Income Tax Act s. 127.1: No Refund for Excluded Corporations

Section 127.1 is the mechanism that turns SR&ED investment tax credits into cash refunds: subsection (1) deems the “refundable investment tax credit” to have been paid on account of tax. The definition of that term repeatedly carves out an “excluded corporation”, meaning a corporation controlled by, or related to, tax-exempt or government entities. Such corporations can earn credits but cannot have them refunded. The excerpt below reproduces the refund mechanism and the passages where the carve-out appears.

Text of the Provision

127.1(1) Where a taxpayer (other than a person exempt from tax under section 149) files

(a) with the taxpayer’s return of income (other than a return of income filed under subsection 70(2) or 104(23), paragraph 128(2)(f) or subsection 150(4)) for a taxation year, or

(b) with a prescribed form amending a return referred to in paragraph 127.1(1)(a)

a prescribed form containing prescribed information, the taxpayer is deemed to have paid on the taxpayer’s balance-due day for the year an amount on account of the taxpayer’s tax payable under this Part for the year equal to the lesser of

(c) the taxpayer’s refundable investment tax credit for the year, and

(d) the amount designated by the taxpayer in the prescribed form.

127.1(2) In this section,

“refundable investment tax credit” of a taxpayer for a taxation year means, in the case of a taxpayer who is

(a) a qualifying corporation for the year,

(b) an individual other than a trust, or

(c) a trust each beneficiary of which is a person referred to in paragraph (a) or (b),

an amount equal to 40% of the amount, if any, by which

… [paragraphs (d) and (e), setting out the credit computation, are omitted here but appear in the PDF] …

plus where the taxpayer is a qualifying corporation (other than an excluded corporation) for the year, the amount, if any, by which

… [paragraphs (f) and (g) are omitted here but appear in the PDF] …

127.1(2.01) In the case of a taxpayer that is a Canadian-controlled private corporation other than a qualifying corporation or an excluded corporation, the refundable investment tax credit of the taxpayer for a taxation year is 40% of the amount, if any, by which … [computation omitted here but appears in the PDF]

Source: Income Tax Act (Canada), section 127.1 (subsection (1), and excerpts of subsections (2) and (2.01); emphasis added to the excluded-corporation carve-outs), as consolidated May 14, 2010. Archived excerpt; subsequent amendments (including later changes to refundable-credit rates) are not reflected. For the current text see the Income Tax Act at Justice Laws. See also the companion page on the definition of “excluded corporation”.