Government Grant or Rebate: Taxable Income or Lower Costs?

Is a government grant, subsidy or rebate taxable to my business?

Generally yes. The Income Tax Act counts money a business receives from a government, municipality or other public authority as a grant, subsidy, forgivable loan or similar assistance as income, unless another rule has already placed it elsewhere (paragraph 12(1)(x)). Federal, provincial and municipal money all count. The rule reaches money received while earning business or property income; a rebate on purely personal spending is a different question.

Where it lands depends on what it paid for. Assistance that paid for a cost lowers that cost. Assistance that paid for nothing in particular is other income.

Sources: CRA guide T4002, chapter 3, subsection 13(7.1) and paragraph 53(2)(k).

A case stops being simple when one grant pays for several things, arrives in instalments across years, carries repayment or forgiveness terms, or arrives after a return was filed. Before recording anything, find the agreement or approval letter. It says what the money is for, when it is paid and whether any of it can come back. If a filed return treated the grant differently, an earlier year may need correcting.

Do I record a grant as income or against the expense it paid for?

Against the expense or asset it paid for whenever the grant can be matched to one, and as other income only when it cannot. CRA tells self-employed filers to subtract a rebate, grant or other assistance from the expense it applies to and enter the net figure on the proper line (T4002, chapter 3). Assistance that cannot be applied to any particular expense or asset goes in Part 3C of the T2125 as other income, line 8230 (T4002, chapter 2).

For expenses, the Act's own route differs slightly. The amount is income under paragraph 12(1)(x) unless the business elects under subsection 12(2.2) to treat the expense as reduced by it. The Act names no form for the election; CRA's guidance on pandemic-era loans describes it as a signed letter sent with the return (CRA). In a single year, the two give the same net income. They can differ when the grant and the cost fall in different years, covered below.

In the books, record the receipt in its own account first, with the date, the payer and the agreement it falls under. At year-end, move each part against the cost it paid for, or to other income.

Three traps:

• Everything as income: for an expense grant, net income comes out the same, but a sole proprietor's T2125 should show the net expense. For an asset grant it is wrong: the grant is taxed at once and CCA is still claimed on the full cost.
• Counted twice: a grant netted against an expense and also reported as income.
• No trail: a net figure with no record of the gross cost and the grant behind it.

What if the grant helped buy equipment or a vehicle?

A grant toward depreciable property lowers that property's capital cost, so CCA is claimed on the net cost. The Act reduces capital cost by assistance the business has received or is entitled to receive for the property, with no election needed (subsection 13(7.1)). CRA's guide says to subtract the grant before entering the capital cost (T4002, chapter 4). A corporation does the same in column 3 of Schedule 8 (T2 guide, chapter 3).

Timing matters for assets:

• Grant received, or owed to you, in the year of purchase: the cost is entered net.
• Grant received or owed to you only in a later year: it lowers the class balance in that year. If that pushes the balance below zero, the shortfall is recapture of CCA, which is income (T4002, chapter 4). A sole proprietor adds it in Part 3C on line 8230 of the T2125; a corporation enters it in column 19 of Schedule 8.
• Grant paid after the property was sold: it is subtracted from the balance of the class the property was in.

The class balance is the running total of unclaimed cost for that type of asset. Recapture means CCA claimed earlier is taken back into income. A grant that arrives in a different year from the purchase is worth taking to a professional before the return is filed.

The automatic reduction covers government assistance only. An amount from another payer (a supplier or landlord, say) can be income under paragraph 12(1)(x), and for that case subsection 13(7.4) lets the business elect to reduce the capital cost of property bought in the year the amount arrives, in any of the three years before, or in the year after. The election is due by the filing-due date for the year the amount arrives, or for the following year if the property is bought then. For land and other non-depreciable property the equivalent election is subsection 53(2.1). CRA's guide describes such an incentive as either added to income or subtracted from capital cost, with any excess over the class balance added to income (CRA).

