SR&ED Shared-Use-Equipment Policy

Date: December 18, 2014

Changes to the SR&ED Shared-Use-Equipment Policy

Reasons for revision

This revision accommodates the legislative changes that have been announced.

Revision overview

Where a property is not all or substantially all used by a taxpayer for SR&ED, but is primarily used by the taxpayer in SR&ED (referred to as shared‑use‑equipment (SUE)), part of the cost of such property can be included in the taxpayer’s qualified expenditures and therefore is partially eligible for an investment tax credit (ITC).

The definitions of first term shared-use-equipment and second term shared-use-equipment contained in section 127(9) of the Income Tax Act are amended as of March 29, 2012 consequential to the repeal of paragraph 37(1)(b) to ensure that the definitions only apply in respect of property acquired before 2014. Expenditures of a capital nature no longer qualify for SR&ED tax incentives starting in 2014.

Because of the interaction of the definition first term SUE and second term SUE, ITCs can still be claimed in tax years ending after 2013 in respect of first term SUE acquired before 2014.

ITCs will not be available in respect to either first term or second term SUE for taxation years ending after February 1, 2017.

The text of this document has been revised to reflect these changes, see Appendix 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 shared-use-equipment (SUE) and prescribed depreciable property (PDP) when administering the scientific research and experimental development (SR&ED) legislation under the federal Income Tax Act and the Income Tax Regulations.

2.0 Overview

An SR&ED capital expenditure is new capital property that is intended to be used during all or substantially all (ASA) of its operating time in its expected useful life for the prosecution of SR&ED carried on in Canada, or where ASA of its value is intended to be consumed in such prosecution, and may qualify for an investment tax credit (ITC). Please refer to the  SR&ED Capital Expenditures Policy for more information on SR&ED capital expenditures and on the intent test. Capital expenditures incurred after 2013 can no longer be claimed for SR&ED purposes.

Before December 3, 1992, expenditures for new capital property that did not meet the ASA test but was used primarily during its operating time in SR&ED did not qualify for ITCs. This was of concern to claimants that performed SR&ED in a shop-floor environment where property can often be used for both SR&ED and commercial work. As a result, rules were introduced for property acquired after December 2, 1992, to allow partial ITCs for expenditures on first and second term shared-use-equipment (SUE). Both first term SUE (see section 3.1) and second term SUE (see section 3.2) are defined in subsection 127(9) of the Income Tax Act.

The 2012 budget announced that expenditures of a capital nature made after 2013, including shared-use-equipment, will no longer qualify for SR&ED tax incentives. However, because of the interaction of the definition first term SUE and second term SUE, ITCs can still be claimed in tax years ending after 2013 in respect of first term SUE acquired and available for use before 2014.

Investment tax credits will not be available in respect to either first term or second term SUE for tax years ending after February 1, 2017.

A prescribed depreciable property (PDP) (see section 4.0) is excluded from being considered first term and second term SUE. Consequently, costs to acquire a PDP do not qualify for ITCs. PDP is defined in subsection 2900(11) of the Regulations.

3.0 Shared-use-equipment

3.1 First term shared-use-equipment

A property must meet certain criteria to qualify as first term shared-use-equipment (SUE). The property must be:

  • depreciable property;
  • acquired after December 2, 1992 and before January 1, 2014;
  • equipment that does not meet the ASA criteria for SR&ED capital expenditures;
  • equipment that is not prescribed depreciable property (PDP) as per subsection 2900(11) of the Regulations (see section 4.0);
  • equipment other than general purpose office equipment or furniture (GPOEF);
  • new equipment (that is, the equipment must not have been used or acquired for use or lease, or for any other purposes before the claimant acquired it); and
  • equipment that is used by the claimant during its operating time in the period starting with the time the equipment was acquired and available for use, and ends at the end of the first tax year that was at least 12 months after the time the equipment was acquired and available for use (this is the "first period"), and was used primarily for the prosecution of SR&ED in Canada.

Depreciable property, operating time and SR&ED capital expenditures are discussed in the SR&ED Capital Expenditures Policy.

