Recapture of SR&ED Investment Tax Credit Policy

Date: October 14, 2022

Table of contents

• 1.0 Purpose
• 2.0 Overview
• 3.0 Expenditures and recapture – Quick reference
• 4.0 Legislation – Conditions to apply the recapture rules
  • 4.1 Conditions under which a claimant will report a recapture
  • 4.2 A recapture in respect of a transfer of qualified expenditures under subsection 127(13)
• 5.0 Definitions
  • 5.1 Cost
  • 5.2 Property
  • 5.3 Corporeal and incorporeal property
    • 5.3.1 Example – Acquisition of intellectual property
  • 5.4 Disposition
  • 5.5 Proceeds of disposition
• 6.0 No recapture
  • 6.1 No recapture on salaries or overhead
    • 6.1.1 Example – No recapture on salaries or overhead
  • 6.2 De minimis rule
    • 6.2.1 Example – No recapture on scrap sales / de minimis rule
  • 6.3 Non-arm's length disposition of equipment
• 7.0 Factors affecting the SR&ED investment tax credit recapture
  • 7.1 Purchase of SR&ED components
    • 7.1.1 Example – Purchase of SR&ED components
  • 7.2 Items in inventory
    • 7.2.1 Example – Items in inventory
  • 7.3 All or substantially all equipment for SR&ED purposes
  • 7.4 Conversion to commercial use
  • 7.5 Disposition or conversion to commercial use of "another property that incorporates the property"
  • 7.6 Property acquired through a contract involving SR&ED and other work
• 8.0 SR&ED investment tax credit recapture rules – Corporations and individuals
  • 8.1 Calculation of a recapture amount – Corporations and individuals
  • 8.2 Effect of recapture – Corporations and individuals
  • 8.3 The SR&ED investment tax credit rate of recapture – Corporations and individuals
• 9.0 Recapture on transferred qualified expenditures
  • 9.1 Calculation of recapture amount on transferred qualified expenditures
  • 9.2 Timing considerations
    • 9.2.1 Example – Timing considerations
• 10.0 Partnerships
  • 10.1 Calculation of a recapture amount – Partnerships
  • 10.2 Effect of recapture – Partnerships
• 11.0 Recycled materials
• 12.0 Forms
• 13.0 Examples
  • 13.1 Calculation of a recapture amount for a corporation or individual using the proceeds of disposition amount
  • 13.2 Calculation of a recapture amount for a corporation or individual using the fair market value amount
  • 13.3 Determining the notional UCC to estimate the fair market value of a capital property
  • 13.4 Calculation of recapture on transferred qualified expenditures where only a portion of the qualified expenditures were transferred
  • 13.5 Calculation of recapture on transferred qualified expenditures where all of the qualified expenditures were transferred
  • 13.6 Calculation of recapture on transferred qualified expenditures where only a portion of the qualified expenditures were transferred
  • 13.7 Calculation of a recapture amount for a corporation or individual on conversion to commercial use when the fair market value is less than the qualified expenditure in respect of the property
• Appendix A – References
  • A.1 Legislative references
• Appendix B – Revisions
  • B.1 Explanation of changes

1.0 Purpose

The purpose of this document is to clarify the position of the Canada Revenue Agency (CRA) regarding the recapture of scientific research and experimental development (SR&ED) investment tax credits (ITCs) when administering the SR&ED legislation under the federal Income Tax Act and the Income Tax Regulations.

2.0 Overview

At the outset of an SR&ED project, a performer may not know whether the materials used in the project will be consumed or transformed, or whether the project will result in a product that has some value to the performer or someone else. For more information in respect of materials consumed or transformed, refer to the Materials for SR&ED Policy. Also, a claimant may intend to use a piece of equipment throughout its useful life in SR&ED, and they have earned an investment tax credit (ITC) for it, but later change its use or dispose of it. The recapture rules are intended to make sure that only the net costs of performing SR&ED attract SR&ED tax incentives. Since it is not always possible to determine net costs at the outset of a project, the recapture rules will reverse all or a portion of the SR&ED (ITC) earned by adding an amount to a claimant's tax payable for the year in which the sale or conversion to commercial use of an SR&ED property takes place.

Expenditures of a capital nature no longer qualify for SR&ED tax incentives after 2013. The recapture rules continue to apply to ITC earned on SR&ED capital expenditures and shared-use-equipment since the ITC can be recaptured up to 20 years from the year it was earned.

For the purposes of this document, recapture means SR&ED ITC recapture.

Legislative references Income Tax Act
Subsection 127(27) Recapture of investment tax credit
Subsection 127(29) Recapture of investment tax credit of allocating taxpayer
Subsection 127(30) Addition to tax – partnership
Subsection 127(34) Recapture of investment tax credit – non-arm's length dispositions, other than a partnership

3.0 Expenditures and recapture – Quick reference

*subject to the comments in this policy

Note

ASA equipment and SUE

An expenditure of a capital nature, including ASA equipment and SUE do not qualify for SR&ED tax incentives after 2013. But the ITC earned on such items (prior to 2014) is subject to recapture after 2013. 

Arm's length contract involving SR&ED and acquisition of property

For expenditures made after 2013, expenditures in respect of SR&ED performed on behalf of the claimant or by third party entities, can only include expenditures of a current nature.

Legislative references Income Tax Act
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Paragraph 37(1)(b) capital expenditures [Repealed]
Subsection 37(14) Look through rule
Subsection 127(9) Definition of "first term shared-use-equipment"
Subsection 127(9) Definition of "second term shared-use-equipment"

4.0 Legislation – Conditions to apply the recapture rules

4.1 Conditions under which a claimant will report a recapture

The investment tax credit (ITC) of a claimant will be recaptured where:

• the claimant acquired a particular property from a person or partnership in the current tax year or in any of the 20 preceding tax years;*
• the cost of the particular property was a qualified expenditure;
• the cost of the particular property is included in an amount, a percentage of which can reasonably be considered to be included in computing the claimant's ITC at the end of the tax year; and
• in the year the claimant converts to commercial use or disposes of the particular property or another property that incorporates the particular property.

Note

All four conditions have to be present to create a recapture.

*The reference to "the 10 preceding taxation years" in paragraph 127(27)(a) of the Income Tax Act ensures that if a property is sold or converted to commercial use and the related ITC earned has expired, it would not be subject to recapture. Section 127(36) of the Act extends the 10 preceding tax years to a maximum of 20 tax years for investment tax credits earned in the 1998 and subsequent tax years.

