T2 Corporation – Income Tax Guide – Chapter 7: Page 8 of the T2 return

Part I tax

Line 550 – Base amount of Part I tax

The basic rate of Part I tax is 38% of taxable income. To determine the base amount of Part I tax, calculate 38% of the taxable income from line 360 of page 3 less income exempt under paragraph 149(1)(t).

On line 550, enter this base amount.

Reference
Section 123

Line 560 – Additional tax on personal services business income (section 123.5)

For tax years that end after 2015, a corporation must add to its Part I tax payable for a year an amount equal to 5% of the corporation’s taxable income for the year from a personal services business.

This additional tax is prorated for tax years that straddle December 31, 2015.

Reference
Section 123.5

Line 602 – Recapture of investment tax credit (ITC)

Scientific research and experimental development

A corporation that disposed of a property used in scientific research and experimental development (SR&ED), or converted it to commercial use, should report a recapture in its income tax return for the year in which the disposition or conversion occurred.

If you performed the SR&ED and earned the related ITC, the recapture will be whichever is less:

  • the ITC earned for the property; or
  • the amount determined by applying the percentage you used in calculating the ITC earned on the property to:
    • the proceeds of disposition of the property if you dispose of it to an arm's length person; or
    • in any other case, the fair market value of the property.

If you performed the SR&ED and transferred the qualified expenditures to a non-arm's length party in accordance with an agreement described in subsection 127(13), the recapture will be whichever is less:

  • the ITC earned by the transferee on the qualified expenditures for the property that was transferred; or
  • the amount determined by the formula:

    A × B − C

    where

    • "A" is the percentage that the transferee used in determining its ITC;
    • "B" is the proceeds of disposition of the property if you dispose of it to an arm's length person, or in any other case, the fair market value of the property; and
    • "C" is the amount, if any, added to the tax payable under subsection 127(27) for the property. This allows for the situation where you transferred only a portion of the cost of the property in an agreement under subsection 127(13).

If you transferred a portion of the expenditures and claimed a portion of that expenditure for ITC purposes, both calculations will apply.

The recapture period for ITCs is 20 years.

For more information, see Guide T4088, Guide to Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim or go to Scientific Research and Experimental Development (SR&ED).

Child care spaces

The ITC for child care spaces will be recovered against the taxpayer's tax otherwise payable if, at any time within the 60 months of the day on which the taxpayer acquired the property:

  • the new child care space is no longer available; or
  • eligible property for purposes of this credit is sold or leased to another person or converted to another use.

If the property disposed of is a child care space, the amount to be recaptured will be the amount that can reasonably be considered to have been included in the original ITC.

In the case of eligible expenditures, the amount to be recaptured will be the lesser of:

  • the amount that can reasonably be considered to have been included in the original ITC; and
  • 25% of the proceeds of disposition of the eligible property or of its fair market value at the time of disposition, if the property was disposed of to a non-arm's-length person.

Use Schedule 31, Investment Tax Credit – Corporations, to calculate the recapture of ITC.

On line 602, enter the amount of recapture of ITC.

References
Subsections 127(27) to (35)

Line 604 – Refundable tax on CCPC's investment income

An additional refundable tax of 6 2/3% is levied on the investment income (other than deductible dividends) of a CCPC.

For tax years that end after 2015, the above percentage is increased from 6 2/3% to 10 2/3%. The rate increase is prorated for tax years that straddle December 31, 2015.

This additional tax may be part of the refundable portion of Part I tax on line 450 and would be added to the refundable dividend tax on hand (RDTOH). The RDTOH pool will be refunded when dividends are paid to shareholders (at a rate of 1/3 of taxable dividends paid).

For tax years that end after 2015, the 1/3 rate (= 33 1/3%) is increased to 38 1/3%. The rate increase is prorated for tax years that straddle December 31, 2015.

A CCPC with investment income has to calculate this additional tax on page 8 and enter the amount on line 604.

References
Section 123.3
Subsections 129(1) and 129(3)

Line 608 – Federal tax abatement

The federal tax abatement is equal to 10% of taxable income earned in the year in a Canadian province or territory less income exempt under paragraph 149(1)(t). The federal tax abatement reduces Part I tax payable. Income earned outside Canada is not eligible for the federal tax abatement.