Legislative References Income Tax Act
Subsection 127(9) Definition of "qualified expenditure", paragraph (c)
Subsection 127(9) Definition of "first term shared-use-equipment"

Legislative Reference Income Tax Regulations
Subparagraph 2902(b)(iii) Prescribed expenditures

3.2 Second term shared-use-equipment

In order to qualify as second term SUE, a property must be:

  • property that was first term SUE;
  • equipment that is used by the claimant during its operating time in the period starting at the time the property was acquired and was available for use and ends at the end of the first tax year that was at least 24 months after the time the equipment was acquired and available for use (this is the "second period"); and
  • used by the claimant during its operating time in the "second period" primarily for the prosecution of SR&ED in Canada (see example in section 3.5).

Legislative Reference Income Tax Act
Subsection 127(9) Definition of "second term shared-use-equipment"

3.3 Qualified expenditures

The definition of a "qualified expenditure" includes an expenditure in respect of first term SUE and second term SUE. For tax years that begin after 1995, and for the purposes of the definition of "qualified expenditure", the amount of an expenditure for first or second term SUE is deemed to be ¼ of the capital cost of the equipment determined:

  • as if no amount were added because of the cost of borrowed money,
  • without reference to deeming provisions with respect to capital costs described in the Income Tax Act, and
  • after adjustments for non-arm’s length costs as described in subsection 127(11.6) of the Act.

The reduction of qualified expenditures for assistance or contract payments for SUE also reduces the amount of qualified expenditures.

Rules for SUE are found in the definitions of "qualified expenditure", "first term shared-use-equipment" and "second term shared-use-equipment" in subsection 127(9) of the Act.

Qualified expenditures are discussed in Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

Legislative References Income Tax Act
Subsection 13(7.1) Deemed capital cost of certain property
Subsection 13(7.4) Deemed capital costs
Section 21 Borrowed money
Subsection 127(9) Definition of "qualified expenditure", paragraph (h)
Paragraph 127(11.5)(b) Adjustments to qualified expenditures [Repealed effective February 1, 2017]
Subsection 127(11.6) Non-arm's length costs [Not applicable effective February 1, 2017]

3.4 The test – Intended use vs. actual use

The test for SUE is based on the actual use of the equipment during its operating time in the first and second period. However, the test for PDP (see section 4.0) is based on the intended use of the equipment (see section 4.2).

The test of whether the equipment qualifies as SUE begins when the claimant acquires the equipment and it is available for use, and ends in the tax year in which the relevant test period ends. The test is based on how the claimant used the equipment during the entire period up to the end of that tax year.

Legislative References Income Tax Act
Subsection 127(9) Definition of "first term shared-use-equipment"
Subsection 127(9) Definition of "second term shared-use-equipment"

3.5 Example – First and second term shared-use-equipment

On December 31, 2013, company A purchased and put into use a new machine for $300,000. Company A intends to use the machine 75% of the time for SR&ED and 25% of the time in manufacturing and processing (M&P) over its expected useful life. As a result, the cost of the new machine is not an SR&ED capital expenditure. The machine is not a PDP (see section 4.0). The machine runs 8 hours a day, 5 days a week. The company has a December 30 year-end in 2014 and each of their two following fiscal years is 53 weeks long. The actual operating time of the machine for SR&ED and M&P is as follows:

Time period Operating Time SR&ED M&P
December 31, 2013 to December 30, 2014 1,600 1,300 300
December 31, 2014 to January 5, 2016 2,000 1,600 400
January 6, 2016 to January 10, 2017 2,000 800 1,200
Total 5,600 3,700 1,900

For the tax year ending December 30, 2014

The cost of the equipment will be included in the regular capital cost allowance (CCA) class and will be subject to the normal rules of CCA. The period is not 12 months long.

For the tax year ending January 5, 2016

The machine was used primarily in SR&ED (2,900 / 3,600 or 81%) for the period from the time the machine is available for use (December 31, 2013) to the end of the first tax year ending at least 12 months after that time (January 5, 2016). Therefore, this is the first term SUE (see section 3.1), and the company can include 25% of $300,000 ($75,000) as a qualified expenditure for investment tax credit (ITC) purposes.