Legislative references Income Tax Act
Subsection 127(27) Recapture of investment tax credit
Subsection 127(28) Recapture of investment tax credit of partnership
Subsection 127(30) Addition to tax – partnership
Subsection 127(31) Tiered partnership
Subsection 127(35) Recapture of investment tax credit – non-arm's length dispositions, partnerships
Subsection 127(36) Transitional application of investment tax credit recapture

4.2 A recapture in respect of a transfer of qualified expenditures under subsection 127(13)

The Income Tax Act provides for the recapture of an ITC in the hands of an SR&ED performer in certain circumstances where the performer has transferred qualified expenditures incurred in the performance of an SR&ED contract to a non-arm’s length payer.

The conditions are similar to those described in section 4.1 except that, in this case, all or part of the qualified expenditures can reasonably be considered to have been the subject of an agreement to transfer qualified expenditures.

The transfer of qualified expenditures to the non-arm's length party will not require a recapture if the intended use of the property, which gave rise to the qualified expenditures, remains all or substantially all (ASA) for SR&ED. The SR&ED performer will be required to recapture the ITC if the property is later sold or converted to commercial use.

Legislative references Income Tax Act
Subsection 127(13) Agreement to transfer qualified expenditures
Subsection 127(29) Recapture of investment tax credit of allocating taxpayer
Subsection 127(36) Transitional application of investment tax credit recapture

5.0 Definitions

5.1 Cost

For recapture purposes:

• The cost cannot exceed the amount paid by the claimant to acquire a property from another person.
• The cost does not include any amount paid by the claimant to maintain, modify, or transform the particular property. It does not include salaries, wages, or overhead costs, which could otherwise be imputed by the claimant to the cost of a property.

See also section 7.2 – Items in inventory.

Legislative reference Income Tax Act
Subsection 127(32) Meaning of cost

5.2 Property

The word property is broad and reflects the intended scope of the recapture rules in the Income Tax Act. The property that could be subject to the recapture rules includes:

• materials for SR&ED that are included in a custom product, a commercial asset, experimental production, or commercial production with experimental development. For more information refer to the following:
  • Materials for SR&ED Policy;
  • SR&ED while Developing an Asset Policy;
  • SR&ED During Production Runs Policy;
• all or substantially all (ASA) equipment (see section 7.3);
• shared‑use-equipment (SUE);
• animals and other growing things used in SR&ED projects;
• property acquired through a contract involving SR&ED and other work. For more information, refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.

For the recapture rules to apply, the property must have been acquired by the claimant from a person or partnership. The disposition of a property that was not acquired from a person or partnership will not trigger the recapture rules with respect to that property. For example, animals born on a farm and used for SR&ED purposes before being sold, or oil generated during an experimental drilling process and that is subsequently sold, will not be subject to the recapture rules.

The choice of method used to report SR&ED expenditures will not impact on the type of property that could be subject to recapture. For more information on the choice of methods to report SR&ED expenditures, refer to the Traditional and Proxy Methods Policy.

Legislative references Income Tax Act
Clause 37(8)(a)(ii)(A) SR&ED expenditures in Canada under the traditional method
Clause 37(8)(a)(ii)(B) SR&ED expenditures in Canada under the proxy method
Subsection 248(1) Definition of "property"

5.3 Corporeal and incorporeal property

The legislation does not distinguish between corporeal and incorporeal property. However, in most cases, an SR&ED performer developing and selling an incorporeal property (such as intellectual property) would not be affected by the recapture rules, because normally the property sold could not be said to contain any other property that had been the subject of an SR&ED claim.

An example of the recapture rules applying to incorporeal property would be the purchase of an existing software application prior to 2014 for SR&ED purposes, where the software is directly incorporated into a larger experimental software application. The purchased software is incorporated into the end product which is eventually perfected and sold (or leased). The recapture rules apply if the expenditure was allowable in the first place (for example, if subsection 37(4) of the Act did not apply to disallow the expenditure).

Another situation where the recapture rules apply to incorporeal property is where a performer acquires, prior to 2014, an off-the-shelf product (for example, software) and subsection 37(4) did not apply because the property was used as an SR&ED tool (the purchased software was not incorporated into the end product). In such a case, the recapture rules will apply when the property is sold or converted to commercial use.

When a payer disposes of the rights to the intellectual property (IP) generated as a result of SR&ED undertaken on its behalf by an arm’s length performer, the recapture rules will not apply.

The rationale is:

• Where the IP belongs to the payer under the terms of a contract, the payer is not acquiring the IP. The IP always belonged to the payer. It simply accrues to the payer as it is generated. Accordingly, there is no recapture when the payer disposes of the IP or converts it to commercial use.
• Where the IP belongs to the performer under the terms of a contract (or remains with the performer), subsection 37(4) would usually apply to disallow the expenditure incurred by the payer to acquire the IP from the performer. However, the payment made under the contract for the SR&ED service is an allowable SR&ED expenditure.

For more information in respect of SR&ED undertaken on behalf of a taxpayer, refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.

For more information in respect of subsection 37(4), acquisition of rights, refer to the Pool of Deductible SR&ED Expenditures Policy.

Legislative references Income Tax Act
Paragraph 37(1)(a) Pool of deductible SR&ED expenditures – current expenditures
Paragraph 37(1)(b) Pool of deductible SR&ED expenditures – capital expenditures [Repealed]
Subsection 37(4) Acquisition of rights

5.3.1 Example – Acquisition of intellectual property

Corporation A (the payer) gives an SR&ED contract to Corporation B, an arm's length corporation, to develop a new process on its behalf. The contract amount is $100,000. The project work is determined to be eligible as SR&ED.

• Assume that the rights to the IP rest with the payer under the terms of the contract. In this case, A has not acquired a property from B (the performer). The IP always belonged to A (the payer). The IP accrued to the payer as it was generated. A will not have to recapture the ITC if it sells or leases (as in a change of use) the rights to the IP.
• Assume that the rights to the IP rest with the performer under the terms of the contract. The $100,000 payment under the terms of the contract for SR&ED work is an allowable SR&ED expenditure for A. Under a second (separate) contract, A pays $20,000 at the end of the project to acquire the rights to the IP from B. In this case, the $20,000 payment by A to acquire the rights to the IP is not an allowable SR&ED expenditure for A. B will not have to recapture the ITC on the sale of IP. 