On line 608, enter the amount of federal tax abatement.

Reference
Section 124

Line 616 – Manufacturing and processing profits deduction

Corporations that derive at least 10% of their gross revenue for the year from manufacturing or processing goods in Canada for sale or lease can claim the manufacturing and processing profits deduction (MPPD). The MPPD reduces Part I tax otherwise payable.

The MPPD applies to the part of taxable income that represents Canadian manufacturing and processing profits. Calculate the MPPD at the rate of 13% on income that is not eligible for the small business deduction (SBD).

Use Schedule 27, Calculation of Canadian Manufacturing and Processing Profits Deduction, to calculate the manufacturing and processing profits deduction.

There are two ways to calculate Canadian manufacturing and processing profits: a simplified method for small manufacturing corporations, and a basic labour and capital employed in qualified activities formula for other corporations. These methods are outlined in Parts 1 and 2 of Schedule 27.

Small manufacturing corporations only have to complete Part 1 of Schedule 27, and are entitled to calculate the MPPD on their entire adjusted business income. Essentially, a corporation's adjusted business income is its income from an active business it carried on in Canada that is more than its losses from similar businesses. If the corporation is involved in resource activities, it has to reduce the adjusted business income by its net resource income, its refund interest, and a portion of its prescribed resource loss. Schedule 27 shows how to calculate the adjusted business income.

To qualify as a small manufacturing corporation, you have to meet all of the following requirements:

  • the activities during the year were mainly manufacturing or processing;
  • the active business income and that of any associated Canadian corporations was not more than $200,000;
  • you were not engaged in any activities specifically excluded from manufacturing and processing, as defined in subsection 125.1(3);
  • you were not engaged in processing ore (other than iron ore or tar sands ore) from a mineral resource located outside Canada to any stage that is not beyond the prime metal stage or its equivalent;
  • you were not engaged in processing iron ore from a mineral resource located outside Canada to any stage that is not beyond the pellet stage or its equivalent;
  • you were not engaged in processing tar sands located outside Canada to any stage that is not beyond the crude oil stage or its equivalent; and
  • you did not carry on any active business outside Canada at any time during the year.

Corporations that do not qualify as small manufacturing corporations have to complete Part 2 of Schedule 27. In Part 2, you will find the basic formula for calculating Canadian manufacturing and processing profits, as well as detailed instructions on how to complete the schedule.

Corporations that produce electricity or steam for sale have to complete Parts 10 to 13 of Schedule 27.

On line 616, enter the amount of the manufacturing and processing profits deduction determined in Part 9 of Schedule 27.

References
Section 125.1
Regulation 5200

Lines 620 and 624 – Investment corporation deduction

A Canadian public corporation that is an investment corporation, as defined in subsection 130(3), can claim a deduction from Part I tax that the corporation would otherwise have to pay. This deduction is equal to 20% of the taxable income for the year that is more than the taxed capital gains for the year.

On line 624, enter the investment corporation's taxed capital gains. On line 620, enter the amount of the deduction you are claiming.

Reference
Section 130

Line 628 – Additional deduction – credit unions

Although a credit union is not generally considered a private corporation, it is eligible for the small business deduction. A credit union can also deduct a percentage of its taxable income that was not eligible for the small business deduction.

For tax years ending after March 20, 2013, the amount of the additional deduction that credit unions can calculate for income that is not eligible for the small business deduction is being phased out as follows: 80% for 2013, 60% for 2014, 40% for 2015, 20% for 2016, and 0% after 2016. The amount is prorated for tax years that include March 21, 2013, and for all tax years during the phase-out period that do not coincide with the calendar year.

The additional deduction is 17.5% (17% before 2016) of whichever of the following amounts is less:

  • the taxable income for the year; or
  • 4/3 of the maximum cumulative reserve at the end of the year, minus the preferred-rate amount at the end of the previous tax year;

minus

  • the least of lines 400, 405, 410, and 427 of the small business deduction calculation (page 4 of the return).