For the tax year ending January 10, 2017

The machine was used primarily in SR&ED (3,700 / 5,600 or 66%) for the period from the time the machine is available for use (December 31, 2013) to the end of the first tax year ending at least 24 months after that time (January 10, 2017). Therefore, this is the second term SUE (see section 3.2), and the company can include 25% of $300,000 ($75,000) as a qualified expenditure for ITC purposes.

Any ITC earned for SUE and applied to reduce taxes payable or refunded, will reduce the undepreciated capital cost (UCC) of the class in the subsequent year.

3.6 Assistance

Qualified expenditures of a claimant are reduced by any government assistance, non-government assistance, or contract payments that the claimant has received, is entitled to receive, or can reasonably be expected to receive, that can be reasonably considered to be in respect of SR&ED, on or before the filing due date of a tax year. For more information on government assistance, non-government assistance, and contract payments, please refer to the Assistance and Contract Payments Policy.

Legislative Reference Income Tax Act
Subsection 127(18) Reduction of qualified expenditures

3.6.1 Example – Assistance

Company B incurred an $80,000 expenditure on equipment on July 19, 2013. The company has a year-end of December 31. The equipment meets the SUE criteria in both the December 31, 2014 year for the first period, and the December 31, 2015 year for the second period. Company B received $21,000 of assistance for SR&ED to purchase the equipment. For the purpose of this example, assume that there are no other qualified expenditures.

The qualified expenditure otherwise determined before the reduction for the assistance received is $20,000 (25% of $80,000) in 2014 and $20,000 in 2015.

The assistance that is in respect of SR&ED will be applied to reduce the qualified expenditures incurred in the year for SR&ED. In 2014, the assistance of $21,000 will fully reduce the qualified expenditures for first term SUE (see section 3.1). There will be a carry-forward of the remaining $1,000 of assistance to reduce the qualified expenditures for the second term SUE (see section 3.2) in 2015 to $19,000 in that year.

3.7 Recapture of SR&ED investment tax credit

The recapture of ITC rules apply where the claimant disposes of the property (that earned an ITC) or converts it to commercial use (see section 3.7.2). It is a question of fact whether a property has been converted to commercial use. For more information on recapture, please refer to the Recapture of SR&ED Investment Tax Credit Policy.

A conversion will only occur for SUE when the usage of the equipment for SR&ED becomes incidental. For this purpose, there will only be recapture of the ITC in respect of SUE when the property has been  ASA converted to commercial use.

Under the current rules, only a portion of the cost of the property that is SUE (25% or 50%) is a qualified expenditure and only this percentage of the proceeds of disposition or the fair market value will be included in the recapture calculation, and not the full amount.

Legislative Reference Income Tax Act
Paragraph 127(27)(d) Recapture of investment tax credit — commercial use or disposition

3.7.1 Example – Recapture

A claimant purchases equipment for $160,000. It is SUE and the claimant makes a claim in each period. The ITC rate for the claimant is 20%. (Note, subsequent to 2013, the basic ITC rate is 15%).

First term SUE: ITC calculation
20% ($160,000 × 25%) = $8,000 ITC

Second term SUE: ITC calculation
20% ($160,000 × 25%) = $8,000 ITC

The claimant subsequently sells the equipment for proceeds of disposition (PD) of $100,000.

The recapture of ITC would be the lesser of:

  • $16,000 (20% × $160,000 × 50%) as the property had been claimed as first and second-term SUE, and
  • $10,000 (20% × $100,000 × 50% PD).

The recapture of ITC is $10,000.

3.7.2 Conversion to commercial use

In the case of a commercial asset, the fact that the SR&ED work is complete on a particular date does not necessarily mean that the asset is being converted to commercial use on that date. The commercial 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. For more information on the conversion to commercial use, please refer to the SR&ED while Developing an Asset Policy.

Legislative Reference Income Tax Act
Subsection 13(27) Interpretation-Available for use

3.7.3 Non-arm's length transfers

The rules with respect to non-arm’s length transfers are not applicable to the transfer of SUE to a non-arm's length person. However, recapture will not occur for SUE that is transferred to a non-arm's length person unless the usage of the equipment for SR&ED becomes incidental. That is, there will only be recapture in respect of SUE when the property is sold to an arm's length person or has been  ASA  converted to commercial use.