Legislative references Income Tax Act
Subsection 37(1) Pool of deductible SR&ED expenditures
Subsection 37(4) Acquisition of rights
Subsection 248(1) Definition of "SR&ED"

5.4 Disposition

A disposition of any property includes any transaction or event entitling a taxpayer to proceeds of disposition of the property.

Legislative reference Income Tax Act
Subsection 248(1) Definition of "disposition"

5.5 Proceeds of disposition

There is no specific definition in the Act of the expression "proceeds of disposition" that would apply for the purpose of the recapture rules. The meaning of the expression includes its common commercial meaning, which is the "sale price of a property that has been sold."

It could also include compensation for property destroyed and any amount payable under a policy of insurance in respect of loss or destruction of property (this is consistent with the definition of "proceeds of disposition" in subsection 13(21) and section 54 of the Act). Compensation under an insurance policy could be seen as an event entitling the claimant to proceeds of disposition. A distinction must be made, however, whether a material was in fact destroyed in the prosecution of SR&ED or in the insurable event.

In the case of a custom product, an experimental production, or commercial production with experimental development, an invoice or contract would normally be available and the proceeds of disposition could be determined without difficulty.

The proceeds of disposition should not be allocated to the different expenditure elements that form part of the total cost of the property. For example, a corporation acquires materials for $75,000 and incurs SR&ED salaries of $120,000 to develop a custom product. The custom product is sold to an arm’s length person for $100,000. The proceeds should not be allocated to the cost of materials and the SR&ED salaries. The proceeds of disposition to calculate the recapture on the property is $100,000.

Legislative references Income Tax Act
Subsection 13(21) Definition of "proceeds of disposition"
Section 54 Definition of "proceeds of disposition"
Subsection 127(27) Recapture of investment tax credit

6.0 No recapture

6.1 No recapture on salaries or overhead

The recapture rules do not apply to an SR&ED investment tax credit (ITC) in respect of labour costs or overhead expenditures. There will be no recapture in respect of any property that is constructed or produced by the claimant, apart from the cost of purchased components or materials (such as a motor in a machine).

Legislative references Income Tax Act
Subsection 127(27) Recapture of investment tax credit
Subsection 127(28) Recapture of investment tax credit of partnership
Subsection 127(29) Recapture of investment tax credit of allocating taxpayer
Subsection 127(32) Meaning of cost

6.1.1 Example – No recapture on salaries or overhead

A corporation develops a new part for a machine in the prosecution of an SR&ED project. The development cost is $10,000 (SR&ED salaries $4,000, cost of materials transformed $5,000, and SR&ED overheads $1,000). The materials were acquired from an arm’s length supplier.

Only the cost of the property acquired by the corporation, that is, $5,000 for the materials, is subject to the recapture rules at the time of the disposition of the property or its conversion to commercial use.

Legislative references Income Tax Act
Subsection 127(27) Recapture of investment tax credit
Subsection 127(32) Meaning of cost

6.2 De minimis rule

By administrative policy, the recapture rules will not be applied in the following situations:

• scrap sales are considered to take place when the proceeds from the sale of an experimental product are less than 10% of the total cost of the property;
• when the fair market value (FMV) of an output of SR&ED at the time of its conversion to commercial use, or disposition to a non-arm’s length party, is less than 10% of the total cost of the property; or
• where an SR&ED expenditure was allowed as "cost of materials consumed", for example, in a case where it was not incorporated into an SR&ED product, there will be no recapture unless the proceeds received are greater than 10% of the cost of the materials (for example, proceeds of an insurance policy, see section 5.5).

6.2.1 Example – No recapture on scrap sales / de minimis rule

In developing an experimental product, a corporation incurs the following SR&ED expenditures: salaries $100,000, overhead $65,000, and materials incorporated in the product $35,000. The product was sold at the end of the project for $10,000. Since the proceeds from the sale represent only 5% of the total cost of the experimental product, it is considered to be scrap sales and the recapture rules will not be applied.

6.3 Non-arm's length disposition of equipment

The recapture rules do not apply to a claimant who disposes of SR&ED capital property to a non-arm’s length purchaser in circumstances where the particular property continues to qualify as all or substantially all (ASA) capital property for the purpose of SR&ED (see section 7.3) in the hands of the purchaser.

The recapture rules allow for the disposal of an SR&ED capital property to a new corporation with a non-arm's length relationship in the context of reorganization, when the use to which the property is put does not change. Without these rules, the ITC would have been recaptured when the property was disposed of at the time of the reorganization.

However, where the non-arm's length purchaser later sells the property or converts it to commercial use, the non-arm's length purchaser is required to apply the recapture rules using the rate at which the original ITC was generated on the property.

Legislative references Income Tax Act
Subclause 127(27)(f)(ii)(B) Recapture of investment tax credit – FMV-NAL disposition or conversion – first term SUE
Subclause 127(27)(f)(ii)(C) Recapture of investment tax credit – FMV-NAL disposition or conversion – second term SUE
Subsection 127(33) Certain non-arm's length transfers
Subsection 127(34) Recapture of investment tax credit – non-arm's length dispositions, other than a partnership
Subsection 127(35) Recapture of investment tax credit – non-arm's length dispositions, partnerships

7.0 Factors affecting the SR&ED investment tax credit recapture

7.1 Purchase of SR&ED components

The impact of the recapture rules is different for:

• a claimant that gives a contract to a supplier to manufacture a component or purchases the components off the shelf; and
• a claimant that manufactures its own SR&ED components (see section 6.1).

Legislative references Income Tax Act
Subsection 127(27) Recapture of investment tax credit
Subsection 127(28) Recapture of investment tax credit of partnership
Subsection 127(29) Recapture of investment tax credit of allocating taxpayer
Subsection 127(32) Meaning of cost

7.1.1 Example – Purchase of SR&ED components

If a corporation orders a part from an arm's length supplier for $12,000 (for example, a $10,000 manufacturing and development cost, plus a profit element), the cost of the property subject to the recapture rules would be $12,000. If this same part was manufactured in house, there would be no recapture on the salaries or overhead cost to manufacture the part (see example 6.1.1).

Legislative references Income Tax Act
Subsection 127(27) Recapture of investment tax credit
Subsection 127(32) Meaning of cost

7.2 Items in inventory

In certain cases a claimant may use for SR&ED purposes a property (see section 5.2) from its inventory of merchandise purchased for resale or of raw materials acquired or produced for manufacturing. The cost of that property is the laid-down costs if it was purchased from an arm's length supplier and, if the property was manufactured by the claimant, its cost includes the manufacturing salary, the cost of materials, and a reasonable portion of overhead. Only the cost of the materials purchased originally would be subject to the recapture rules.

