Income Tax Act s. 127(27): Recapture of SR&ED Investment Tax Credits

Subsection 127(27) claws back SR&ED investment tax credits when property whose cost was a qualified expenditure is later sold or converted to commercial use; a prototype or custom equipment that ends up in production is the typical case. The recapture, added to tax payable in the year of conversion or disposition, is the lesser of the ITC originally earned on the property and the credit-rate percentage of the proceeds or fair market value. Claimants with materials incorporated into saleable product face this rule routinely.

Text of the Provision

127(27) Where

(a) a taxpayer acquired a particular property from a person or partnership in a taxation year of the taxpayer or in any of the 10 preceding taxation years,

(b) the cost of the particular property was a qualified expenditure to the taxpayer,

(c) the cost of the particular property is included in an amount, a percentage of which can reasonably be considered to be included in computing the taxpayer’s investment tax credit at the end of the taxation year, and

(d) in the year and after February 23, 1998, the taxpayer converts to commercial use, or disposes of without having previously converted to commercial use, the particular property or another property that incorporates the particular property,

there shall be added to the taxpayer’s tax otherwise payable under this Part for the year the lesser of the amount that can reasonably be considered to be included in computing the taxpayer’s investment tax credit in respect of the particular property and the amount that is the percentage (described in paragraph (c)) of

(e) if the particular property or the other property is disposed of to a person who deals at arm’s length with the taxpayer, the proceeds of disposition of that property, and

(f) in any other case, the fair market value of the particular property or the other property at the time of the conversion or disposition.

Source: Income Tax Act (Canada), subsection 127(27), as consolidated May 14, 2010. Archived excerpt; subsequent amendments are not reflected. The PDF also reproduces the general definition of “property” from subsection 248(1). For the current text see the Income Tax Act at Justice Laws.