Legislative Reference Income Tax Act
Subsection 127(33) Certain non-arm's length transfers

4.0 Prescribed depreciable property

4.1 Definition

The depreciable property of a claimant that is prescribed for the purposes of the definition "first term shared-use-equipment" is:

  • a building of the claimant;
  • a leasehold interest of the claimant in a building;
  • a property or part of a property of the claimant if, at the time it was acquired by the claimant, the claimant or a person related to the claimant intended that the part would be used in the prosecution of SR&ED during the assembly, construction, or commissioning of a facility, plant or line for commercial manufacturing, commercial processing or other commercial purposes (other than SR&ED), and intended:
    • that it would be used during its operating time in its expected useful life primarily for purposes other than SR&ED; or
    • that its value would be consumed primarily in activities other than SR&ED.

Property that is prescribed depreciable property (PDP) is not first term shared-use-equipment (SUE) (see section 3.1) and, therefore, not second term SUE (see section 3.2), and does not qualify for an investment tax credit (ITC) even if the use test (see section 3.5) for SUE is met.

Buildings are discussed in the SR&ED Capital Expenditures Policy. Lease expenditures are discussed in the SR&ED Lease Expenditures Policy.

Legislative Reference Income Tax Regulations
Subsection 2900(11) Prescribed depreciable property

4.2 Prescribed depreciable property and intended use

It should be noted that a property is not a PDP if, at the time of its acquisition, it was not intended to be used for SR&ED in the context of the assembly, construction or commissioning of a facility, plant or line for commercial manufacturing, commercial processing or other commercial purposes (other than SR&ED).

The determination of whether a particular property is a PDP is made at the time the property is acquired. To make this determination, the intended use of the property in the year in which the expenditure was made, as well as over its expected useful life, must be considered.

Subsequent use of the property may provide evidence of the claimant's intention at the time the expenditure was made. Although the subsequent use of a property may differ from the claimant's intention at the time the expenditure was made, if the claimant can support that, at the time it was acquired, the property was intended to be used primarily for SR&ED work over its expected useful life or that its value would be consumed primarily in SR&ED activities, the property does not become a PDP.

Equipment used in pilot plants will not be considered PDP. Pilot plants are discussed in the SR&ED while Developing an Asset Policy.

Legislative References Income Tax Regulations
Paragraph 2900(11)(c) Prescribed depreciable property, assembly, construction or commissioning of a facility, plant or line for commercial manufacturing
Paragraph 2900(11)(d) Prescribed depreciable property, primarily for purposes other than SR&ED, or value consumed in activities primarily other than SR&ED

4.3 Examples – Prescribed depreciable property

4.3.1 Intended for SR&ED during assembly with usage primarily other than SR&ED during operating time

Facts

The SR&ED work consists of the development of new manufacturing and processing (M&P). A new production line was installed as part of the SR&ED project, including modifications to M&P equipment, which is incorporated in the new production line. More than 75% of the claimant's total production is carried out on this new production line. The percentage of use of the M&P equipment for SR&ED during the "first period" is 70%.

Question: Does the M&P equipment qualify as first term SUE?

A property or part of a property that meets both of the following conditions will be a PDP and therefore will not qualify as SUE:

  1. the claimant intended at the time that the equipment was acquired that it would be used in the prosecution of SR&ED during the assembly, construction or commissioning of a facility, plant or line for commercial manufacturing, commercial processing or other commercial purposes (other than SR&ED); and
  2. the claimant intended at the time that the equipment was acquired that it would be used during its operating time in its expected useful life primarily for purposes other than SR&ED, or that its value would be consumed primarily in activities other than SR&ED.

In this case, the project involves the development of a new process and the M&P equipment claimed as SUE is incorporated into a new production line. The M&P equipment was intended to be used in the prosecution of SR&ED during the assembly, construction or commissioning of a facility, plant or line for commercial manufacturing, commercial processing or other commercial purposes.

The intent of the first point above has, therefore, been met. The other point is to determine the claimant's intention concerning the use of the property during its expected useful life.