Legislative references Income Tax Act
Subsection 127(27) Recapture of investment tax credit
Subsection 127(28) Recapture of investment tax credit of partnership
Subsection 127(29) Recapture of investment tax credit of allocating taxpayer
Subsection 127(32) Meaning of cost

7.2.1 Example – Items in inventory

As part of an SR&ED project a corporation is using a batch of cardboard boxes from its inventory to test a new printing process. The corporation manufactures the boxes, which are normally sold to customers. There is no SR&ED labour involved in the manufacturing of the boxes. The manufacturing cost for a batch of boxes is $12 (labour $3, material acquired from an arm's length supplier $7, and overhead $2). The costs of the boxes used to test the new printing process (assuming there is no excess quantity) were deducted under subsection 37(1) in year 1. The corporation was able to sell the boxes at $15 in year 2. The recapture rules will apply and the cost of a "property acquired" by the corporation is $7 for the purposes of the recapture rules in year 2.

In the above situation the onus is on the claimant to break down the costs of items in inventory that are used in SR&ED activities. Reasonable estimates and / or breakdown of standard costs are acceptable.

Legislative references Income Tax Act
Subsection 127(27) Recapture of investment tax credit
Subsection 127(32) Meaning of cost

7.3 All or substantially all equipment for SR&ED purposes

Where all or substantially all (ASA) equipment is sold to a non-arm's length person or converted to commercial use, one of the limits to determine the amount of recapture is the fair market value (FMV). For this purpose, a notional undepreciated capital cost (UCC) for the ASA equipment, calculated using the capital cost allowance (CCA) rate that would have applied had the equipment not been an SR&ED capital expenditure, would be used as an estimate of the FMV. The onus is on the claimant to support any value that is substantially less than the notional UCC (see example 13.3). 

Legislative references Income Tax Act
Paragraph 127(27)(f) Recapture of investment tax credit – fair market value
Subparagraph 127(28)(e)(ii) Recapture of investment tax credit of partnership – fair market value
Paragraph 127(29)(f) Recapture of investment tax credit of allocating taxpayer – fair market value

7.4 Conversion to commercial use

The recapture rules apply where the claimant disposes of a property or converts it to commercial use. It is a question of fact whether a property has been converted to commercial use.

"Commercial" generally suggests an association with a revenue-generating activity.

In the case of a commercial asset, the fact that the SR&ED project is complete on a particular date does not necessarily mean that the asset is being converted to commercial use on that date. The asset will be considered to be converted to commercial use when it becomes available for use. For the purposes of determining when the conversion to commercial use occurs, the available-for-use rules will apply. The rules specify that one date to consider is the time the property is first used by the taxpayer for the purposes of earning income.

When determining if shared‑use-equipment (SUE) was converted to commercial use, it is the CRA's position that a conversion will not occur for SUE unless the usage of the equipment for SR&ED becomes only incidental. That is, there will only be recapture in respect of SUE when the property has been ASA converted to commercial use. 

When a property that was developed by the claimant is converted to commercial use or sold to a non-arm's length party and converted to commercial use, it is necessary to establish the FMV of the property. Since the FMV of the property would reflect the costs of materials transformed into the property, the labour costs and a portion of the overhead expenditures, the FMV will usually be greater than the other limit to calculate (that is, the amount that can reasonably be considered to be included in computing the claimant's investment tax credit (ITC) in respect of the particular property that was acquired by the claimant). The onus is on the claimant to substantiate any FMV that would be a lesser amount than the costs of materials transformed in the property and claimed as qualified expenditures.

Legislative references Income Tax Act
Subsection 13(27) Interpretation – available for use
Paragraph 13(27)(a) Time of first use – available for use
Paragraph 127(27)(d) Recapture of investment tax credit – commercial use or disposition
Paragraph 127(28)(c) Recapture of investment tax credit of partnership – commercial use or disposition
Paragraph 127(29)(d) Recapture of investment tax credit of allocating taxpayer – commercial use or disposition

7.5 Disposition or conversion to commercial use of "another property that incorporates the property"

A claimant may sell a particular property, the cost of which was claimed as a qualified expenditure, or convert it to commercial use, and the particular property cannot be physically distinguished or separated from the property that contains it. In such a case, the total proceeds of disposition or the FMV for the entire property, as the case may be, will be used to determine the amount in subsections 127(27)(e) or (f) of the Act.

For example, a corporation develops a new nylon monofilament on an experimental basis. The cost of materials included in this experimental production is $10,000. The new nylon produced was just of average quality but it was incorporated into an existing fabric and sold to an arm's length party for $8,000. The entire property, once finished, cannot easily be broken down into its separate components. The proceeds of disposition for the purposes of subsection 127(27)(e) is $8,000.

In certain cases, the particular property contained in another property could be sold as part of a whole property. The CRA is of the view that a prorated portion of the proceeds of disposition of the property sold would be acceptable where it is possible to physically distinguish the particular property, the cost of which was claimed as a qualified expenditure, as a separate property.

For example, a corporation develops an experimental engine for a machine with the objective of increasing the performance of the existing models. The cost of materials transformed into the experimental product was $100,000. The SR&ED project did not result in a better engine and at the end of the project the new engine was incorporated into a machine, which was sold to an arm's length party for $200,000. However, it would have been possible to sell the engine separately for $50,000. In this case, the proceeds of disposition for the purposes of subsection 127(27)(e) is $50,000.

Legislative references Income Tax Act
Paragraph 127(27)(d) Recapture of investment tax credit – commercial use or disposition
Paragraph 127(28)(c) Recapture of investment tax credit of partnership – commercial use or disposition
Paragraph 127(29)(d) Recapture of investment tax credit of allocating taxpayer – commercial use or disposition

7.6 Property acquired through a contract involving SR&ED and other work

In certain cases a payer acquires under contract a component part to be used for SR&ED. In other cases the contract involves the performance of SR&ED and other work and results in the acquisition of a property by the payer that can reasonably be expected to be used in its business or that will be sold.

Projects, such as the development of a custom product, that may involve SR&ED work may also involve work that does not constitute SR&ED under paragraph (i) of the definition SR&ED in subsection 248(1) of the Act. To determine the eligible expenditures on SR&ED for such projects, the SR&ED work and the non-SR&ED work should be identified and the project costs allocated between these activities.

