What is the Small Business Air Quality Improvement Tax Credit?

What is the Small Business Air Quality Improvement Tax Credit?


In 2021, the federal Government of Canada introduced a Small Business Air Quality Improvement Tax Credit. This is a temporary credit designed to help businesses upgrade their air systems in response to the COVID-19 pandemic.

To receive a credit for air system related expenses, they must be incurred between September 1, 2021 and December 31, 2022. If the expenses were incurred under an agreement made before September 1, 2021, they do not qualify. To be eligible for this credit you must be one of three entities:

- Individual (sole-proprietorship)
- Partnership
- Canadian-controlled private corporation (CCPC) with taxable capital employed in Canada of less than $15 million in the prior tax year

The expenses must also be incurred for equipment at a qualifying location that is used primarily in the course of business, including rental activities. Personal residences are not a qualifying location, even if this is where you operate your business from. Trusts do not qualify.

Eligible expenditures for this credit include those that are attributed to a new or retrofitted HVAC system that has been purchased, installed, converted or upgraded. The purchase of a device that is designed to filter air using HEPA filters also qualifies. Expenses are only eligible if they are reasonable and are intended to increase the intake of outdoor air or improve interior air quality. Expenses that don’t qualify include:

- Routine or recurring repairs
- Financing
- Non-arm’s length party
- Salary or wages to your employee for helping with installation, etc.

If you received any government assistance to pay for an expense, you will have to reduce the expense by the amount of assistance received. The refundable tax credit is 25% of expenses up to $10,000 in expenses at a single location and up to $50,000 across all locations. Entities will claim expenses incurred in 2021, for the first taxation year that ends on or after January 1, 2022. Expenses incurred in 2022 will be claimed for the taxation year that they were incurred in. Keep in mind, however, that the tax credit has not been enacted into law. Until it is, the CRA will not process claims for this credit on tax returns. As such, your claim may need to be made after your return is filed, depending on your business's tax deadline.