Scientific Research and Experimental Development (SR&ED)

Corporations engaged in scientific research and experimental development (SR&ED) may need to report recapture in their income tax return when disposing of property used in SR&ED or converting it to commercial use. The recapture rules depend on whether the property was disposed of or transferred to a non-arm's length party.

1. Disposition of Property with SR&ED ITC:

• When disposing of property on which SR&ED Investment Tax Credits (ITC) were earned, the recapture is the lesser of:
  • ITC earned for the property.
  • The amount calculated by applying the ITC percentage to the proceeds of disposition (if disposed to an arm's length person) or the fair market value (in other cases).

1. Transfer to Non-Arm's Length Party:

• If SR&ED was conducted, and qualified expenditures were transferred to a non-arm's length party under an agreement in subsection 127(13), the recapture is the lesser of:
  • ITC earned by the transferee on the qualified expenditures for the property.
  • Amount determined by the formula: A × B − C
    • "A" is the percentage used by the transferee in determining its ITC.
    • "B" is the proceeds of disposition (if disposed to an arm's length person) or fair market value.
    • "C" is the amount added to tax payable under subsection 127(27) for the property, considering the situation where only a portion of the cost was transferred.

1. Partial Transfer of Expenditures:

• If a portion of the expenditures was transferred, and a portion was claimed for ITC purposes, both calculations apply.

1. Recapture Period for ITCs:

• The recapture period for SR&ED ITCs is 20 years.