For more information on contracts involving the performance of SR&ED and other work, refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.

The cost of a finished product may include SR&ED expenditures incurred by the performer to develop the product. Therefore, the cost of the finished product (or a portion of the cost) has generated an ITC. The allowable SR&ED expenditures incurred by the payer in respect of a property acquired under an arm's length contract that will be used in its business or that will be sold will be one of the limits to consider when applying the ITC recapture rules (see example 13.7).

Note

An expenditure of a capital nature or an expenditure for the right to use capital property (lease) does not qualify for SR&ED tax incentives after 2013. However, the ITC earned on SR&ED capital expenditures or shared-use equipment (SUE) prior to 2014 can be subject to recapture. 

Legislative references Income Tax Act
Subparagraph 37(1)(a)(i) Pool of deductible SR&ED expenditures – current expenditures
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subclause 37(8)(a)(ii)(A)(I) SR&ED expenditures in Canada under the traditional method – ASA
Subclause 37(8)(a)(ii)(B)(II) SR&ED expenditures in Canada under the proxy method – contracts
Subsection 127(27) Recapture of investment tax credit
Subsection 248(1) Definition of "SR&ED", paragraph (i) – commercial production or use

8.0 SR&ED investment tax credit recapture rules – Corporations and individuals

8.1 Calculation of a recapture amount – Corporations and individuals

To calculate a recapture, where there is no transfer of qualified expenditures, a claimant will add to Part I tax otherwise payable for the tax year the lesser of two amounts:

1. the SR&ED investment tax credit (ITC) earned in respect of the particular property; and
2. the amount determined by multiplying the percentage used in calculating the SR&ED ITC earned on the property (historical rate) to:

            a) the proceeds of disposition of the property if it is disposed of to an arm’s length person (see example 13.1); or

            b) in any other case, the fair market value (FMV) of the property (see example 13.2).

Note

The historical rate is the percentage (35%, 15%, or possibly 20% if the ITC was earned prior to 2014) that the claimant applied in calculating the original SR&ED ITC earned in respect of the particular property.

The expression "in any other case" refers to where the property, or another property that incorporates the property, is converted to commercial use or sold to a non-arm's length party.

Legislative reference Income Tax Act
Subsection 127(27) Recapture of investment tax credit

8.2 Effect of recapture – Corporations and individuals

The fact that the recapture takes place in a different tax year from the original claim may occasionally create a liability for tax in a loss year.

A claimant who has a balance of unused SR&ED ITC can use it to reduce or eliminate the amount of Part I tax payable for the year, including any amount added to tax payable due to the recapture rules.

All amounts added to tax payable for a tax year under the recapture rules will increase the amount of the claimant's pool of deductible SR&ED expenditures for the following year. For more information in this respect, refer to the Pool of Deductible SR&ED Expenditures Policy.

Legislative references Income Tax Act
Subsection 37(1) Pool of deductible SR&ED expenditures
Subsection 127(27) Recapture of investment tax credit
Subsection 127(29) Recapture of investment tax credit of allocating taxpayer
Subsection 127(34) Recapture of investment tax credit – non-arm's length dispositions, other than a partnership

8.3 The SR&ED investment tax credit rate of recapture – Corporations and individuals

In certain cases a Canadian-controlled private corporation (CCPC) may earn a portion of its SR&ED ITC at a rate of 35% and another portion at 15% (20% if earned prior to 2014). The ITC that can be earned at the enhanced rate (35%) is determined by the amount of qualified SR&ED expenditures up to the expenditure limit. The ITC that is earned at the base rate of 15%, (20% if earned prior to 2014) is determined by the amount of qualified SR&ED expenditures above the expenditure limit. For more information with respect to the SR&ED expenditure limit, refer to the SR&ED Investment Tax Credit Policy.

Generally, the recapture amount will be computed according to the nature of the expenditure (current or capital) and the rate that was used to calculate the ITC earned on the property (see note in section 8.1). For example, in the case of CCPCs:

• When the total qualified expenditures is not more than the expenditure limit, the recapture amount will be computed at the rate of 35%.
• When the total qualified expenditures is more than the expenditure limit, but the amount of current expenditures is less than this limit and the amount recaptured is related to current expenditures, the recapture amount will be computed at the rate of 35%. However, if the amount of current expenditures is more than the limit and the amount recaptured is related to a current expenditure, a rate of 15% (20% prior to 2014) will be used on the portion of the amount recaptured that is more than the expenditure limit, and a rate of 35% will be used on the portion of the amount that is within the expenditure limit.
• If the total qualified expenditures is more than the expenditure limit and the property sold or converted to commercial use is related to a capital expenditure, a rate of 20% will be used on the portion of the capital expenditure that is more than the expenditure limit, and a rate of 35% will be used on the portion that falls within the expenditure limit. Note that expenditures of a capital nature no longer qualify for SR&ED tax incentives starting in 2014. For example, if in 2013 the total of qualified expenditures is $3,100,000 and the capital expenditures recaptured are $600,000, then $500,000 will be computed at the rate of 35% and $100,000 at the rate of 20%*.

*Given an expenditure limit of 3 million.

Other situations may arise and will be handled by the CRA on a "case-by-case" basis. The onus is on the claimant to match SR&ED expenditures with the costs incurred in such a way as to identify the SR&ED ITC rate used and the recapture amount, where appropriate.

Legislative reference Income Tax Act
Subsection 127(27) Recapture of investment tax credit

9.0 Recapture on transferred qualified expenditures

The following sections only apply to non-arms’ length situations.

9.1 Calculation of recapture amount on transferred qualified expenditures

To calculate a recapture in the hands of the performer where there was a transfer of qualified expenditures (from a non-arm’s length party), the performer will add to Part I tax otherwise payable for the tax year the lesser of two amounts:

• the amount that can reasonably be considered to have been included in computing the transferee's investment tax credit (ITC) in respect of the qualified expenditure that was the subject of the agreement; and
• the amount determined by the formula

(A x B) - C

where

A is the percentage used by the transferee to calculate its ITC in respect of the qualified expenditure that was the subject of the agreement;

B is one of two amounts:

• where the property (or another property that incorporates the property) is disposed of to an arm's length person, B is the proceeds of disposition of that property;
• in any other case, B is the fair market value (FMV) of the property, or the other property that incorporates the property, at the time of conversion or disposition to a non-arm's length party.

