Investment Tax Credits for Canadian Businesses
Canadian tax credits reduce the income tax businesses pay
Investment Tax Credits (ITCs) reduce the amount of Part I tax that a corporation has to pay or the amount of tax an individual has to pay (depending on whether one's business is set up as a corporation or as a sole proprietorship or partnership).
An Investment Tax Credit allows a corporation or an individual to apply a specified percentage to the cost of acquiring certain property or on certain expenditures.
Claiming Investment Tax Credits
If you are claiming Investment Tax Credits as an individual, complete Form T2038 (IND): Investment Tax Credit (Individuals) and then claim the appropriate amount on Line 412 of your T1 Income Tax Form.
If your corporation is claiming Investment Tax Credits, use Form T2SCH31: Investment Tax Credit – Corporations and then claim the appropriate amount on Line 652 of the T2 Corporation Income Tax Form.
However, when you are calculating these Canadian Tax Credits, be aware that before you apply the specified percentage, you need "to reduce the capital cost of the property or expenditure by any government or non-government assistance you received or will receive for that property or the expenditure" (Canada Revenue Agency).
This includes any related GST/HST Input Tax Credits or rebates!
The Apprenticeship Job Creation Tax Credit
The Apprenticeship Tax Credit is an attempt by the Canadian federal government to create long-term jobs by encouraging Canadian employers to hire apprentices, as explained on page 65 of the T4012 T2 Corporation – Income Tax Guide:
“A corporation can earn an ITC equal to 10% of the eligible salaries and wages paid to eligible apprentices employed in the business in the tax year to a maximum credit of $2,000, per year, per apprentice.”
Individual taxpayers can also claim the Apprenticeship Tax Credit.
An eligible apprentice is an apprentice who is working in a prescribed trade (a trade currently listed as a Red Seal Trade) in the first two years of his or her apprenticeship contract.
The great thing about the Apprentice Tax Credit is that any unused portion of this tax credit can be carried back three years or carried forward 20 years, so you can choose when to use it for your best tax advantage.
The Cost of Qualified Property Tax Credit
A corporation or individual business owner can earn Investment Tax Credits by doing designated activities on or with their qualified property in Newfoundland and Labrador, Nova Scotia, Prince Edward Island, New Brunswick, the Gaspé Peninsula and prescribed offshore regions.
Designated activities include:
- Manufacturing or processing goods for sale or lease;
- Prospecting, exploring, extracting and developing minerals;
- Exploring, drilling, operating an oil or gas well and extracting oil or natural gas;
- Processing ore, iron ore, or tar sands to the prime metal stage only;
- Farming or fishing; and
- Canadian field processing.
Qualified property includes the “new prescribed” buildings, machinery or equipment a corporation acquires during the year to use in designated activities.
Particular rules apply to corporations that lease qualified properties. Generally, such property has to be directly related to the corporation’s principal business and leased “in the ordinary course of carrying on business in Canada”.
Research and Development Investment Tax Credit and Refund
The federal and provincial governments have various tax credit/refund programs in place for Canadian- controlled private corporations engaged in qualifying research and development. The Scientific Research and Experimental Development (SR&ED) Tax Credit Program is a great example.
Investment Tax Credit for Child Care Spaces
Canadian employers who are not in the child care services business can claim Child Care Tax Credits for creating new child care spaces.
These new child care spaces must be in new or existing licensed child care facilities and can be for the children of employees or for other children.
The Child Care Tax Credit is equal to the lesser of $10,000 or 25% of the eligible expenditure per child care space created.
These eligible expenditures may include the cost of depreciable property and/or specified start-up costs; they may not include ongoing expenses of the child care facility such as supplies, wages or utility costs.
Some of the depreciable property that is considered an eligible expense is
- The building where the care facility is located;
- Furniture and appliances;
- Playground structures and equipment.
Specified start-up costs that are eligible for this Investment Tax Credit include expenses such as building permits, architect’s fees, and regulatory inspections.
Pre-Production Mining Expenditures
As defined in subsection 127 (9) of the Income Tax Act and Regulations of Canada.
Provincial Investment Tax Credits
Individual provinces and territories also offer various tax credits. These are listed and explained in the Provincial and Territorial Tax section of T2 Corporation - Income Tax Guide (Chapter 8).