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Notes, continued

(4) Qualifying CCPCs are those with taxable income (on an associated group basis) for the

preceding year that does not exceed its “qualifying income limit”. A corporation’s “qualifying

income limit” is determined by the formula $500,000 ×[($40,000,000 - A)/ $40,000,000].

The variable “A” is nil if the corporation’s prior year taxable capital employed in Canada is

$10 million or less. Otherwise, the variable “A” is equal to the portion of the corporation’s

prior year taxable capital employed in Canada that exceeds $10 million (not to exceed $40

million).

The expenditure limit (see note (3)) is phased out for CCPCs with taxable capital employed

in Canada of between $10 and $50 million in the prior year (on an associated group basis).

The expenditure limit is reduced by $0.75 for every $10 by which taxable capital exceeds

$10 million. The ability to claim the 35% ITC rate and related 100% ITC refund on current

expenditures is eliminated once prior year taxable capital exceeds $50 million or once

taxable income exceeds $800,000.

(5) The ITC rate on expenditures in excess of the expenditure limit, for both CCPCs and non-

CCPCs (including individuals and unincorporated businesses) will be reduced to 15% (from

20%) for taxation years ending after 2013. For taxation years straddling January 1, 2014, the

ITC rate will be calculated proportionately, based on the number of days in each calendar

year that are within the taxation year.

(6) The ITC rate for non-CCPCs (including individuals and unincorporated businesses) will

decrease to 15% (from 20%) for taxation years ending after 2013. For taxation years

straddling January 1, 2014, the ITC rate will be calculated proportionately, based on the

number of days in each calendar year that are within the taxation year.

Federal R&D expenditure pool

Eligible Canadian R&D expenditures, both current and capital, are aggregated in a pool each

year and may be deducted in whole or in part. Expenditures for R&D capital property (including

the right to use such property) made after 2013 from the federal R&D expenditures pool are

excluded. These expenditures can still be claimed as regular business expenditures (presuming

they qualify as such).

Any allowable amounts not deducted from the R&D pool in the current year may be carried

forward indefinitely.

Foreign current expenditures may also be deducted as current R&D expenditures in the year

they are incurred. Such expenditures generally do not give rise to federal ITCs. However, R&D

labour expenditures incurred outside Canada may result in federal ITCs, as discussed below.

Government assistance (which includes provincial ITCs), non-government assistance and

contract payments reduce the amount of eligible expenditures in the year. Eligible expenditures

are also reduced when R&D assets, for which the taxpayer received an ITC in any of the 20

previous years (for taxation years after 1997), are converted to commercial use or sold during

the year. In such instances the related recaptured ITCs will increase eligible expenditures.

Eligible expenditures incurred in the year, as well as project technical narratives and related

project information, must be identified on prescribed forms (Forms T661 and T661 Part 2) and

filed with the CRA within 12 months of the entity’s filing due date for its regular income tax

return. The related prescribed form (T2 Schedule 31), must also be filed within this time frame,
to ensure a complete R&D filing.

Federal Research and Development Tax Incentives

Current as of May 3, 2013