C will apply where an SR&ED performer has transferred a portion of the qualified expenditure associated with a property and has retained the remainder of the qualified expenditure. C is the amount of the recapture that relates to that remainder, that is, the portion of the qualified expenditure that was not transferred. C reduces the amount of ITC recapture of the transferor by any amount of ITC recapture (see section 6.0) in respect of the particular property. See example 13.4, example 13.5 and example 13.6.

Legislative references Income Tax Act
Subsection 127(13) Agreement to transfer qualified expenditures
Subsection 127(29) Recapture of investment tax credit of allocating taxpayer

9.2 Timing considerations

If the performer and the payer have different tax year-ends, timing problems may arise for the purposes of the ITC recapture rules. There will be a timing problem in circumstances where:

• The performer disposes of a property for which it incurred a qualified expenditure.
• All or part of the qualified expenditure is transferred to a non-arm's length payer.
• The tax year-end of the payer ends before the performer's tax year-end.

Legislative references Income Tax Act
Subsection 127(13) Agreement to transfer qualified expenditures
Subsection 127(29) Recapture of investment tax credit of allocating taxpayer

9.2.1 Example – Timing considerations

Corporation A (the payer) enters into a contract with Corporation B (the performer) to do SR&ED on its behalf. A does not deal at arm's length with B. A's tax year-end is November 30, 2019, and B's is December 31, 2019. B incurs expenditures of $100,000 for labour, $65,000 for overheads, and $135,000 for materials transformed into an experimental product. B transfers in its tax year ending on December 31, 2019, the qualified expenditures of $300,000 to A. B retains and sells the underlying property prior to December 31, 2019. The FMV of the experimental product at the time of its transfer to A is $500,000.

As a result of the transfer of qualified SR&ED expenditures, B's SR&ED qualified expenditure pool is reduced by $300,000 in its tax year ending on December 31, 2019. However, A's SR&ED qualified expenditure pool is increased by $300,000 in its tax year ending on November 30, 2020—its first tax year that ends at the same time or after the end of the particular tax year of the performer.

Since B sold the property, there is a recapture of ITC for B in its tax year ending on December 31, 2019. The recapture amount of ITC is calculated using the ITC rate for A, which is not known until November 30, 2020. Assuming an ITC rate of 35%, the amount of the recapture would be $47,250 (35% of $135,000, the materials transformed).

A will claim ITC of $105,000 (35% of $300,000) in its tax year ending on November 30, 2020.

In this situation, the CRA will accept that the performer defer the ITC recapture to its subsequent tax year—December 31, 2020. This is because B will not likely know the ITC rate used by Company A until they claim the ITC on the property—November 30, 2020.

If the performer only transfers a portion of the qualified expenditures to the payer, then only the amount of ITC recapture that is more than the amount of ITC earned by the performer in the year in respect of the property can be deferred to the subsequent tax year.

Legislative references Income Tax Act
Subsection 127(13) Agreement to transfer qualified expenditures
Subsection 127(29) Recapture of investment tax credit of allocating taxpayer

10.0 Partnerships

10.1 Calculation of a recapture amount – Partnerships

The recapture will be calculated for the fiscal period of the partnership in which the property was disposed of or converted to commercial use.

The amount of the recapture will be determined as the lesser of:

• the SR&ED investment tax credit (ITC) earned in respect of the particular property that was acquired by the partnership; and
• the amount determined by applying the percentage that was used to calculate the ITC earned on the property to the proceeds of disposition of the property if it was disposed of to an arm's length person, or in any other case, the fair market value of the property.

Legislative references Income Tax Act
Subsection 127(28) Recapture of investment tax credit of partnership
Subsection 127(30) Addition to tax – partnership
Subsection 127(31) Tiered partnership
Subsection 127(35) Recapture of investment tax credit – non-arm's length dispositions, partnerships

10.2 Effect of recapture – Partnerships

The recapture will be deducted from the ITC of the partnership before allocating the year’s ITC amount to the members. Each member of the partnership will report his or her share of the ITC of the partnership, reduced by the amount of the recapture. If the partnership does not have enough ITC otherwise available to offset the recapture, then the amount by which reductions to ITC are more than additions (the excess) will be determined. A member should report the amount that is his or her share of the excess as an addition to Part I tax payable.

Any amounts payable under this provision for a tax year by members of the partnership will increase the amount of the partnership's pool of deductible SR&ED expenditures for the following year. In addition, the adjusted cost base of the member's partnership interest will be increased by the amount added to the member's tax.

The comments made under section 6.3 "Non-arm's length disposition of equipment" also apply in respect of non-arm's length dispositions of equipment where the purchaser is a partnership.

For more information in respect of partnerships, refer to the SR&ED Claims for Partnerships Policy.

Legislative references Income Tax Act
Subsection 37(1) Pool of deductible SR&ED expenditures
Paragraph 53(1)(e) Adjustments to cost base – interest in a partnership
Subsection 127(8) Investment tax credit of partnership
Subsection 127(28) Recapture of investment tax credit of partnership
Subsection 127(30) Addition to tax – partnership
Subsection 127(35) Recapture of investment tax credit – non-arm's length dispositions, partnerships

11.0 Recycled materials

Recycled SR&ED materials meet the definition of materials transformed rather than materials consumed. In general, recycled materials are incorporated into products that have some value either to the claimant or to another party.

Materials transformed are subject to the recapture rules where a product resulting from an SR&ED project is sold or converted to commercial use.

Where SR&ED materials are recycled it is reasonable to conclude that the fair market value (FMV) of the SR&ED material can be determined by considering the value of the input materials that would otherwise have been used in the experimental production, or commercial production with experimental development.

For more information in respect of materials consumed or transformed, refer to the Materials for SR&ED Policy.

Legislative references Income Tax Act
Subclause 37(8)(a)(ii)(A)(I) SR&ED expenditures in Canada under the traditional method – ASA
Subclause 37(8)(a)(ii)(A)(II) SR&ED expenditures in Canada under the traditional method – directly attributable
Subclause 37(8)(a)(ii)(B)(V) SR&ED expenditures in Canada under the proxy method – cost of materials consumed or transformed
Paragraph 127(27)(d) Recapture of investment tax credit–commercial use or disposition
Paragraph 127(28)(c) Recapture of investment tax credit of partnership – commercial use or disposition
Paragraph 127(29)(d) Recapture of investment tax credit of allocating taxpayer – commercial use or disposition

12.0 Forms

The amount of recapture is calculated using Schedule T2SCH31, Investment Tax Credit – Corporations (or Form T2038 (IND), Investment Tax Credit (Individuals)) and is added to Part I tax payable. These forms are also used by members of a partnership.

