Canada Revenue Agency clarifies changes regarding concessional loans; claimants may amend scientific research and experimental development claims for open tax years

On 13 November 2024, Canada Revenue Agency (CRA) representatives provided additional information on recent legislative amendments to the Income Tax Act (the Act) that exclude from government assistance certain bona fide concessional loans made after 2019.

The CRA has now clarified that claimants affected by the change in definition of government assistance may file amended tax returns and revised scientific research and experimental development (SR&ED) claim forms for the year(s) affected, even if their SR&ED reporting deadline has passed, as long as the tax year is not statute-barred.

Background

Bill C-69, Budget Implementation Act, 2024, No. 1, enacted on 20 June 2024, included a significant change to the definition of government assistance, which has a direct impact on the calculation of SR&ED expenditures and investment tax credits (ITCs). The amending legislation provides that a bona fide concessional loan with reasonable repayment terms from a public authority in Canada would generally not be treated as government assistance. The relieving rule is effective retroactively to 1 January 2020 and applies to loans made after 2019.

However, Bill C-69 did not provide clarity on whether a claimant could amend their SR&ED claims from previous tax years to reflect the change in the treatment of these concessional loans; as such, various entities, including EY Canada, requested additional clarification from the CRA.

For details, see EY Global Tax Alert, Canada | Amendments to treatment of concessional loans impact scientific and experimental development claims, dated 26 July 2024.

Key highlights

Representatives from the CRA have clarified that taxpayers impacted by the change in the definition of government assistance may submit amended tax returns with their revised SR&ED forms for the years affected, even if the taxpayer's SR&ED reporting deadline has passed, provided that the tax year is not statute-barred. However, no new SR&ED expenditures will be accepted on the amended Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, if the taxpayer's SR&ED reporting deadline has passed.

As a result of the retroactive application of the amended definition of government assistance, amounts that are no longer considered government assistance can be removed from line 431 on Form T661.

Any amounts of assistance related to an "excluded loan"1 (as defined in subsection 12(11) of the Act) that were previously included in income on Schedule 1, Net Income (Loss) for Income Tax Purposes, of the T2 Corporate Income Tax Return, in the same tax year can be removed from Schedule 1.

In addition, Schedule 31, Investment Tax Credit — Corporations (2022 and later tax years), of the T2 return (or Schedule T2038, Investment Tax Credit, for earlier years) should be updated to incorporate the changes made on the amended Form T661, which will result in an increase in the amount of ITCs earned. If the increased ITC amount is nonrefundable, the amount can be applied to Part I income tax payable (if any), carried back up to three tax years to recover previously paid Part I income tax or carried forward to offset Part I income tax payable in any of the next 20 tax years.

If a previous tax return that included government assistance is statute-barred, the taxpayer may report repayments of government assistance in the tax year in which the amount was repaid — regardless of whether the government assistance would now be considered an excluded loan — to recover the related ITCs. However, any ITCs earned will be nonrefundable.

Implications

Taxpayers who received concessional loans that were reported as government assistance in tax returns that are not statute-barred should review their SR&ED claims to determine if the change in the treatment of concessional loans affects their deductible SR&ED expenditures and ITC calculations.

Further, affected taxpayers should consult with their tax advisors to help ensure compliance with the new legislative provisions and explore how the changes to the concessional loan rules affect their SR&ED claims.