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Ottawa is fixing a perceived flaw in its flagship research and development program by lifting a cap on how much income small companies can generate and still qualify for the tax credit.

Under the current rules, the government claws back the value of the credits when companies earn more than $500,000 a year and phases it out completely when they earn more than $800,000.

Experts say the policy has had the perverse effect of prompting companies to pay out income in salaries to employees rather than reinvesting in the business – just to stay below the income threshold.

“For small companies, it was a pretty common problem,” said Bruce Ball, vice-president of taxation for the Chartered Professional Accountants of Canada. “This will be a welcome change for them.”

The federal budget includes new spending in a range of areas including support for first-time homebuyers, ensuring seniors are enrolled in CPP and the further advancement of reconciliation.

The government’s Scientific Research and Experimental Development Program offers small Canadian-controlled private companies refundable tax credits of up to 35 per cent on the first $3-million a year they spend on R&D expenditures and non-refundable credits of 15 per cent for all other companies. The program costs the government roughly $3-billion a year and is used by more than 20,000 companies.

The budget eliminates the income test, effective with the current tax year. The government is keeping in place a $10-million limit on how much capital a company can have to qualify for the refundable credit.

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