All amounts added to tax payable by a claimant under the provisions of the recapture rules for a tax year will increase the amount of the claimant's pool of deductible SR&ED expenditures for the following year. For more information, refer to the Pool of Deductible SR&ED Expenditures Policy.

13.0 Examples

13.1 Calculation of a recapture amount for a corporation or individual using the proceeds of disposition amount

A manufacturer of paper products performs SR&ED related to the development of fine papers with special finishes. In 2014, production runs were performed to test whether a product with the necessary qualities could be produced. This was determined to be experimental production. Expenditures were incurred as follows:

The paper produced in these production runs was subsequently sold in an arm's length transaction for $4,500, triggering a recapture of the SR&ED investment tax credit (ITC).

The recapture amount is the lesser of:

• the ITC earned in respect of the particular property (the materials acquired from a third party): $400 x 15% = $60 (reference: 127(27)(c) of the Act); and
• the amount determined by applying the percentage which was used in calculating the ITC on the particular property to the proceeds of disposition of the paper that was disposed to an arm's length person: $4,500 x 15% = $675 (reference: 127(27)(e) of the Act).

The recapture is $60, the lesser of $60 and $675.

13.2 Calculation of a recapture amount for a corporation or individual using the fair market value amount

In 2013, a corporation purchased a piece of equipment for $300,000. The expenditure qualified as an SR&ED capital expenditure (all or substantially all (ASA) equipment). The corporation earned an ITC of $105,000 (that is, ITC was earned at the 35% rate). Three years later the corporation stopped using the equipment for SR&ED and moved it into the manufacturing division. The fair market value of the equipment at that time was estimated to be $180,000 (see example 13.3).

The recapture is the lesser of:

• the ITC earned in respect of the particular property: $105,000 (reference: 127(27)(c) of the Act); and
• the amount determined by applying the percentage used in calculating the ITC earned on the particular property to, in this case, the fair market value of the particular property:
  $180,000 x 35% = $63,000 (reference: 127(27)(f) of the Act).

The recapture will be $63,000, the lesser of $105,000 and $63,000.

13.3 Determining the notional UCC to estimate the fair market value of a capital property

In 2013, a corporation bought a machine for $100,000 to be used for SR&ED. It was determined that the machine qualified as SR&ED ASA equipment. In tax year 2016, the corporation decided to use the machine for manufacturing purposes because the SR&ED project failed.

The machine would have qualified as a class 43 asset if it had been used for manufacturing in 2013. Since class 43 has a 30% declining balance rate, the undepreciated capital cost (UCC) of the machine could be calculated to be $41,650 at the time of its conversion to commercial use.

The capital cost allowance (CCA) is calculated as follows:

It is that notional UCC of $41,650 that should be used to estimate the fair market value (FMV) of the machine for the purposes of the recapture rules.

13.4 Calculation of recapture on transferred qualified expenditures where only a portion of the qualified expenditures were transferred

In 2013, Corporation X purchased a $2 million microscope and included it as a SR&ED qualified expenditure for the performance of an SR&ED contract for Y, a non-arm's length corporation. X also had $3 million of qualified expenditures of a current nature.

In 2013, X transferred qualified expenditures to Y, using Form T1146.

In 2014, X sold the microscope to an arm's length third party for $1.5 million.

X had transferred $800,000 and kept $1.2 million of the qualified expenditures.

Assuming an ITC rate of 20% for both X and Y in 2013, the recapture for X in 2014, will be (using 20%, the historical ITC rate earned on the microscope, see section 8.1):

• on the qualified expenditures of the microscope that X did not transfer:
  • ($2,000,000 - $800,000) x 20% = $240,000 (reference: 127(27) of the Act); plus
• the X recapture on qualified expenditures of the microscope transferred to Y, which is the lesser of:
  • the ITC earned by Y on the SR&ED qualified expenditures in respect of the property, which was transferred: $800,000 x 20% = $160,000; and
  • the amount determined by the formula: (A x B) – C; (20% x $1,500,000) - $240,000 = $60,000 (reference: 127(29)(f) of the Act) where:
    A is the percentage that Y used in determining the ITC, 20%,
    B is the proceeds of disposition: $1,500,000,
    C is $240,000, the amount added to the Part I tax payable of X in respect of the microscope.

The total recapture in the hands of X is $300,000 ($240,000 + $60,000).

X will add $300,000 in the subsequent year to its pool of deductible SR&ED expenditures at line 453 of Form T661, Scientific research and experimental development (SR&ED) claim.

Had X not transferred any qualified expenditures in 2013, its recapture would still have been $300,000. This would be calculated as: $1.5 million (being, the lesser of proceeds of disposition and cost) x 20% = $300,000 (reference: 127(27) of the Act).

13.5 Calculation of recapture on transferred qualified expenditures where all of the qualified expenditures were transferred

Corporation Payer (PAYER) runs a feedlot operation. PAYER contracts with Corporation Farm (FARM), a non-arm's length party for FARM to perform SR&ED on behalf of PAYER with a view to determining the best diet for steers. FARM purchases 300 head of steers for $300,000. The steers were determined to be SR&ED materials and there is no commercial production. FARM incurs other expenditures of $20,000 for feed and $65,000 for SR&ED salaries. FARM transfers the qualified expenditures of $385,000 to PAYER in an agreement under subsection 127(13) of the Act. PAYER earns ITC at the 15% rate on the expenditures. FARM subsequently sells the 300 steers for $450,000 (arm's length sale).

Since all the expenditures were transferred to another person under an agreement described in subsection 127(13), the amount of the recapture for FARM, determined by the formula in subsection 127(29) of the Act, will be the lesser of the following:

• the ITC earned on the qualified expenditures in respect of the property, which was transferred:
  15% of $300,000 = $45,000 (reference: 127(29)(e) of the Act),
  (no recapture on the feed, which was consumed in the prosecution of SR&ED and no recapture for SR&ED salaries); and
• the amount determined by the formula:
  (A x B) - C: (15% x $450,000) – 0 = $67,500 (reference: 127(29)(f) of the Act), where:
  A is the percentage which PAY used in determining the ITC, 15%,
  B is the proceeds of disposition: $450,000,
  C is $0, since all of the expenditures were transferred.

FARM will have a recapture of $45,000, the lesser of $45,000 and $67,500.

FARM will add $45,000 in the subsequent year to its pool of deductible SR&ED expenditures at line 453 of Form T661, Scientific Research and Experimental Development (SR&ED) Claim.

13.6 Calculation of recapture on transferred qualified expenditures where only a portion of the qualified expenditures were transferred

All of the facts are the same as in example 13.5, except that FARM transfers $200,000 of the total SR&ED expenditures of $385,000. PAYER earns an ITC of $30,000 (15% of $200,000). FARM earns ITC of $27,750 (15% of $185,000). When the steers are sold there will be a recapture of ITC calculated in two steps as follows:

First step

Recapture for FARM on the portion not transferred will be determined as the lesser of:

• the ITC earned in respect of the particular property:
  15% x ($300,000 x $185,000/$385,000) = $21,623 (reference: mid amble to 127(27) of the Act); and
• the amount determined by applying the percentage used to calculate the ITC earned on the property to the proceeds of disposition of the property:
  15% x $450,000 = $67,500 (reference: 127(27)(e) of the Act).

FARM will have a recapture of $21,623, the lesser of $21,623 and $67,500.

Second step

Recapture for FARM on the portion transferred will be determined as the lesser of:

• the ITC earned on the qualified expenditures that were transferred in respect of the particular property:
  15% x ($300,000 x $200,000/$385,000) = $23,377 (reference: 127(29)(e) of the Act); and
• the amount determined by the formula (A x B) - C:
  (15% x $450,000) - $21,623 = $45,877 (reference: 127(29)(f) of the Act), where:
  A is the percentage which PAY used in determining ITC, 15%,
  B is the proceeds of disposition: $450,000,
  C is $21,623, the recapture determined in first step.

FARM will have recapture of $23,377, the lesser of $23,377 and $45,877.

The total recapture in the hands of FARM is $45,000 ($21,623 + $23,377)

FARM will add $45,000 in the subsequent year to its pool of deductible SR&ED expenditures at line 453 of Form T661, Scientific research and experimental development (SR&ED) claim.

13.7 Calculation of a recapture amount for a corporation or individual on conversion to commercial use when the fair market value is less than the qualified expenditure in respect of the property

Corporation X contracts to Corporation Y (arm's length) for the construction of equipment to meet unique performance criteria. The contract requires that Y perform SR&ED on behalf of X in developing the equipment. The total amount of the contract is $1 million. All of the work was completed at the end of 2012. At the beginning of 2013, X started using the new equipment in its operations.

For purposes of claiming the allowable SR&ED expenditures, X identified the SR&ED and non-SR&ED activities and allocated the costs accordingly. The SR&ED portion of the contract was estimated at $800,000. The $200,000 not claimable is a cost relating to expenditures incurred for the non-SR&ED activities. The CRA found the allocation to be reasonable.

For the tax year 2012, X claimed $800,000 (on line 340 of form T661) as expenditures for an arm's length SR&ED contract. For more information in respect of contracting SR&ED, refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy. In year 2013, when X starts using the equipment in its operations, there is a conversion to commercial use and the recapture rules apply.

The fair market value (FMV) of the equipment at the time of conversion to commercial use was determined to be $500,000, based on the cost of producing a second unit if the technology had already existed.

For the purposes of the recapture rules, using a prorated amount as FMV would be acceptable since it is reasonable to apportion the FMV between the SR&ED costs and other costs. Any other reasonable proration of the FMV would be acceptable if it is based on the facts of the case, and is supportable.

Since the ITC on the particular equipment was claimed using a 20% rate, the recapture will be calculated as follows.

The recapture amount is the lesser of:

• the ITC earned in respect of the particular property (the portion of the contract in respect of the SR&ED is part of the cost of acquiring the property):
  $800,000 x 20% = $160,000 (reference: 127(27)(c) of the Act); and
• the amount determined by applying the percentage that was used to calculate the ITC on the property to the FMV of the property at the time of its conversion to commercial use:
  ($500,000 x $800,000/$1,000,000) x 20% = $80,000 (reference: 127(27)(f) of the Act).

The recapture will be $80,000, the lesser of $80,000 and $160,000.

Appendix A – References

A.1 Legislative references

Appendix B – Revisions

B.1 Explanation of changes

This document cancels and replaces the Recapture of SR&ED Investment Tax Credit Policy (December 18, 2014).

The following is the explanation of changes to the Recapture of SR&ED Investment Tax Credit Policy as part of the revision of October 14, 2022:

Section 2.0 has been revised to mention that the ITC can potentially be recaptured up to 20 years from the year it was earned. Even though expenditures of a capital nature no longer qualify for SR&ED tax incentives after 2013, the recapture rules contained in this document continue to apply to recapture ITC earned on SR&ED capital expenditures and shared-use-equipment.

Section 3.0 the quick reference table has been modified for rows, “All or substantially all (ASA) equipment” and “Shared-Use-Equipment (SUE),” and for the “Note” after the table, to show that such expenditure items are no longer eligible for SR&ED tax incentives. The ITC earned on such items (prior to 2014) is subject to recapture after 2013. The last sentence in this section was modified to remove reference to available for use rules which apply to capital expenditures, since after 2013, SR&ED contracts can only include expenditures of a current nature.

Section 5.2, 6.3, and 7.4 were modified to delete the reference to the SR&ED tShared Use Equipment Policy document.

Section 5.3.1, the example has been expanded to show that there is no ITC recapture on the sale of intellectual property (IP).

Section 7.3 was modified to delete the reference to the SR&ED Capital Expenditures Policy document.

Section 7.6 was modified to include a sentence in the Note, that SR&ED capital expenditures or shared use-equipment (SUE) that resulted in the earning of ITC prior to 2014, can be subject to recapture.

Section 9.1 was modified with a clarification in brackets, that qualified expenditures can be transferred from a non-arms length party, and subsection 127(13) of the Income Tax Act was added to the Legislative references at the end of this section.

Section 9.2.1 includes an example that has been updated to more current years. The enhanced ITC rate has not changed and remains at 35%.

Section 13.4 the example was modified to include years 2013 and 2014, rather than year 1 and 2.

Section 13.5 and 13.6 include examples on recapture of ITC that was previously earned at the 15% rate. The previous version of this policy document had the ITC rate in the examples at 20%. The basic ITC rate is 15%, prior to 2014 it was 20%.

Section 13.7 the example was modified to include years 2012 and 2013, and removed the wording year 1.

Other minor formatting and editing corrections were made throughout the document.