A vehicle follows the same rule. A zero-emission vehicle also has its own class and cost-limit rules, covered in writing off an electric vehicle. Provincial or territorial investment tax credits for equipment also reduce its cost on Schedule 8 (T2 guide, chapter 3).

Classes, rates and the first-year rules belong to buying equipment before year-end.

Where does a grant go on the T2125, and where on a corporation's return?

A sole proprietor puts it net on the expense's line of the T2125, as a reduced capital cost in the CCA schedule, or in Part 3C on line 8230 as other income. A corporation reports through its financial statements and, for equipment, column 3 of Schedule 8. A partnership applies the same routes in its own books.

CRA's instruction to subtract a grant from the expense is written for self-employed filers. A partnership or corporation works under the same Act, where the amount is income under paragraph 12(1)(x) unless the subsection 12(2.2) election moves it against an expense, or the automatic reductions in subsection 13(7.1) (depreciable property) and paragraph 53(2)(k) (land and other capital property) move it against a cost. Its books should show which route each grant took.

For the income rule in paragraph 12(1)(x), the Act treats a grant a partner receives for the partnership's activities or costs as received by the partnership (subsection 12(2.1)). It belongs in the partnership's books, not the partner's personal books.

The T2 guide names no separate line for a grant. When grants are booked as revenue, the General Index of Financial Information (GIFI) item for them is 8242, subsidies and grants (CRA GIFI). The tax figure can differ from the statements, and Schedule 1 reconciles the two (T2 guide). The corporate year-end entries are in the year-end close checklist.

Which year does a grant belong to: approved, received or spent?

Usually the year the money is received, not the year it was approved or spent. For equipment, it is the year the business receives it or becomes entitled to receive it. An election can move an expense grant to the year of the cost. Whether an approval letter creates that entitlement depends on the conditions in the agreement.

The election applies to an expense made or incurred before the end of the year after the year the grant arrives. A grant received in one year for a cost incurred the next can therefore reduce that next-year cost instead of adding to the first year's income. If a grant arrives after the year of the cost it paid for, the Act directs whatever reassessment of tax, interest and penalties is needed to give effect to an election, so an earlier year can change and interest can follow.

Spending alone does not set the year a grant is taxed, but with the election the year of the expense matters. Money received before the work is done from a customer, not a government, follows the rules in customer prepayments and unearned revenue.

Is a forgivable loan treated like a grant?

Yes. The Act lists forgivable loans beside grants and subsidies as assistance, so a forgivable loan follows the same routes. The forgivable part counts in the year the loan is received, not the year it is forgiven, and if the business later repays it, the repayment is deductible in the year it is repaid. CRA states this for the forgivable part of pandemic-era business loans (CRA). A loan on real repayment terms can be different: debt, not assistance.

The Act expressly keeps an excluded loan out of the assistance rules. It needs all of these (subsection 12(11)):

• It is in writing, and it is not a forgivable loan.
• The lender is a government, municipality or other public authority in Canada, or a Canadian-resident person or partnership that would not have lent but for government money.
• Real arrangements were made, when the loan was made, to repay it within a reasonable time.
• The money is used to earn business or property income.

The agreement's terms decide which one a business has, not the label on the letter. Booking an advance as a loan when it is really assistance can understate income. When the terms are mixed, have the agreement read before recording it. For program funding such as IRAP, see IRAP and other government funding.

What if I have to repay some or all of the grant?

A repayment the business is legally obliged to make is adjusted in the year it is repaid. A repayment it is not obliged to make gets none of these adjustments.

• Assistance that was reported as income: the amount repaid is deductible in the year of repayment (paragraph 20(1)(hh)).
• Assistance that reduced an expense by election: the amount repaid is deductible in the year of repayment, to the extent the expense would have been deductible without the grant (same paragraph).
• Assistance that reduced a depreciable property's capital cost: the amount repaid is added back to the capital cost (paragraph 13(7.1)(d)). If the property was already sold, it is added to the balance of its class instead (T4002, chapter 4).

Read the agreement's repayment clause before the money is spent: it names what triggers repayment. Keep a note of each repayment with its date and the clause behind it.

