Get an investment tax credit (ITC)
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Use your ITC to reduce income tax payable or get a refund
You may earn an investment tax credit (ITC) on your qualified SR&ED expenditures for the year. The ITC can be:
- refundable (if you have excess ITCs in the year and are eligible)
- non-refundable (which may reduce your income tax payable)
Who can get an ITC
The following entities may earn an ITC on their qualified SR&ED expenditures:
- Partners in a partnership
Partnerships cannot claim an ITC
Since a partnership is not a taxpayer, it cannot claim an ITC. In general, the ITC is calculated at the partnership level and then allocated to eligible partners in the partnership (individuals, corporations, or trusts).
If you are submitting a partnership claim for SR&ED, review the SR&ED Claims for Partnerships Policy.
Claim a tax credit on Form T2SCH31 or Form T2038-IND
Claimants may calculate their SR&ED ITC using the investment tax credit form for either corporations or individuals.
Understand ITC rates
The basic ITC rate is 15% on qualified SR&ED expenditures for corporations, individuals, trusts, and partners in a partnership.
Most Canadian controlled private corporations (CCPCs), whether stand-alone or associated, may earn an ITC on qualified SR&ED expenditures up to a maximum threshold of $3 million (expenditure limit) at the enhanced rate of 35%.
Any qualified expenditures beyond the expenditure limit earn an ITC at the basic rate of 15%.
Determine your expenditure limit
The expenditure limit for most CCPCs is $3 million. However, some large CCPCs may have a reduced expenditure limit.
What is the reduced expenditure limit
The limit starts to decrease when a CCPC’s taxable capital employed in Canada for the previous tax year reaches $10 million. The limit becomes zero starting at $50 million.
Other factors can also reduce the ITC expenditure limit for CCPCs, including short tax years and having multiple tax years within one calendar year.
For detailed information on determining expenditure limits, review Section 3.1, SR&ED ITC Policy.
Expenditure limit for associated corporations
If your corporation is associated with one or more CCPCs, you must allocate the expenditure limit among the associated CCPCs.
Associated corporations must use Schedule 49 to allocate the expenditure limit:
For detailed information about associated corporations, review Schedule 9, Related and Associated Corporations.
Claimants may be able to have some or all of their SR&ED ITC refunded. If there is no tax payable, the ITC earned for the year may be refunded.
Most CCPCs can earn a refundable ITC calculated at the enhanced rate of 35% on qualified expenditures up to their expenditure limit for the tax year. Individuals may get a partial refund of their ITC earned at 15%. If a CCPC is a qualifying corporation, 40% of the ITC earned at 15% can be refunded.
What is a qualifying corporation
A qualifying corporation is a CCPC whose taxable income (or total taxable income if associated with another corporation) in the previous year was not more than their qualifying income limit for the current year.
For detailed information on qualifying corporations and their income limit, review Section 4.2, SR&ED ITC Policy.
Generally, an ITC can only be refunded in the year that the qualified expenditure occurred.
The refund rate varies depending on if the claimant is a corporation, an individual, a trust, or a partner in a partnership.
Review ITC rates and refund rates
|Claimant||ITC rates up to expenditure limit||Refund rate||ITC rates over expenditure limit||Refund rate|
|CCPCs that are qualifying corporations other than excluded corporations||35%||100%||15%||40%|
|CCPCs that are excluded corporations||35%||40%||15%||40%|
|CCPCs other than qualifying or excluded corporations||35%||100%||15%||0%|
|All other corporations not included above||15%||0%||15%||0%|
|Individuals, certain trusts and unincorporated businesses||15%||40%||15%||40%|
|Partner in a partnership||15%||40%||15%||40%|
Source: SR&ED ITC Policy, Appendix A
To learn more about refundable ITC for various entities, review Section 4.1, SR&ED ITC Policy.
Carry back or carry forward an ITC
Claimants who have an unused ITC beyond the amount needed to reduce income tax payable to zero may carry it back 3 years or carry it forward 20 years. This lets you use the credit to reduce your tax payable for other years.
A refunded ITC will reduce the credit available for carry back or forward.
To learn more about carrying back ITCs, review Section 2.3.2, SR&ED ITC Policy.
Recapture of ITC
If you sell materials transformed or convert them to commercial use, you may have an investment tax credit (ITC) recapture amount you need to report.
An ITC recapture is triggered if you previously claimed the cost of the sold or converted property as an SR&ED expenditure for ITC purposes. The recapture is intended to make sure that you only claim SR&ED tax incentives on the net costs of conducting SR&ED work.
Since it’s not always possible to determine net costs at the start of a project, the recapture reverses all or a portion of the SR&ED ITC you earned by adding an amount to your tax payable for the year in which the sale or conversion of the property takes place.
You calculate and can report the recapture amount when you complete the ITC form for either corporations (Form T2SCH31) or individuals (Form T2039-IND).
For detailed information, review Recapture of SR&ED ITC Policy.
Get support with your ITC
Review the policy for investment tax credits
Review the policy for partnerships
Estimate your ITC
Use the Self-Assessment and Learning Tool (SALT) to estimate the amount of SR&ED investment tax credit you may be able to claim.
Call us if you have any questions about the SR&ED program or calculating an ITC.
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