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Line 652 - Investment tax credit

Federal Line 652 - Investment tax credit

A corporation can claim an investment tax credit (ITC) to reduce Part I tax that it would otherwise have to pay, or in some cases this credit may be fully or partially refundable.

Use Schedule 31, Investment Tax Credit - Corporations, to calculate the ITC.

A corporation earns ITCs by applying a specified percentage to the cost of acquiring certain property (investments) or on certain expenditures. However, you first have to reduce the capital cost of the property or the expenditure by any government or non-government assistance you received or will receive for that property or the expenditure. Any goods and services tax/harmonized sales tax (GST/HST) input tax credit or rebate received for property acquired is considered government assistance.

On page 2 of Schedule 31, you will find a list of the percentages you have to apply to eligible investments and expenditures.

Available-for-use rule

A corporation is not considered to have acquired a property or made capital expenditures for earning an investment tax credit until the property becomes available for use.

For more information about the available-for-use rule, see "When is property available for use?" on page 46.

References
Subsections 13(26) to 13(32) and 127(11.2)

Investments and expenditures that qualify for an ITC

The following investments and expenditures earn an ITC:

A. the cost of acquiring qualified property
A.1 the cost of acquiring qualified resource property (only carry-forward amounts are allowed)
B. SR&ED qualified expenditure pool
C. pre-production mining expenditures (only carry-forward amounts are allowed)
D. apprenticeship expenditures
E. eligible child care space expenditures (only carry-forward amounts are allowed)

Note
For clean economy ITCs, see Line 780 on page 135.

The following are definitions of investments and expenditure that qualify for an ITC:
A. Qualified property is defined in subsection 127(9). It includes new prescribed buildings, prescribed machinery, and equipment or prescribed energy and conservation property acquired during the year to use in certain activities in Newfoundland and Labrador, Nova Scotia, Prince Edward Island, New Brunswick, the Gaspé Peninsula, and prescribed offshore regions (Atlantic region).
A.1 Qualified resource property is defined in subsection 127(9). You can no longer file a claim for this credit, since it expired December 31, 2015, and transitional measures expired December 31, 2016. Only unused credits that have not expired can be carried forward for up to 20 tax years following the tax year in which you made the investment.
B. Qualified expenditure and SR&ED qualified expenditure pool are defined in subsection 127(9). Scientific research and experimental development is defined in subsection 248(1).
C. Pre-production mining expenditure is defined in subsection 127(9). You can no longer file a claim for this credit, since it expired December 31, 2015, and so did transitional measures. Only unused credits that have not expired can be carried forward for up to 20 tax years that follow the tax year in which you made the investment.
D. Apprenticeship expenditure is defined in subsection 127(9).
E. Eligible child care space expenditure was defined in subsection 127(9) (the definition has been repealed). You can no longer file a claim for this credit, since it expired March 31, 2017, and transitional measures expired December 31, 2019. Only unused credits that have not expired can be carried forward for up to 20 tax years following the tax year in which you made the investment.

ITC for qualified property

You can earn ITCs on qualified property acquired mainly for use in designated activities in the Atlantic region.

Designated activities include, among others, the following:

The ITC rate for qualified property is 10%.

In addition, the following rules apply to certain corporations that lease qualified properties such as prescribed machinery and equipment or prescribed energy generation and conservation property to lessees who use the property in any of the designated activities:

Scientific research and experimental development (SR&ED) qualified expenditure pool

You have to file Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, along with Schedule 31 when making a claim for an ITC on qualified expenditures for SR&ED. See page 65 for more information.

Note
You have to identify qualified SR&ED expenditures on Form T661 and Schedule 31 no later than 12 months after the filing due date for the year the expenditures were incurred (without reference to subsection 78(4)).

The SR&ED qualified expenditure pool includes qualified SR&ED expenditures, that is current expenditures the corporation incurred in the year, plus or minus adjustments, plus any qualified expenditures transferred to the corporation under an agreement as outlined in subsection 127(13), less any qualified expenditures transferred by the corporation under such an agreement. For an agreement under subsection 127(13), see Form T1146, Agreement to Transfer Qualified Expenditures Incurred in Respect of SR&ED Contracts Between Persons Not Dealing at Arm's Length.

References
Subsections 37(11) and 127(9)

SR&ED investment tax credit and refund

You may earn a non-refundable ITC of 15% of the SR&ED qualified expenditure pool at the end of the tax year.

Some CCPCs may earn the enhanced ITC at the rate of 35% on the SR&ED qualified expenditure pool, up to their expenditure limit.

The expenditure limit is $3 million and is subject to a phase-out based on the taxable capital employed in Canada of the CCPC and its associated corporations for the previous tax year. The limit begins to decrease when this capital reaches $10 million and becomes nil at $50 million and higher.

The Government announced that, for tax years that begin on or after December 16, 2024:

  • the expenditure limit would increase from $3 million to $4.5 million

  • the phase-out thresholds would increase from $10 million and $50 million, to $15 million and $75 million, respectively. CCPCs would have the option to have their annual expenditure limit determined based on gross revenue instead of taxable capital

  • the enhanced refundable SR&ED credit would be extended to Canadian public corporations. However, unlike CCPCs:

    • the $15 million and $75 million phase-out thresholds would be based on the corporation's gross revenue over the prior three years instead of its taxable capital for the preceding year

    • qualifying expenditures in excess of an eligible Canadian public corporation's annual expenditure limit would not be eligible for a partially refundable SR&ED ITC

For property acquired after December 15, 2024 (or lease costs first becoming payable after that date) the pre-2014 eligibility of capital expenditures would be reinstated to both the SR&ED income deduction and the SR&ED ITC. Qualifying CCPCs eligible to earn a 35% SR&ED ITC would be entitled to partial refundability of the credit at a rate of 40% on their capital expenditures.

