Canada

Foreign tax credits

Taxpayers that have foreign-source income and are resident in Canada at any time in the year are eligible for foreign tax credit relief. Separate foreign tax credit calculations are prescribed for business and non-business income on a country-by-country basis. All provinces and territories also allow a foreign tax credit, but only in respect of foreign non-business income taxes.

Income or profits taxes paid to foreign governments generally are eligible for credit against a taxpayer's Canadian income taxes payable. The credit in respect of taxes paid on foreign income is restricted to the amount of Canadian taxes otherwise payable on this income. Generally, foreign tax credits are available only to reduce Canadian tax on foreign-source income that is subject to tax in the foreign country.

Foreign business income or loss is computed for each foreign country in which a branch is located. Excess foreign business income tax credits may be carried back three years or forward ten. The foreign non-business income tax credit applies to all foreign taxes other than those classified as business income tax. No carryover is allowed with respect to the non-business income foreign tax credit. Unused foreign non-business income tax may be deducted in computing income.

Regional incentives

In specified regions of Canada (i.e. Atlantic provinces, the Gaspé region, and Atlantic offshore region), a 10% federal ITC is available for various forms of capital investment (generally, new buildings, machinery and equipment, and/or clean energy generation equipment to be used primarily in manufacturing or processing, logging, farming, or fishing). The ITC is fully claimed against a taxpayer's federal tax liability in a given year. Unused ITCs reduce federal taxes payable for the previous three years and the next 20, or may be 40% refundable to CCPCs.

The provinces and territories may also offer incentives to encourage corporations to locate in a specific region. Income tax holidays are available in Newfoundland and Labrador, Nova Scotia, Prince Edward Island, and Quebec for certain corporations operating in specific industries (e.g. commercialisation of intellectual property in Quebec and aviation or marine technology in Prince Edward Island) or meeting certain conditions (e.g. job creation for Newfoundland and Labrador).

Industry incentives

Canada offers many tax incentives at the federal, provincial, and territorial levels, for various industries and activities, including those related to:

• research and development (see below)
• film, media, computer animation and special effects, interactive digital media, and multi-media productions
• manufacturing and processing
• liquefied natural gas development, and
• environmental sustainability (e.g. see Federal environmental incentives below).

Scientific research and experimental development (SR&ED) credit

In addition to the SR&ED deduction, a taxpayer can benefit from a federal ITC, which is generally a 15% non-refundable credit on SR&ED expenditures* that can be applied against federal taxes payable. Alternatively, this tax credit can be carried back 3 years or forward 20, to be applied against federal taxes owing.

A qualifying CCPC can qualify for a 35% refundable tax credit annually on its first CAD 3 million (proposed to increase to CAD 4.5 million for taxation years beginning after 15 December 2024) in expenditures. This enhanced credit is subject to certain capital limitations (or if the CCPC elects, certain gross revenue limitations as proposed for eligible Canadian public corporations (see below)).

Effective for taxation years beginning after 15 December 2024, the 2024 federal Fall Economic Statement proposes to expand eligibility for the enhanced 35% refundable tax credit to eligible Canadian public corporations, subject to certain gross revenue limitations.

*Since 2014, only current expenditures have qualified for both the SR&ED deduction against income and the tax credit components of the SR&ED program, but the 2024 Federal Fall Economic Statement proposes to restore the eligibility of capital expenditures for property acquired after 15 December 2024.

In addition to the federal SR&ED incentives, all provinces (except Prince Edward Island), as well as the Yukon, provide tax incentives to taxpayers that carry on research and development activities in the province or territory.

British Columbia natural gas tax credit

A non-refundable natural gas tax credit under the British Columbia Income Tax Act is available to qualifying corporations that develop natural gas and have an establishment in British Columbia. The credit can reduce the effective provincial CIT rate to a minimum of 9% (from 12%). Any unused credit can be carried forward indefinitely.

Federal environmental incentives

Refundable ITCs, are available and applications are now being accepted, for:

• Carbon capture, utilisation, and storage (CCUS), equal to: (i) between 37.5% and 60% after 2021 to 2030 and (ii) between 18.75% and 30% (i.e. reduced by 50%) after 2030 to 2040 of the capital cost of eligible carbon dioxide capture, storage, and transportation equipment that will be geologically stored or sequestered in concrete in Canada; starting 28 November 2023, claimants must meet certain labour conditions to claim the full ITC rate; if not met, the ITC rate is reduced by 10 percentage points.

• The development of clean technologies (e.g. wind, solar, geothermal), equal to 30% of the capital cost of eligible new equipment that is acquired and becomes available for use after 27 March 2023 (the rate is reduced to 15% in 2034, and the credit is eliminated after 2034); starting 28 November 2023, claimants must meet certain labour conditions to claim the full ITC rate; if not met, the ITC rate is reduced by 10 percentage points.
• Clean hydrogen and clean ammonia production (via eligible pathways, e.g. electrolysis and steam methane reforming; eligible pathways proposed to be expanded to include the pyrolysis of natural gas and other eligible hydrocarbons, for property that is acquired and becomes available for use in an eligible project after 15 December 2024), equal to 15%, 25%, or 40% (depending on assessed carbon intensity of hydrogen produced) of eligible investments made and becomes available for use after 27 March 2023 (the rates are reduced by 50% in 2034 and the credit is eliminated after 2034); starting 28 November 2023, claimants must meet certain labour conditions to claim the full ITC rate; if not met, the ITC rate is reduced by 10 percentage points, and
• Clean technology manufacturing, equal to 30% of investments in certain depreciable property that is used for qualified zero-emission technology manufacturing activities and critical minerals extraction, processing, and recycling, that are made and become available for use after 2023 (the rates are gradually phased out starting in 2032 and the credit is eliminated after 2034).

Draft legislative proposals introduce refundable ITCs for:

• Clean electricity generation, equal to 15% of eligible investments made after 15 April 2024 and eliminated after 2034 for projects that did not begin construction before 28 March 2023; certain labour and other conditions will be attached to this credit, which must be met for claimants to be eligible for the maximum rate, and
• Electric vehicle (EV) supply chain investment, equal to 10% of eligible investments in buildings used in Canada in EV assembly, EV battery production, and cathode active material production (the EV supply chain segments) that are acquired and become available for use after 2023 (the rates are reduced to 5% in 2033 and 2034, and the credit is eliminated after 2034); to qualify for this credit, the claimant must also claim (directly or indirectly) the ITC for clean technology manufacturing (CTM, see above) and invest at least CAD 100 million (by itself, or part of a related group) in property eligible for the CTM ITC in each of the three qualifying EV supply chain segments.

Corporations can claim only one of the CCUS, clean technology, clean hydrogen, clean technology manufacturing, or clean electricity generation tax credits per property if a particular property is eligible for more than one ITC (exceptions apply) but could claim more than one ITC on the relevant portions of the same project (e.g. solar powered hydrogen products).