Investment tax credit (ITC) — SR&ED and other qualifying investments
Logging tax credit and investment tax credit
Section 127 provides investment tax credits (ITCs) for qualifying expenditures — most importantly, scientific research and experimental development (SR&ED), clean technology, and certain regional investments.
Plain-language explanation
Section 127 offers refundable and non-refundable credits against income tax for qualifying capital and current expenditures. The most important is the SR&ED credit.
SR&ED (Scientific Research and Experimental Development): - 35% refundable ITC for CCPCs on the first $3 million in qualifying SR&ED expenditures (refundable: the credit is paid even if no tax is owing) - 15% non-refundable ITC for larger corporations and expenditures above $3 million - Qualifying expenditures include: wages of employees directly engaged in R&D, contractor costs, and materials consumed in R&D
Clean technology ITC: Budget 2023 introduced new ITCs for clean technology investments: - Clean Technology ITC: 30% credit on qualifying clean tech property (solar, wind, energy storage, zero-emission vehicles, heat pumps) - Clean Electricity ITC: 15% credit for utilities on clean electricity generation
How ITCs work: The ITC reduces your tax payable (and for refundable portions, generates a refund). However, claiming an ITC reduces the tax basis of the underlying asset — you must include the ITC benefit in income in the following year.
Key form: T661 (SR&ED Expenditure Claim) filed with the T2 corporate return.
Example
BioHealth Inc. (CCPC) spends $2,000,000 on qualifying SR&ED. ITC: 35% × $2,000,000 = $700,000 — fully refundable. The credit is returned to the corporation regardless of whether it has any taxable income, making it accessible for early-stage companies burning cash.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
Clean Technology ITC (30%) and Clean Electricity ITC (15%) introduced in Budget 2023. These new refundable tax credits for clean energy investments are the largest expansion of ITC since the SR&ED program.
Before
No specific ITC for renewable energy and clean technology capital (beyond some Atlantic ITC)
After
30% Clean Tech ITC on qualifying property; 15% Clean Electricity ITC for utilities; refundable for most taxpayers
Budget 2024 introduced the Carbon Capture, Utilization, and Storage ITC (CCUS ITC) at 50% for qualifying CCUS equipment and the Clean Hydrogen ITC at 15–40% (rate depends on carbon intensity of hydrogen production).
Before
No specific CCUS or hydrogen ITC
After
CCUS ITC at up to 50%; Clean Hydrogen ITC at 15–40%
Common questions
What is SR&ED? +
Scientific Research and Experimental Development — Canada's R&D tax incentive program. Qualifying work includes basic and applied research, and experimental development aimed at resolving technological uncertainty. CRA has a technical reviewer process; software and manufacturing R&D commonly qualifies.
Is the SR&ED credit refundable? +
For CCPCs, yes — up to 35% on the first $3 million in qualifying expenditures is fully refundable (you get it back even with no tax owing). For larger corporations, the 15% credit is non-refundable (reduces tax but not paid out in cash).
Who can claim the clean technology ITC? +
Most taxable Canadian corporations and individuals investing in qualifying property (solar panels, battery storage, heat pumps, zero-emission vehicles used in business). The credit is claimed on the T2 or T1 return. Certain labour conditions must be met for the full 30% rate.
Key terms
Related sections
CPA recommendation
SR&ED claims are complex and frequently audited by CRA's SR&ED directorate. A CPA or SR&ED specialist should review and file T661.
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 127. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.