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Published: January 05, 2022
Updated: January 05, 2022
As part of the Economic and Fiscal Update 2021 on December 14, the federal government proposed a new tax credit for owner-managed businesses called the Small Businesses Air Quality Improvement Tax Credit (SBAQITC). This temporary, refundable credit is designed to help offset some of the cost of investing in better ventilation and air filtration systems to improve indoor air quality.
Once enacted, the credit will be available to eligible entities for qualifying expenditures made between September 1, 2021 and December 31, 2022. The following comments are based on documents released by the government as part of the Economic and Fiscal Update. The credit has not yet been passed into law.
Quick facts about the Small Businesses Air Quality Improvement Tax Credit
As we examine the newly proposed tax credit, these basic points are worth outlining:
- The credit rate is 25% of qualifying expenditures to a maximum of $10,000 in qualifying expenditures, or a $2,500 tax credit, per eligible location.
- Each eligible entity would be limited to a maximum of $50,000 of eligible expenditures across all locations.
- Credit amounts will be included in taxable income for the year in which the credit is claimed. That said, we expect the draft legislation will confirm that the credit claimed can be netted against the cost of capital assets that are included in eligible expenditures incurred.
The announcement states that the limits on qualifying expenditures would need to be shared among affiliated businesses, but this may instead mean associated businesses.
Qualifying expenditures relate to the purchase and installation of mechanical heating, ventilation, and air conditioning (HVAC) systems. They also include expenditures to upgrade or convert existing systems and the purchase of devices designed to filter air using high efficiency particulate air (HEPA) filters. The primary purpose of the HEPA filter should be to increase outdoor air intake, or to improve air cleaning or air filtration.
To count as qualifying expenditures, they must be paid to an arm's length person. Employee wages to install or fabricate the equipment will not qualify.
Eligible entities include unincorporated sole proprietors and Canadian-controlled private corporations (CCPCs) with taxable capital employed in Canada of less than $15 million in the immediately preceding taxation year. For example, for a taxpayer with a December year-end, this cap on taxable capital applies for the taxation year ended December 31, 2020 for expenditures made in 2021, and to the taxation year ended December 31, 2022 for expenditures made in 2022. For these purposes, the taxable capital of a group of associated corporations is the relevant measure of taxable capital employed in Canada for corporations in an associated group.
Certain partners will be able to claim the credit for qualified expenses are incurred by a partnership. The credit will only be able to be claimed by members of the partnership that are qualifying corporations or individuals (other than trusts). Such a credit would be based on each partner's proportionate interest in the partnership.
Expenses attributable to an HVAC system will only be considered qualifying expenditures if the system is:
- designed to filter air at a rate surpassing a Minimum Efficiency Reporting Value (MERV) of eight; or
- designed to filter air at a rate equal to MERV eight and to achieve an outdoor air supply rate in excess of what is required for the space by relevant building codes. For a system that is upgraded or converted prior to the improvement, the system must have been designed to filter air at a rate equal to MERV eight.
The proposed credit will have certain restrictions such as:
- The expenses cannot have been made or incurred under the terms of an agreement entered into before September 1, 2021.
- Expenses for routine repairs and maintenance will not qualify, nor will financing costs related to a qualifying expenditure.
- An expense that may be considered a qualifying expenditure will be reduced by the amount of any government assistance received by the eligible entity in respect of that expense.
Qualifying locations will be properties used by a claiming taxpayer primarily during its ordinary commercial activities in Canada (including rental activities), provided such a location is not a home or an apartment.
The proposed tax credit is to be available with respect to qualifying expenditures incurred between September 1, 2021 and December 31, 2022. However, for expenditures incurred before January 1, 2022, the tax credit claim could not be until the first taxation year of the claimant that ends on or after January 1, 2022. This would mean the 2022 tax return for a calendar-year taxpayer.
Though, for qualifying expenditures incurred on or after January 1, 2022, they could be claimed for the taxation year in which the expenditure was incurred.
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The information in this publication is current as of January 5, 2022
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.