Small Businesses Air Quality Improvement Tax Credit

Triggered by COVID-19 pandemic and in anticipation of future pandemics, the Government of Canada has introduced a temporary 25% “Refundable” Tax Credit” to encourage small businesses to invest in improved and efficient indoor air filtration and ventilation systems. Refundable tax credits are credits which directly reduce the tax owing and if they are higher than tax owing, the balance is refunded to the individual or an entity

The tax credit rate is 25% applicable to an entity’s qualifying expenditures limited to maximum $10,000 per qualifying location and a maximum of $50,000 across all qualifying locations which incurred between September 1, 2021 and December 31, 2022. Limits across all locations also includes affiliated businesses (subsidiaries). The taxation year in which an individual or an entity would claim the credit is the year in which qualifying expenditures were made. As with any other business tax credits, the credit amount for Air Quality Improvement Tax Credit would be included in the taxable income of the entity.

Eligibility is limited to Individuals (sole proprietors) and entities with taxable capital employed amount of less than $15,000,000 in the tax year preceding the taxation year in which the qualifying expenditures were made. For example if you made qualifying expenditures in 2022, your 2021 taxable capital employed amount should have been less than $15,000,000. If the taxable capital employed amount was $15,000,000 or more, the individual or the entity would not qualify for the credit. For Canadian-controlled private corporations filing T2s, the taxable capital employed can be determined using Schedule 33.

Expenditure which qualify for this temporary credit are direct expenditures to purchase, install, upgrade, conversion of mechanical heating, ventilation and air conditioning (HVAC), and high-efficiency particulate air filters (HEPA).

Qualifying HVAC systems must meet the following criteria:

designed to filter air at a rate in excess of a minimum efficiency reporting value (MERV) of 8

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. (source: budget.gc.ca)

Disallowed expenditures are:

expenditures made before September 1, 2021

routine repairs and maintenance

financing charges

payments made to individuals or entities who do not deal at arm’s length with the individual or entity claiming the credit

wages paid to an employee of the individual or entity claiming the credit

Locations qualifying for the credit are any properties in Canada which are used by the individual or an entity during the ordinary course of its commercial operations, but excludes properties where the individual claiming the credit generally sleeps or eat at. This provision effectively eliminates all residences which have a basement rental