On July 18, 2005 Ralph Goodale released a series of revised legislative proposals to make technical amendments the Income Tax Act. A summary of the proposals likely to affect SR&ED tax credit claims appears below.

Better response to cases in which a corporation is associated with more, fewer or different corporations in one taxation year than in the past.

A corporation’s entitlement to the small business deduction is determined by reference to among other things, the “business limit” of the corporation. Subsection 125(5.1) can act to reduce the business limit where a corporation had a liability for Part 1.3 (large corporation) tax in its preceding year. Where the business limit is reduced, the access to refundable investment tax credits is also reduced. This happens because the business limit forms part of the calculation of the expenditure limit for a corporation. The expenditure limit determines how much of a company’s expenditures are eligible for enhanced (35%) investment tax credits on R&D expenditures.

Where a corporation is associated with one or more corporations in the particular year, the current provisions take into account the liability for large corporation tax (LCT) for all corporations associated with the filing corporation in the particular year, for their last taxation year ended in the preceding calendar year.

These rules have been relatively easy to apply when the corporations that were associated with the particular corporation were the same in the current and preceding taxation year. Where they were not the same, it was more difficult to apply the rules. In order to eliminate this difficulty Finance has proposed that subsection 125(5.1) will be amended to provide that:

1. If the filing corporation is not associated with any corporation in the current year and was not associated with any corporation in the preceding year, the calculation will take into account the filing corporation’s LCT for the preceding year.
2. If the filing corporation is not associated with any corporation in the current year but was so associated in the preceding year, the calculation will take into account the filing corporation’s LCT for the current year.
3. If the filing corporation is associated with one or more corporations in the current year, the calculation will take into account the filing corporation and all the associated corporations LCT for their last taxation year ended in the preceding year.

If this proposal is passed into law, it applies to taxation years that begin after December 20, 2002.

Recapture of Investment Tax Credit

Subsection 127(27) of the Act provides for recapture of investment tax credits where property which earned ITCs is sold or converted to commercial use. There are some difficulties in applying these provisions to shared use equipment and to property which did not earn ITCs due to the application of the 180 day rule. (The 180 day rule denies ITCs where property acquired in a year is not paid for within 180 days of the end of a taxation year.)

Amendments are proposed to insure that:

1. A company only recaptures the ITC on shared use equipment to the extent the ITC was earned.
2. A company does not recapture the ITC on property where the ITC could not be claimed due to the application of the 180 day rule.

If this proposal is passed into law, it applies to taxation years that begin after December 20, 2002.