If the corporation is associated with one or more CCPCs, you have to allocate the expenditure limit among the associated CCPCs on Schedule 49, Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Expenditure Limit. See page 34 for details about Schedule 49.

CCPCs that do not meet the definition of qualifying corporation can earn ITCs at the enhanced rate of 35% on qualified SR&ED expenditures up to their expenditure limit. This ITC can be refunded if it cannot be used in the year to offset Part I tax. The ITC earned on SR&ED expenditures that exceed the expenditure limit is earned at the rate of 15% and it is not refundable.

A qualifying corporation is a CCPC whose taxable income for the previous tax year before the application of the specified future tax consequences plus the taxable incomes of all associated corporations before the application of the specified future tax consequences (for tax years ending in the same calendar year as the corporation's previous tax year) is not more than the total of the qualifying income limits of the corporation and the associated corporations for those previous years.

The qualifying income limit is $500,000. It begins to decrease when the total taxable capital employed in Canada of the corporation and its associated corporations for the previous tax year reaches $10 million and becomes nil at $50 million.

CCPCs that meet the definition of qualifying corporation can also earn ITCs at the enhanced rate of 35% on qualified SR&ED expenditures up to their expenditure limit. This ITC can be refunded if it cannot be used in the year to offset Part I tax. For qualifying corporations, the ITC earned on SR&ED expenditures that exceed the expenditure limit is earned at the rate of 15%, of which 40% is also refundable.

Corporations may be associated because the same group of persons controls them, but the members of this group do not act together and have no other connection to each other.

CCPCs that are associated only because of the above definition of a group will not be considered associated for the following calculations:

For this exception to apply, one of the corporations must have at least one shareholder who is not common to both corporations.

References
Section 127.1
Subsections 127(5) to 127(12) and 248(1)
Regulations 2902 and 4600

Apprenticeship job creation tax credit

A corporation can earn a non-refundable ITC equal to 10% of the eligible salaries and wages paid to eligible apprentices employed in the business in the tax year to a maximum credit of $2,000, per year, per apprentice.

An eligible apprentice is one who is working in a prescribed trade in the first 24 months of their apprenticeship contract. This contract is registered with Canada or a province or territory under an apprenticeship program designed to certify or license individuals in the trade.

A prescribed trade will include the trades currently listed as Red Seal Trades. For more information about the trades, go to red-seal.ca. Also, the minister of Finance may in consultation with the minister of Employment and Social Development, prescribe other trades.

Eligible salaries and wages are those payable by the employer to an eligible apprentice for the apprentices' employment in Canada in the tax year and during the first 24 months of the apprenticeship. Eligible salaries or wages do not include qualified expenditures incurred by the corporation in a tax year, remuneration based on profits, bonuses, taxable benefits including stock options, and certain unpaid remuneration.

Where two or more related employers employ an apprentice, special rules apply to ensure that the $2,000 limit is allocated to only one employer.

An unused credit can be carried back 3 years and carried forward 20 years.

Complete parts 19 to 21 of Schedule 31 to calculate the credit.

Investment tax credit (ITC) for child care spaces

Note
You can no longer earn this credit. It was eliminated for expenditures made after March 21, 2017, and so was the transitional measure for eligible expenditures incurred before 2020 under a written agreement entered into before March 22, 2017. You can only carry forward the non-refundable, unused, unexpired credit for 20 tax years.

To claim the carryforward, complete parts 22 and 23 of Schedule 31.

The credit will be added to the taxpayer's tax otherwise payable under Part I of the Act if, at any time within the 60 months of the day on which the taxpayer acquired the property:

For more information on the recapture, see Line 602 on page 83.

Investment tax credit (ITC) claim

You can deduct the full amount of ITC against federal Part I tax payable. If you are claiming an ITC for a depreciable property, reduce the capital cost of the property in the next tax year by the amount of this year's ITC. For more information, see Schedule 8, "Column 3 - Cost of acquisitions during the year", on page 49.

If you are claiming an SR&ED ITC to reduce tax payable or to receive a refund, you have to reduce the pool of deductible SR&ED expenditures in the next tax year. For more information see Line 435 in Guide T4088, Scientific Research and Experimental Development (SR&ED) Expenditures Claim - Guide to Form T661.

Note
A corporation cannot claim an ITC for an expense or expenditure incurred in the course of earning income if any of that income is exempt income or is exempt from tax under Part I.

References
Subsections 13(7.1), 37(1), and 127(5)

You can carry forward certain ITCs not previously deducted for 20 years, or carry them back 3 years, to reduce Part I tax. Remember that you can only carry back ITCs to a prior year if you cannot deduct them in the year you earn them.

Special rules restrict the carryforward and carryback of ITCs following an acquisition of control.

References
Paragraph 127(5)(a)
Subsections 127(9.1), 127(9.2), and 127(36)

When to complete Schedule 31

Complete Schedule 31 and file it with the return if the corporation:

Complete Schedule 31 and enter the amount of the ITC for the current year on line 652 or 780.

Note
Eligibility for an ITC is limited to those expenses or expenditures identified in Schedule 31 filed within 12 months of the filing due date for the tax year in which the expenses were made or incurred [without reference to subsection 78(4)].

Investment tax credit refund

For information about CCPCs claiming a refund of ITC for scientific research and experimental development, see "SR&ED investment tax credit and refund" on page 89.

Note
The clean economy ITCs are fully refundable. See the details in Line 780 on page 135.

You have to file Schedule 31 to claim the ITC refund. On line 780 of your return, enter the ITC refund claim calculated on Schedule 31.

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