Investment tax credit

A credit works differently from a deduction

A deduction reduces the income you are taxed on, so its value depends on your tax rate. A credit comes off the tax calculated, so its value depends on the credit rate. If a corporation earns a 15% credit on $100,000 of qualifying spending, the credit is $15,000. A $100,000 deduction would instead save $100,000 multiplied by the tax rate, so at an assumed 12% rate it would save $12,000. These figures are illustrative.

Which credits exist and how they are earned

A corporation earns an ITC by applying a specified percentage to the cost of certain property or to certain expenditures, after first reducing the amount by government and non-government assistance. A GST/HST input tax credit or rebate received counts as government assistance for this purpose. Property must also be available for use before the credit can be earned.

The CRA’s corporate return guide lists SR&ED expenditures, apprenticeship expenditures and qualified property in Atlantic Canada, among others. The apprenticeship credit is 10% of eligible wages, up to $2,000 per apprentice per year. Credits for pre-production mining and child care spaces have expired, with only unused carry-forwards remaining, and clean economy credits use their own calculation schedules. SR&ED is covered in its own entry, the SR&ED tax credit.

Refunds, carrybacks and recapture

Corporations calculate ITCs on Schedule 31, filed with the T2 return. A credit first reduces tax payable, and a refundable credit can then be refunded. For SR&ED, an unused non-refundable credit can generally be carried back 3 tax years or forward 20. Selling or converting property after claiming a credit can trigger recapture, which adds back some or all of the credit to tax payable.

Do not confuse it with the GST/HST input tax credit

Both are called ITCs, but the GST/HST input tax credit recovers sales tax paid on business purchases and is claimed on a GST/HST return. An income tax ITC is earned on qualifying investments or spending and is claimed on the T2. They are separate calculations with separate records.

What to discuss with your accountant

Ask which credits your planned spending or hiring might earn before you commit to it, because timing and documentation matter. Confirm whether any funding you receive reduces the credit, whether the credit is refundable for your corporation, and how it affects tax instalments and your cash flow forecast.