What capital expenses can be claimed?
Capital asset costs can be claimed for SR&ED credit provided they do not fall under the exclusions list. Capital assets that cannot be claimed are:
- land and other non-depreciable property (per ITA 37(1)(b))
- buildings and intangible rights (such as patents) (per ITA 37(1)(b))
- used equipment (per ITA Regulation 2902(b)(iii))
Capital assets that can be claimed fall into one of three categories depending on the SR&ED use of the asset over its estimated economic life. Investment Tax Credits (ITCs) are awarded based on the intended use of the equipment; if this changes (i.e. a prototype is eventually used for commercial production) a portion of the ITC earned may need to be re-paid:
- >90% SR&ED (ASA - "all or substantially all"): ITCs will be earned on the capital cost of the equipment in the year of acquisition or full credits on lease payment when paid. See the CRA's Capital Property Intended to be Used ASA for SR&ED for more information
- >50% but <90% SR&ED ("Primary" shared use): earn either a deferred credit (over 3 years) on 50% of the lease payments or capital cost of the asset or the actual percentage of lease payments allocated to SR&ED if the traditional method of overhead allocation is used. See the CRA's Shared Use Equipment for more information.
- >0% but <50% SR&ED: can earn credits on the actual percentage of lease payments allocated to SR&ED but only if traditional method of overhead allocation is used.
A good overview of this issue with more details is presented in MEUK Newsletter 2003-1.