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, Ontario, Prince Edward Island, and Quebec for certain corporations operating in specific industries (e.g. in Ontario and Quebec, commercialisation of intellectual property [IP]; in Prince Edward Island, aviation or marine technology) 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.
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 in expenditures. This enhanced credit is subject to certain capital limitations and, for taxation years ending before 19 March 2019, to certain income limitations. For taxation years ending after 18 March 2019, draft legislation no longer required taxable income to be used as a factor when determining a CCPC's annual expenditure limit for purposes of the CCPC qualifying for the 35% enhanced SR&ED ITC rate.
SR&ED ITCs extend to certain salary and wages (limited to 10% of salary and wages directly attributable to SR&ED carried on in Canada) incurred in respect of SR&ED carried on outside Canada.
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.
British Columbia natural gas tax credit
For taxation years that begin after 31 December 2019, 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.