Subsidiary Company eligibility for SRED Credits

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Foreign-controlled subsidiary companies can receive Scientific Research and Experimental Development (SRED) credits in Canada, together with the potential for additional provincial tax credits related to reseach and development, but the eligibility and amount of the credits differ from those available to Canadian-controlled private corporations (CCPCs).

To be eligible for SRED credits, the foreign-controlled subsidiary company must be a resident in Canada and must have a permanent establishment within Canada. This means the subsidiary company must conduct its SRED activities and have a physical, operational presence within Canada, such that:

• The SRED work must be performed in Canada.

• The costs claimed must be for expenditures incurred in Canada, such as salaries of Canadian employees and payments to Canadian contractors.

• Materials must be consumed or transformed in Canada as part of the SRED work.

When it comes to credit rates and refundability, the most significant difference between foreign-controlled corporations (Non-CCPCs) and Canadian-controlled private corporations (CCPCs) is the rate and refundability of the SRED investment tax credits (ITCs):

• With respect to Federal Credits - SRED ITCs (in 2025):

  • Foreign-controlled corporations (Non-CCPCs): Eligible for a non-refundable tax credit at a rate of 15% on qualified SR&ED expenditures. A non-refundable credit can only be used to offset taxes payable and doesn't result in a cash refund if the corporation has no taxes owing. However, unused credits can be carried back three years or forward 20 years.

  • Canadian-controlled private corporations (CCPCs): Can earn a refundable credit of 35% on the first $3 million of qualified SR&ED expenditures and a non-refundable credit of 15% on amounts over $3 million. A refundable credit means the corporation can receive a cash refund even if it has no taxes payable.

• With respect to eligible research and development (R&D) work undertaken in the province of Alberta, those activities might take advantage of Alberta's Innovation Employment Grant (IEG), which provides a refundable tax credit to corporations for eligible R&D activities conducted in Alberta (available to both CCPCs and non-CCPCs, which includes foreign-controlled subsidiary companies):

  • IEG is a refundable tax credit, meaning that even if a corporation doesn't have provincial taxes payable, it can still receive a payment for the credit.

  • IEG rates and refundability are the same for both Canadian-controlled private corporations (CCPCs) and foreign-controlled corporations (Non-CCPCs), as long as the corporation meets the IEG eligibility criteria.

  • IEG Standard Rate: 8% of eligible R&D expenditures.

  • IEG Enhanced Rate: An additional 12% (totaling 20%) for eligible R&D spending that exceeds a corporation's base level of spending.

  • IEG Expenditure Limit: The grant is available on up to $4 million in annual R&D spending.

  • IEG Eligibility: To qualify, a corporation must incur eligible R&D expenditures in Alberta that also meet the criteria for the federal SR&ED program.

• By comparison, in the province of Ontario, foreign-controlled corporations have more limited options when it comes to Ontario SRED credits:

  • Ontario Innovation Tax Credit (OITC): Non-CCPCs (e.g., foreign-controlled subsidiary companies) are not eligible for the OITC.

  • Ontario Research and Development Tax Credit (ORDTC): Foreign-controlled subsidiary companies, with qualified SRED expenditures in Ontario can receive a non-refundable credit of 3.5%, although this credit can only be used to reduce Ontario corporate income tax payable.

To learn more about how our law firm stands apart when it comes to expanding your business into Canada, in what we do differently from most larger law firms and how this can properly protect and advance your Canadian commercial venture, contact our law firm today for a confidential initial consultation at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.  

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