Generally, a credit union's maximum cumulative reserve is equal to 5% of the amounts owing to members, including members' deposits, plus 5% of all members' share capital in the credit union.

The preferred-rate amount at the end of a tax year is equal to the total of the preferred rate amount at the end of the previous year, plus 100/17.5 (100/17 before 2016) of the amount of the small business deduction for the year.

Both the additional deduction and the preferred‑rate amount are prorated for tax years that straddle January 1, 2016.

Use Schedule 17, Credit Union Deductions, to claim this additional deduction.

On line 628, enter the credit union's additional deduction.

Reference
Section 137

Line 632 – Federal foreign non-business income tax credit

Use Schedule 21, Federal and Provincial or Territorial Foreign Income Tax Credits and Federal Logging Tax Credit, to calculate this credit.

A federal foreign non-business income tax credit is available to Canadian residents to prevent double taxation of any non-business income earned in a foreign country that was taxed by that foreign country. The credit is also available to authorized foreign banks on their Canadian banking business from sources in a foreign country. This credit reduces Part I tax that the corporation would otherwise have to pay.

Foreign non-business income includes dividends, interest, and capital gains. It does not include dividends received from foreign affiliates, or income from operating a business in a foreign country.

Foreign non-business income tax does not include any foreign tax paid on income that is exempt from tax in Canada under an income tax treaty.

As another option, under subsection 20(12), instead of claiming a foreign non-business income tax credit, a corporation can deduct from income all or any part of non-business income tax it paid to a foreign country.

If, after you claim the federal foreign non-business income tax credit, there is any foreign non-business income tax left over, you can claim it as a provincial or territorial foreign tax credit. See Provincial or territorial foreign tax credits for details.

Under section 110.5 and subparagraph 115(1)(a)(vii), you can also increase your taxable income so that you can use an otherwise non-deductible foreign non-business income tax credit. See Line 355 – Section 110.5 additions and/or subparagraph 115(1)(a)(vii) additions for details.

To claim this credit, complete Part 1 of Schedule 21. Calculate the federal foreign non-business income tax credit for each country separately. Use more than one schedule if more space is required.

Add all the allowable foreign non-business income tax credits in column I on Schedule 21. Then, enter the total allowable credit or a lesser amount on line 632.

References
Subsection 126(1)
Income Tax Folio S5-F2-C1, Foreign Tax Credit

Line 636 – Federal foreign business income tax credit

Use Schedule 21, Federal and Provincial or Territorial Foreign Income Tax Credits and Federal Logging Tax Credit, to calculate this credit.

To prevent double taxation, a corporation that pays foreign tax on income or profits it earned from operating a business in a foreign country can claim a federal foreign business income tax credit. This credit reduces the Part I tax that the corporation would otherwise have to pay.

Unlike foreign non-business income tax, you cannot deduct excess foreign business income tax paid as a provincial or territorial foreign tax credit. However, under section 110.5, you can increase taxable income so as to claim an otherwise non-deductible foreign business income tax credit. See Line 355 for details.

To claim this credit, complete Part 2 of Schedule 21. Calculate the foreign business income tax credit for each country separately. Use more than one schedule if more space is required.

Add all allowable foreign business income tax credits in column J on Schedule 21. Then, enter the total allowable credits or a lesser amount on line 636.

Notes

Foreign business income tax does not include any foreign tax paid on income that is exempt from tax in Canada under an income tax treaty.

When calculating income for the year from sources in a foreign country, deduct the maximum amount of foreign exploration and development expense that is deductible on a country-by-country basis.

References
Subsection 126(2)
Income Tax Folio S5-F2-C1, Foreign Tax Credit

Continuity of unused federal foreign business income tax credits

Complete Part 3 of Schedule 21 if you have a foreign business income tax credit that:

  • expired in the current year;
  • was transferred from an amalgamation or wind-up;
  • was deducted in the current year; or
  • was carried back to a previous year.

You have to establish the continuity and the application of the foreign tax credits on business income for each country. Use more than one schedule if more space is required.

Carryback or carryforward of unused credits

You can carry back any unused foreign business income tax credit to the 3 previous tax years, and you can carry the credit forward for 10 tax years.

To claim a carryback to previous years, complete Part 4 of Schedule 21.

Note

You can use this credit only to reduce Part I tax on income originating from the same foreign country.

Lines 638 and 639 – General tax reduction

Calculate this reduction on page 5.

If you were a CCPC throughout the tax year, enter the amount on line 638.

If you were a corporation other than a CCPC, an investment corporation, a mortgage investment corporation, a mutual fund corporation, or a corporation that has income that is not subject to the corporation tax rate of 38% enter the amount on line 639.

See General tax reduction for details.

Line 640 – Federal logging tax credit

Corporations that have income from logging operations and have paid logging tax to the province of Quebec or British Columbia can claim this credit.

Complete Part 5 of Schedule 21, Federal and Provincial or Territorial Foreign Income Tax Credits and Federal Logging Tax Credit, to calculate this credit. On line 640, enter the credit you calculated on line 580 of Schedule 21 or a lesser amount.

References
Subsection 127(1)
Regulation 700

Line 641 – Eligible Canadian bank deduction under section 125.21

A Canadian parent bank can claim a deduction for certain amounts of non resident withholding tax paid for interest arising from amounts that the parent bank owes to its non resident affiliate.

The deduction must be net of any of this non resident withholding tax amount that is available to the eligible bank affiliate, or any other person or partnership, as a credit, reduction, or deduction against an amount payable to the government of a country other than Canada, or a political subdivision of that country, under its laws and tax treaties, and any other agreements entered into by it.

References
Subsection 95(2.43)
Section 125.21

Line 648 – Federal qualifying environmental trust (QET) tax credit

A corporation that is the beneficiary under a qualifying environmental trust can claim a tax credit equal to Part XII.4 tax payable by the trust on that income.

A QET is a trust:

  • whose trustees only include:
    • the federal or provincial Crown, or
    • a corporation resident in Canada and licensed or authorized under Canadian federal or provincial laws to carry on the business of providing services as trustee to the public in Canada;
  • that is maintained only to fund the reclamation of a site in Canada that is, or has been used primarily for, or for any combination of the following:
    • the operation of a mine,
    • the extraction of clay, peat, sand, shale, or aggregates (including dimension stone and gravel),
    • the deposit of waste, or
    • if the trust was created after 2011, the operation of a pipeline, as long as the other requirements defined in subsection 211.6(1) are met;
  • that is, or may become within the specified time period, required to be maintained under:
    • a federal or provincial law,
    • the terms of a contract entered into with the federal or provincial Crown, or
    • if the trust was established after 2011, an order of a tribunal constituted under federal or provincial law; and
  • that is not an excluded trust, as defined under subsection 211.6(1) of the Income Tax Act.

The rate of tax payable by a QET is currently 15%.

On line 648, enter the credit claim up to the amount of Part I tax otherwise payable. On line 792 (page 9), enter any unused amount.

Reference
Section 127.41

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, we list 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?.

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;

B. SR&ED qualified expenditure pool;

C. pre-production mining expenditures;

D. apprenticeship expenditures; and

E. eligible child care spaces.

The following are definitions of investments and expenditure that qualify for an ITC:

Note

Pre‑production development expenses incurred in 2015 qualify for a 5% rate if they meet the requirements in clause (k)(iii)(B) of the definition of “specified percentage” in subsection 127(9). See Schedule 31 for more details.

  • 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). It includes new prescribed buildings, machinery or equipment acquired after March 28, 2012, for use in Canada primarily in oil, gas and mining activities in the Atlantic region. The ITC rate for qualified resource property is now 0%. The rate decreased from 10% to 5% for expenses incurred in 2014 and 2015, and 0% after 2015.
    Transitional relief is available. For property acquired after 2013 and before 2017, the ITC on qualified resource property applies at a rate of 10% if the property is acquired:
    • under a written agreement entered into by the corporation before March 29, 2012; or
    • as part of a phase of a project where, before March 29, 2012:
      • the construction of the phase was started by, or on behalf of, the corporation; or
      • the engineering and design work for the construction of the phase, as evidenced in writing, was started by, or on behalf of, the corporation.
  • For excluded activities, see the definition of “specified percentage” in subsection 127(9).

  • B. Qualified expenditures and SR&ED qualified expenditure pool are defined in subsection 127(9). SR&ED is defined in subsection 248(1).
  • C. Pre-production mining expenditures are defined in subsection 127(9). The ITC rate for pre-production mining expenditures is now 0%.

    The rate decreased from 10% to 5% for exploration expenses incurred in 2013, and to 0% after 2013. For pre-production development expenses, the 10% rate decreased to 7% in 2014, 4% in 2015, and 0% after 2015.

    Transitional relief is available. For pre-production development expenses incurred after 2013 and before 2016, the ITC rate remains at 10% if the expense is incurred:

    The excluded activities are the same as the ones for the Atlantic ITC.

    • under a written agreement entered into by the corporation before March 29, 2012; or
    • as part of the development of a new mine and, before March 29, 2012:
      • the construction of the new mine was started by, or on behalf of, the corporation; or
      • the engineering and design work for the construction of the new mine, as evidenced in writing, was started by, or on behalf of, the corporation.
  • The excluded activities are the same as the ones for the qualified resource property.
  • D. Apprenticeship expenditures are defined in subsection 127(9).
  • E. Eligible child care spaces expenditures are defined in subsection 127(9).

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:

Eligible machinery and equipment acquired after 2015 and before 2026 for use in Canada mainly for the manufacturing and processing of goods for sale or lease is included in a new class 53 . These assets are qualified property for the ITC .
  • manufacturing or processing goods for sale or lease;
  • logging;
  • farming or fishing; and
  • energy conservation, for which prescribed property acquired after March 28, 2012, is listed in class 43.1 or class 43.2.

The ITC rate for qualified property is 10%.

In addition, the following rules apply to certain corporations that lease qualified properties:

  • For a corporation with a principal business of leasing property, lending money, or purchasing conditional sales contracts, accounts receivable, or other obligations, property acquired for the purposes of leasing it in the ordinary course of carrying on business in Canada is considered qualified property.
  • For a corporation with a principal business of manufacturing property that it sells or leases, property acquired for leasing purposes is considered qualified property only if the corporation manufactures it and leases it in the ordinary course of its business in Canada.
  • For a corporation with a principal business of selling or servicing property, property acquired for leasing purposes is considered qualified property only if it is a type of property that the corporation sells or services, and the property is leased in the ordinary course of carrying on business in Canada.

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 Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, 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 (leased equipment and capital expenditures incurred before 2014, and current expenditures) the corporation incurred in the year plus any qualified expenditures transferred to the corporation under an agreement in subsection 127(13) less any qualified expenditures transferred by the corporation under such an agreement (see Form T1146, Agreement to Transfer Qualified Expenditures Incurred in Respect of SR&ED Contracts Between Persons Not Dealing at Arm's Length).

Capital expenditures made after 2013, including allowable lease costs of equipment, can no longer be claimed for SR&ED purposes. Those expenditures are given the treatment otherwise applicable to such expenditures under the Income Tax Act.

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.

For tax years ending before 2014, the SR&ED investment tax credit basic rate is 20%. It is prorated for tax years that straddle December 31, 2013.

Some CCPCs can claim the enhanced ITC 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 income and the taxable capital employed in Canada, of the CCPC and its associated corporations, for the previous tax year.

The expenditure limit begins to decrease when the taxable income before the application of the specified future tax consequences (see note) of the CCPC and its associated corporations for the previous tax year exceeds $500,000 and becomes nil at $800,000 and higher.

The expenditure limit also begins to decrease when the taxable capital employed in Canada of the CCPC and its associated corporations for the previous tax year reaches $10 million and becomes nil at $50 million and higher.

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

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. Here, 40% earned on capital SR&ED expenditures before 2014 and 100% earned on current SR&ED expenditures are refundable if the ITC cannot be used in the year to offset Part I tax. The ITC earned at the rate of 15% (20% before 2014) on SR&ED expenditures that exceed the expenditure limit is not refundable to a corporation unless it is a qualifying corporation.

A qualifying corporation is a CCPC whose taxable income for the previous tax year before the application of the specified future tax consequences (see note) 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. Here, 40% earned on capital SR&ED expenditures before 2014 and 100% earned on current SR&ED expenditures are refundable if the ITC cannot be used in the year to offset Part I tax. For qualifying corporations, the ITCs earned above the expenditure limit are earned at the rate of 15% (20% before 2014), of which 40% earned on capital expenditures before 2014 and current SR&ED expenditures is also refundable.

Note

The taxable income mentioned in the definition of expenditure limit and qualifying corporation is determined before taking into consideration the specified future tax consequences. These consequences include, among others, the carryback of losses from later years that would have reduced the taxable income for the year in which those losses were applied. For more information, see the definition of specified future tax consequence in subsection 248(1).

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:

  • the refundable ITC on eligible SR&ED expenditures;
  • calculating the expenditure limit; and
  • allocating the expenditure limit.

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 an 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 two years 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 the Red Seal Trades site. In addition, 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 21 to 23 of Schedule 31 to calculate the credit.

Investment tax credit (ITC) for child care spaces

An employer carrying on business in Canada, other than a child care services business, can claim a non-refundable tax credit to create one or more new child care spaces in a new or existing licensed child care facility for the children of their employees and for other children in the community. The non-refundable tax credit is equal to the lesser of $10,000 and 25% of the eligible expenditure, per child care space created. Eligible expenditures include the cost of depreciable property (other than specified property), and the amount of specified start-up costs, acquired or incurred only to create the new child care space at a licensed child care facility.

Eligible depreciable property includes:

  • the building or the part of the building in which the child care facility is located;
  • furniture and appliances;
  • computer and audio-visual equipment; and
  • playground structures and equipment.

Specified child care start-up costs include the initial costs for:

  • building permits and architect's fees;
  • landscaping for the children's playground;
  • regulatory inspections and licensing fees; and
  • children's educational material.

Eligible expenditures do not include specified property such as motor vehicles, or a property that is, or is located in or attached to, a residence of: the taxpayer, an employee of the taxpayer, a person who holds an interest in the taxpayer, or any person related to a person referred to above.

The credit is not available for any of the ongoing expenses of the child care facility such as supplies, wages, salaries, or utilities.

The amount of the credit is added to the ITC pool and is available to reduce the federal taxes payable in the tax year. Any unused credits can be carried back 3 years or carried forward 20 years.

Complete Parts 24 to 28 of Schedule 31 to claim the credit.

The credit will be recovered against 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:

  • the new child care space is no longer available; or
  • property that was an eligible expenditure for this credit is sold or leased to another person or converted to another use.

For more information on the recapture, see line 602.

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, including shared-use equipment, reduce the capital cost of the property in the next tax year by the amount of this year's ITC. If you are claiming an ITC for SR&ED expenditures, other than expenditures for shared-use equipment, reduce the SR&ED expenditure pool in the next tax year by the amount of this year's ITC. For more information, see Schedule 8, Column 4 – Adjustments and transfers.

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. ITCs also cannot be claimed for expenses or expenditures incurred in earning taxable income that is exempt from tax under Part I.

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

You can carry forward 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 and file Schedule 31 with the return if the corporation:

  • acquired any qualified property or incurred any expenditures qualifying for ITC purposes;
  • is carrying forward unused ITCs from a previous year;
  • is transferring unused ITCs from a predecessor corporation on amalgamation, or from a subsidiary corporation on wind-up;
  • is applying ITCs against Part I tax;
  • is requesting a carryback of unused ITCs to a prior tax year; or
  • is requesting a refund of unused ITCs.

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

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.

Any ITC you earned in the tax year must first be used to reduce taxes payable to zero before the remainder can be claimed as a refund.

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.

Part I tax payable

Part I tax payable for the year is the basic Part I tax plus the personal service business income tax and the amount of recapture of ITC, and the refundable tax on the CCPC's investment income (line A plus lines B, C, and H), minus any allowable deductions and credits (line K).

Enter this amount on line L, and also on line 700 in the "Summary of tax and credits" section on page 9 of your return.

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