The facts indicate that substantially all of the production is carried out on this new line. Therefore it seems that the claimant's intention at the time it acquired the property was that the property would be used primarily during its expected useful life for activities other than SR&ED. The onus is on the claimant to demonstrate that the intention was to use the property primarily for SR&ED during its operating time in its expected useful life.

Conclusion

In this example, the property is a PDP. Therefore, the claimant would not be able to claim the property as SUE and, therefore, it is not eligible for ITC.

Legislative References Income Tax Regulations
Paragraph 2900(11)(c) Prescribed depreciable property, assembly, construction or commissioning of a facility, plant or line for commercial manufacturing
Paragraph 2900(11)(d) Prescribed depreciable property, primarily for purposes other than SR&ED, or value consumed in activities primarily other than SR&ED

4.3.2 Property intended to be used primarily for SR&ED

Facts

The claimant acquires a new machine and intends to use it primarily for SR&ED and the rest of the time in M&P. The machine is not an SR&ED capital expenditure.

It is used primarily for SR&ED purposes in the first period and it was not used or intended to be used in the assembly, construction or commissioning of a facility, plant or line for commercial manufacturing, commercial processing or other commercial purposes.

Question: Can this property qualify as SUE?

To qualify as first term SUE (see section 3.1), the property must:

Since the property was not used (or intended to be used) for SR&ED purposes during the assembly, construction or commissioning of a facility, plant or line for commercial manufacturing, commercial processing or other commercial purposes, the property is not a PDP.

Conclusion

Since the property was used primarily for SR&ED purposes during the first period, the property qualifies as SUE. It is the claimant's responsibility to provide documentation that the property was primarily used in SR&ED.

Note
There will be recapture of ITC for SUE when the property is sold or has been all or substantially all (ASA) converted to commercial use.

4.3.3 SR&ED intended during assembly and primarily during operating time with a subsequent change in actual use during operating time.

Facts

A claimant acquires a piece of equipment to be used in the prosecution of SR&ED during the construction of an assembly line for commercial production purposes, and it is to be used primarily in other SR&ED activities once the assembly line is completed. Due to unforeseen circumstances, the equipment cannot be used primarily for SR&ED purposes during its operating time throughout its expected useful life. The percentage of use of the equipment for SR&ED during the first period is 70% of its operating time.

Question: Does the equipment become a PDP?

The determination of whether a particular property is a PDP is made at the time the property is acquired. To make this determination, the intended use of the property over its expected useful life must be considered. Although the subsequent use of a property may differ from the claimant's intention at the time the expenditure was made, if the claimant can support that, at the time it was acquired, the property was intended to be used primarily for SR&ED activities over its expected useful life, the property does not become a PDP. Assuming that the original intent can be justified, the claimant is not prevented from earning the ITC for SUE, provided all other conditions of first-term SUE are met.

Conclusion

Thus, the property is not a PDP. It could qualify as SUE to the extent that it meets all the other criteria listed in section 4.3.2. To pass the use test, the property needs to be used during its operating time primarily in the prosecution of SR&ED in the first period. Based on the facts provided, the property meets the use test because its actual operating time for SR&ED during the first period exceeds 50%.

4.3.4 Property intended to be used primarily for activities other than SR&ED with subsequent actual SR&ED

Facts

A claimant acquires a new machine to replace an existing one that is part of a line for commercial manufacturing. The machine is performing one of five steps of a continuous manufacturing process. When the new machine is installed into the line and the initial work is started, unexpected technical difficulties arise and, as a result, the new machine (property) is used primarily for the prosecution of SR&ED during the first and second periods in its attempts to overcome the technical difficulties.

Question: Is the machine a PDP?

At the time the property was acquired, the claimant did not intend that the property be used in the prosecution of SR&ED in the context of the assembly, construction or commissioning of a facility, plant or line for commercial manufacturing, commercial processing or other commercial purposes. The machine was acquired to replace an existing machine that is used for commercial production. It should also be noted that the property is not a facility within the meaning of subsection 2900(11) of the Regulations. Finally, the Regulations refer to part of a property, not part of a facility.

Conclusion

Thus, the property is not a PDP. It could qualify as SUE if it meets all the other criteria listed in section 4.3.2.