Are GST/HST rebates and input tax credits assistance too?

Yes. The Act deems a GST/HST input tax credit or rebate you claim to be government assistance (subsection 248(16)), and CRA applies the same netting rule (T4002, chapter 3).

• Expenses: reduce the expense by the credit when the GST/HST was paid or became payable, whichever is earlier, for a credit claimed on the return for that period. The Act times a credit claimed in a later period differently, so have that case read.
• Depreciable property: subtract the credit from the capital cost, which affects CCA. A passenger vehicle with a lower business-use share has a different timing rule in T4002, chapter 4.
• No expense or asset to apply it to: report the credit as other income on line 8230.
• Quick Method: CRA's T4002 enters the GST/HST a Quick Method registrant keeps in sales on line 8000 and the credit claimed on the GST/HST return on line 8230 (T4002, chapter 2). Whether the Act itself reaches the kept amount is not settled; see the Quick Method in the books.

A GST/HST rebate counts when it is received or credited. Any other rebate follows the general rule: subtract it from the expense or asset it relates to. Filing the return, claiming credits and the Quick Method are covered in filing GST/HST and input tax credits; setting up the accounts is in recording GST/HST in your books.

Do provincial grants and rebates (BC, Ontario) follow the same rule?

Yes, for the federal return. For a government payer the Act does not ask which government, so a federal, British Columbia, Ontario or municipal grant follows the same rule (paragraph 12(1)(x)). Money from a non-government payer can also be income under it, if paid while earning income, to gain a benefit, or only because of government money.

What differs is the program's own agreement: what the money may be spent on, when it is paid and what must be repaid. Each agreement sets those terms, so read it. A business that also files a Quebec return should confirm Quebec's treatment separately, because this page covers the federal return only.

What papers support the entry?

The agreement, and the proof of what the money paid for. CRA says to support income entries with original documents, such as invoices, receipts and contracts, and to keep records for at least six years from the end of the last tax year they relate to (CRA business records).

For a grant, gather:

• The agreement and any amendments, and the approval letter.
• The claims, reports or applications sent to the payer.
• Payment notices showing the date and amount received.
• Invoices and proof of payment for the costs the grant covered, and for any equipment.
• Repayment terms, and any notice of repayment or forgiveness.
• A note of how each dollar was recorded: lower expense, lower asset cost or other income.

Example

These examples are illustrative. All amounts are Canadian dollars.

An Ontario cafe buys an oven

A cafe in Ontario buys an oven for C$25,000 and receives a C$10,000 government grant toward it in the same year. The oven's capital cost becomes C$15,000, and CCA starts from that figure. The cafe reports no grant income and claims no CCA on the C$10,000.

If the grant had been paid the next year instead, and the cafe had no right to it before then, the first year's return would show C$25,000. The grant would lower the class balance by C$10,000 in the second year, and any balance below zero would be recapture, which is income.

A BC sole proprietor takes a course

A sole proprietor in British Columbia pays C$3,000 for a course and receives a C$3,000 grant for it in the same year. The training expense nets to C$0 on the T2125: no income and no deduction. If the grant had been C$2,000, the expense would show C$1,000.

An operating grant tied to no single cost

A business receives a C$5,000 operating grant that pays for no single cost. There is nothing to subtract it from, so it goes on line 8230 as other income in the year received. A corporation shows it as subsidies and grants in its income statement.

Different for you?

If the grant paid for equipment or wages across several years, has repayment or forgiveness terms, or arrived in a year you have already filed, the entries, the year and any fix to a filed return all depend on the agreement. Read it alongside the books before you record anything; see bookkeeping help.

• A filed return left out a grant or netted it wrongly: see bookkeeping help. A corporation's correction route is in correcting last year's financial statements; a sole proprietor's expense lines are in self-employed expense lines.
• One project with several grants, or instalments over years: see bookkeeping help.
• IRAP, startup funding or an SR&ED claim: see IRAP and other government funding.
• Your books are behind: see catching up on overdue books and bookkeeping help.