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Air Quality Improvement Federal Tax Credit
To encourage small businesses to invest in better ventilation and air filtration to improve indoor air quality, the Government of Canada proposes a refundable Small Businesses Air Quality Improvement Tax Credit of 25 per cent on eligible air quality improvement expenses incurred by small businesses to make it more affordable for them to invest in safer and healthier ventilation and air filtration. Businesses would receive the credit on eligible expenses incurred between September 1, 2021, and December 31, 2022, related to the purchase or upgrade of mechanical heating, ventilation and air conditioning (HVAC) systems and the purchase of standalone devices (air purifiers / air cleaners) designed to filter air using High Efficiency Particulate Air (HEPA) filters, up to a maximum of $10,000 per location and $50,000 in total.
Tax Credit Rate and Limits
The tax credit would be refundable and have a credit rate of 25 per cent that would apply to an eligible entity’s qualifying expenditures. An eligible entity would be limited to a maximum of $10,000 in qualifying expenditures per qualifying location and a maximum of $50,000 across all qualifying locations. The limits on qualifying expenditures would need to be shared among affiliated businesses. Consistent with the general treatment of business tax credits, credit amounts would be included in the taxable income of the business in the taxation year the credit is claimed.
Eligible Entities
Eligible entities for a taxation year would include unincorporated sole proprietors and Canadian-controlled private corporations with taxable capital employed in Canada of less than $15 million in the taxation year immediately preceding the taxation year in which the qualifying expenditure is incurred. For this purpose, the taxable capital of associated corporations is also counted.
The credit would also be available where qualified expenses are incurred by a partnership. The credit could only be claimed by members of the partnership that are qualifying corporations or individuals (other than trusts), and would be based on their proportionate interest in the partnership. Special rules would apply to calculate a partner’s credit entitlement where a partnership interest is held indirectly through one or more partnerships.
Qualifying Expenditures
Qualifying expenditures would include expenses directly attributable to the purchase, installation, upgrade, or conversion of mechanical heating, ventilation and air conditioning (HVAC) systems, as well as the purchase of devices (air purifiers, air cleaners) designed to filter air using high efficiency particulate air (HEPA) filters, the primary purpose of which is to increase outdoor air intake or to improve air cleaning or air filtration.
Expenses attributable to an HVAC system would only be considered qualifying expenditures if the system is:
- designed to filter air at a rate in excess of a minimum efficiency reporting value (MERV) of 8; or
- designed to filter air at a rate equal to MERV 8 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 8.
Qualifying expenditures for an eligible entity would exclude an expense:
- made or incurred under the terms of an agreement entered into before September 1, 2021;
- related to recurring or routine repair and maintenance;
- for financing costs in respect of a qualifying expenditure;
- that is paid to a party with which the eligible entity does not deal at arm’s length;
- that is salary or wages paid to an employee of the eligible entity; or
- that can reasonably be expected to be paid or returned to the eligible entity, or to a person or partnership either not dealing at arm’s length with the eligible entity or at the direction of the eligible entity.
An expense that may be considered a qualifying expenditure would be reduced by the amount of any government assistance received by the eligible entity in respect of that expense.
Qualifying Locations
Qualifying locations would include properties used by an eligible entity primarily in the course of its ordinary commercial activities in Canada (including rental activities), excluding self-contained domestic establishments (i.e., a place of residence in which a person generally sleeps or eats).
Timing
The tax credit would be available in respect of qualifying expenditures incurred between September 1, 2021 and December 31, 2022.
The taxation year for which an eligible entity would claim the tax credit would depend on when the qualifying expenditure was incurred.
- Qualifying expenditures incurred before January 1, 2022 would be claimed by an eligible entity for its first taxation year that ends on or after January 1, 2022.
- Qualifying expenditures incurred on or after January 1, 2022 would be claimed by an eligible entity for the taxation year in which the expenditure was incurred.