Running a business requires investment in cash as well as kind. If you are running a retail store, you need to invest in inventory; if you have a software firm, you invest in research and development. And with any business, you need to invest your time. In Canada, re-investing profit into your business not only allows you to grow your investment but also helps you qualify for tax benefits. The Canada Revenue Agency (CRA) gives tax credits or incentives specifically meant to boost business investment. For instance, Investment Tax Credits (ITCs) are amounts that a business can deduct from its taxable income, in order to reduce the annual tax obligation. These credits are over and above depreciation allowances.
Types of Investment Tax Credits
There are various types of Investment Tax Credits aimed at the country’s different business and employment sectors. Some of these credits include:
- Scientific Research and Experimental Development Investment Tax Credit
- Apprenticeship Job Creation Tax Credit
- Atlantic Investment Tax Credit
- Investment Tax Credit for Childcare Spaces
Below, we’ll provide an overview of the above-listed Investment tax credits, including eligibility requirements and information on how they can benefit qualifying businesses.
Scientific Research and Experimental Development Investment Tax Credit
Businesses that create or develop new products, services, software, and processes or enhance the existing ones may be eligible to claim Scientific Research and Experimental Development (SR&ED) ITC. The CRA determines the amount of a company’s qualifying ITC based on a percentage of the salary and wages of employees working on developing or improving the products and services, as well as the material and overhead costs directly toward the project.
Under the SR&ED Tax Incentive Program, a business receives tax credits only for research and development-related expenses and not capital expenditure, such as the purchase of a building or machinery. Activities eligible for SR&ED ITC include basic research, applied research, and experimental development, among others. Activities not eligible for the tax credit include commercial production or use of a new or improved product, market research, data collection, sales promotion, and the exploration or production of natural gas, petroleum and minerals.
For example, let’s say that Hank operates a software business. He has hired Sophie and pays her $10,000 to develop a new version of one of the business’s existing products. Hank can claim a SR&ED ITC equal to at least 15% but up to 35% (for a CCPC) on the amount that he will pay Sophie for her work. If Hank also hires Sanjay and pays him the same amount to create a marketing scheme for the product resulting from Sophie’s work, Sanjay’s salary would not qualify. This credit is a refundable tax credit, which means that the CRA will refund you the amount, if any, left after adjusting your tax bill.
Apprenticeship Job Creation Tax Credit
The Apprenticeship Job Creation Tax Credit is available to businesses that employ people who are working in a prescribed trade such as a broker, carpenter, cook, hairstylist, construction worker, or painter. Essentially, it applies to industries in which an apprentice can train and qualify for a license or certification. If a business employs apprentices, it can receive an ITC equal to 10% of the apprentice’s salary, up to a maximum of $2,000 per year. The credit only applies to an apprentice’s salary during the first two years of their apprenticeship program.
Let us say that Tom runs a residential construction business. His work requires him to hire construction workers and painters regularly. In 2020, he hired 15 apprentice construction workers and 10 apprentice painters. He paid $40,000 to each construction worker and $45,000 to each painter. He would then be able to claim a total Apprenticeship Job Creation Tax Credit of $50,000 ($2,000 x 25) each year for their first two years of apprenticeship..
Atlantic Investment Tax Credit
If a business carries out a certain set of activities involving qualified property in the Atlantic region, it may qualify for an Atlantic Investment Tax Credit equal to 10% of the property’s value. These activities include fishing, farming, logging, harvesting peat, manufacturing and processing, storing grain, prescribed new energy generation and conservation property, mining, and extraction, among others. “Qualified property” refers to new assets acquired to carry out the aforementioned activities in the Atlantic region, such as a new building, where the business activity takes place, or equipment such as new machinery to carry out such activities. The Atlantic region of Canada includes the Gaspé Peninsula region in Quebec, New Brunswick, Prince Edward Island, Nova Scotia, and Newfoundland.
For example, let’s say that Michelle runs a fishing business in Nova Scotia. She invested a total of $100,000 to build a factory and for the equipment required to run the business. Michelle would then qualify to claim an Atlantic Investment Tax Credit of $10,000 (10% of $100,000).
Investment Tax Credit for Childcare Spaces
The CRA allows a business to claim an ITC if it invests in the establishment of a new childcare space. It should be noted that this credit is applicable for businesses that are not in the childcare services business, but rather those that invest in a childcare space for their employees or a combination of employee’s children and for members of the community. Qualifying businesses can receive 25% of the expenditure of creating a childcare space up to a maximum of $10,000. Eligible expenses include start-up costs like the architect’s fees and building permits, as well as the cost of depreciable property like furniture, facility building, and playground structures, among others. Notably, it excludes everyday expenses such as salaries paid to employees of the facility, utility costs, and the cost of supplies.
For example, Sarah runs a spa and salon and has invested $55,000 in the creation of a childcare facility for her employees. Of the $55,000, she used $40,000 to obtain permits, decorate the facility, and buy furniture and build play structures. She set aside the remaining $15,000 for ongoing operational costs. Sarah can claim an ITC of $10,000 (25% of $40,000).
How Does a Business Claim Investment Tax Credits?
You need to complete Form T2038 if you want to claim ITC as an individual and form T2SCH31 to claim the credit on behalf of a corporation. The CRA states that 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.” Further, you can carry forward these tax credits for two decades and carry them back three years.
Investment forms an essential part of any business, and in turn, can benefit the communities in which the business operates. Every business owner thinks twice before investing in their operations as it involves a lot of risks. This is where investment tax credits come into play as they help recoup some of the initial cost while providing a service or additional funding to the surrounding community.
At Sloan Partners LLP, our financial professionals will help you make the most of your investment tax credits while ensuring you remain in compliance with all provincial and federal requirements. Contact us online or by telephone at 416-665-7735.