Legislative References Income Tax Regulations
Paragraph 2900(11)(c) Prescribed depreciable property, assembly, construction or commissioning of a facility, plant or line for commercial manufacturing
Paragraph 2900(11)(d) Prescribed depreciable property, primarily for purposes other than SR&ED, or value consumed in activities primarily other than SR&ED

4.3.5 SR&ED intended during assembly with primarily usage other than SR&ED during operating time

Facts

A company planned to build a new full-scale commercial fluidized bed recovery boiler for the continuous chemical and energy recovery of pulp and paper kraft black liquor in a fully commercial and pre-existing pulp and paper mill operation. The cost of construction for the company would be $20 million. The company decided to bypass an expensive and time-consuming pilot scale recovery boiler in favour of full-scale plant trials.

As a result, the planned scale-up factor between the original bench-scale "proof-of-concept" equipment and the full-scale boiler exceeded 1,100, and significant technological uncertainties remained prior to the commissioning of the new boiler.

Since the design of the new full-scale recovery boiler was based upon the results of much smaller bench-scale data, company staff fully expected that extensive SR&ED via mill trials would be required during the commissioning phase and through the first full year of operation. Prior to the commissioning phase, there were numerous technological uncertainties that were associated with both the end products and the process operation and reliability.

Operations data indicated that SR&ED was carried out for 55% of the operational time of the boiler for the first period, and that the time decreased to 30% in the second period.

Question: Can the fluidized bed recovery boiler be claimed as SUE?

The company intended that SR&ED would be carried out on this boiler during its assembly, construction, and commissioning. In addition, the company's intent was to use this boiler primarily for commercial work after the SR&ED was complete. According to the Regulations, the equipment is a PDP.

Conclusion

Therefore, even though the equipment's use exceeded 50% for the first period, no ITC can be claimed. The PDP exclusion applies as per the Regulations.

Legislative Reference Income Tax Regulations
Subsection 2900(11) Prescribed depreciable property

Appendix A – References

A.1 Legislative references

List of provisions
Income Tax Act Description
Subsection 13(7.1) Deemed capital cost of certain property
Subsection 13(7.4) Deemed capital costs
Subsection 13(27) Interpretation – Available for use
Section 21 Borrowed money
Subsection 127(9) Definition of "qualified expenditure", paragraph (c)
Subsection 127(9) Definition of "qualified expenditure", paragraph (h)
Subsection 127(9) Definition of "first term shared-use-equipment"
Subsection 127(9) Definition of "second term shared-use-equipment"
Paragraph 127(11.5)(b) Adjustments to qualified expenditures [Repealed effective February 1, 2017]
Subsection 127(11.6) Non-arm's length costs [Not applicable effective February 1, 2017]
Subsection 127(18) Reduction of qualified expenditures
Subsection 127(26) Unpaid amounts
Subsection 127(27) Recapture of investment tax credit
Paragraph 127(27)(d) Recapture of investment tax credit — commercial use or disposition
Subsection 127(33) Certain non-arm's length transfers
List of regulations
Income Tax Regulations Description
Subsection 2900(11) Prescribed depreciable property
Paragraph 2900(11)(c) Prescribed depreciable property, assembly, construction or commissioning of a facility, point or line for commercial manufacturing
Paragraph 2900(11)(d) Prescribed depreciable property, primarily for purposes other than SR&ED, or value consumed in activities primarily other than SR&ED
Subparagraph 2902(b)(iii) Prescribed expenditures

Appendix B – Revisions

B.1 Explanation of changes

The following are the explanation of changes to the SR&ED Shared-Use-Equipment Policy as part of the revision of December 18, 2014.

Section 1.0 has been revised to delete the first sentence of the previous version of this policy which mentioned that this policy document was a consolidation of the CRA publications.

Section 2.0 has been revised to reflect the legislative changes resulting from the 2012 federal  budget measures with respect to SR&ED capital expenditures.

Section 3.0 has been revised to reflect and illustrate the legislative changes resulting from the 2012 federal budget measures with respect to SR&ED capital expenditures.

Appendix A.2 "CRA publications" has been deleted.

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

Report a problem or mistake on this page
Please select all that apply:

Thank you for your help!

You will not receive a reply. For enquiries, contact us.

Date modified: