T2 Corporation – Income Tax Guide – Chapter 7: Page 8 of the T2 return
On this page...
- Part I tax
- Line 550 – Base amount of Part I tax
- Line 560 – Additional tax on personal services business income
- Line 565 – Additional tax on banks and life insurers
- Line 602 – Recapture of investment tax credit (ITC)
- Line 604 – Refundable tax on CCPC's investment income
- Line 608 – Federal tax abatement
- Line 616 – Manufacturing and processing profits deduction and zero-emission technology manufacturing deduction
- Lines 620 and 624 – Investment corporation deduction
- Line 632 – Federal foreign non-business income tax credit
- Line 636 – Federal foreign business income tax credit
- Lines 638 and 639 – General tax reduction
- Line 640 – Federal logging tax credit
- Line 641 – Eligible Canadian bank deduction under section 125.21
- Line 648 – Federal qualifying environmental trust tax credit
- Line 652 – Investment tax credit
- Available-for-use rule
- Investments and expenditures that qualify for an ITC
- Activities that qualify for an ITC on qualified property
- Scientific research and experimental development (SR&ED) qualified expenditure pool
- SR&ED investment tax credit and refund
- Apprenticeship job creation tax credit
- Investment tax credit (ITC) for child care spaces
- Investment tax credit (ITC) claim
- When to complete Schedule 31
- Investment tax credit refund
- Part I tax payable
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.
On line 550, enter this base amount.
Line 560 – Additional tax on personal services business income (section 123.5)
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.
For tax years that end after April 7, 2022, an additional tax of 1.5% of the taxable income is introduced for members of bank and life insurer groups. The tax applies to any member in the group that is a bank, life insurer or other related financial institution.
A $100 million taxable income exemption could be allocated by agreement amongst group members. For a tax year that includes April 7, 2022, the additional tax would be prorated based on the number of days after April 7, 2022.
To allocate the exemption and calculate the additional tax, complete Schedule 68, Additional Tax on Banks and Life Insurers, and file it with your return. Enter the amount of the additional tax on line 565 of the return.
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 disposed of a property on which you earned SR&ED ITC, the recapture will be whichever is less:
- the ITC earned for the property
- 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
- in any other case, the fair market value of the property
If you did the SR&ED and transferred the qualified expenditures to a non-arm's length party according to an agreement as 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
- the amount determined by the formula:
A × B − C
- "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
- "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 parts 16 and 17 of Schedule 31 on how to claculate the recapture of ITC or go to Scientific Research and Experimental Development (SR&ED).
Child care spaces
The ITC for child care spaces is eliminated for expenditures incurred after March 21, 2017. See ITC for child care spaces.
The ITC for child care spaces will be added to 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.
For 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
- 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.
Subsections 127(27) to (35)
Line 604 – Refundable tax on CCPC's investment income
An additional refundable tax of 10 2/3% is levied on the investment income (other than deductible dividends) of a corporation that is a CCPC. throughout the tax year and, under proposed changes for tax years starting after April 6, 2022, that is a substantive CCPC at any time in the tax year.
The additional tax may be part of the refundable portion of Part I tax on line 450 and would be added to the non‑eligible refundable dividend tax on hand (NERDTOH) pool. Amounts added to the NERDTOH pool will be refunded when taxable dividends (other than eligible dividends) are paid to shareholders (at a rate of 38 1/3% of such dividends paid).
A CCPC (or, under proposed changes, a substantive CCPC to which the additional tax applies) with investment income has to calculate this additional tax on page 8 and enter the amount on line 604.
Subsections 129(1) and 129(4)
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.
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.
Line 616 – Manufacturing and processing profits deduction and zero-emission technology manufacturing 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).
A temporary measure to reduce the corporate tax rates for manufacturers of qualified zero-emission technology is introduced for tax years starting after 2021.
Income that would otherwise be subject to the 15% general corporate rate is now be taxed at a 7.5% rate. Income that would otherwise be taxed at the 9% small-business rate is now taxed at 4.5% rate. The reduced rates will be gradually phased out starting in tax years that begin in 2029 and fully phased-out for tax years that begin after 2031 as follows:
|Tax year start||Small business rate||Other rate|
|2022 to 2028||4.5%||7.5%|
|2032 and later||9%||15%|
At least 10% of the corporation's gross revenue from all active businesses carried on in Canada must be derived from eligible activities. Eligible activities include things such as manufacturing of energy conversion equipment (for example, solar, wind, water, and geothermal equipment), and most manufacturing activities around zero‑emission vehicles (for example, manufacturing of vehicles, batteries and charging stations).
The manufacturing of air-source heat pumps used for space or water heating is now included as a qualified zero‑emission technology manufacturing activity.
Use Schedule 27, Calculation of Canadian Manufacturing and Processing Profits Deduction, to calculate the manufacturing and processing profits deduction and the zero‑emission technology manufacturing 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.
The new reduced tax rate for zero‑emission technology applies only to the corporation's zero‑emission technology manufacturing profits, defined in subsection 125.2(2) of the Act. These profits are equal to the corporation's adjusted business income multiplied by the proportion of its total labour and capital cost that are used in zero-emission technology manufacturing.
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 part 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), such as farming, fishing, logging, construction, operating an oil or gas well or extracting petroleum or natural gas, extracting minerals, processing ore, producing industrial minerals, and others
- 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.
Corporations that engage in zero‑emission technology manufacturing have to complete Parts 14 to 17 of Schedule 27.
On line 616, enter the amount of the manufacturing and processing profits deduction determined in Part 9 of Schedule 27.
Sections 125.1 and 125.2
S4-F15-C1, Manufacturing and Processing
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.
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 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.
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.
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.
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.
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.
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.
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
- 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
- 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.
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.
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?.
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 spaces (only carry‑forward amounts are allowed).
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 expenditures 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 spaces 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:
- manufacturing or processing goods for sale or lease
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 class 53. These assets are qualified property for the ITC.
- farming or fishing
- storing grain
- harvesting peat
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:
- 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, a property 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, a property 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.
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).
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.
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. For more information about this schedule, see 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:
- the refundable ITC on eligible SR&ED expenditures
- calculating the expenditure limit
- 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.
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 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. 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
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:
- 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. For more information, see Schedule 8, Column 5 – Adjustments and transfers.
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.
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.
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.
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:
- acquired any qualified property or incurred any qualified expenditures 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 previous tax year
- is requesting a refund of ITCs earned in the year
Complete Schedule 31 and enter the amount of the ITC for the current year on line 652.
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.
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 (amount A)
- the personal services business income tax, the additional tax on banks and life insurers, the amount of recapture of ITC, and the refundable tax on the CCPC's investment income (amounts B, C, D,and I)
- any allowable deductions and credits (amount L).
Enter this amount at amount M, and also on line 700 in the "Summary of tax and credits" section on page 9 of your return.
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