Ontario Research and Development Tax Credit Increase (2018)

May 31, 2018 SRED

Update December 2018: In their fall statement, the Progressive Conservative government has announced it is putting the proposed increase, which had been introduced by the former Liberal government earlier this year, on hold while it reviews the effectiveness of both the Ontario Research and Development Tax Credit and Ontario Innovation Tax Credit. According to an Annex of the Fall Statement 2018, “Ontario will review tax support provided for research and development activity and, as such, the government will not be implementing these changes. The government will ensure that support provided for research and development is effective and efficient.”¹

In the 2018 Ontario Provincial budget, the Ontario Research and Development Tax Credit rate was increased by 2%.

The Ontario Research and Development Tax Credit (ORDTC) supports qualifying corporations to “claim a non-refundable tax credit on eligible scientific research and experimental development expenditures performed in Ontario to reduce their Ontario corporate income tax payable.” ² The ORDTC is claimed by corporations filing Schedule 508 with their T2 Corporation Income Tax return.³ Prior to March 28, 2018, the ORDTC offered corporations a 3.5%, non-refundable tax credit on “eligible R&D expenditures” ⁴ that corporations could claim if they met the qualifying criteria.

The Ontario Research and Development Tax Credit Increase

In the 2018 Ontario Provincial Budget, the Provincial Ontario Government announced that the ORDTC would be increased by 2%, to 5.5%, for all eligible expenditures incurred after March 28, 2018.⁵ This “enhanced rate” would be available to corporations who meet the qualifying criteria on eligible expenditures over $1 million in a single taxation year, or $1 million prorated for shorter taxation years.

This means that eligible expenditures under $1 million, incurred prior to March 28, 2018, would be calculated at 3.5%. Therefore between January 1, 2018 and March 28, 2018, ORDTCs would be calculated as follows: “3.5 per cent multiplied by the ratio of the number of days in the year that are [before March 28, 2018] to the total number of days in the year.” ⁶ If the corporation has eligible expenditures over $1 million, they could then calculate their ORDTC for 2018 in the following manner:

( 3.5% [ORDTC rate prior to March 28, 2018] × 87 [number of days in year prior to March 28, 2018] / 365 [total number of days in year] ) + ( 5.5% [ORDTC rate after March 28, 2018] × 278 [number of days in year after March 28, 2018] / 365 )

= 5.0233% ⁷

The introduction of an enhanced rate is a welcome measure to award corporations conducting R&D in Ontario and has been described as “a win for the ITAC community” by the Information Technology Association of Canada (ITAC).⁸ However, as the enhanced rate only applies to eligible expenditures incurred after March 28, 2018 many companies may believe the enhanced rate, though welcomed, is poorly timed.

What is the Eligibility Criteria to Claim the Ontario Research and Development Tax Credit?

According to the Ontario Ministry of Finance website, corporations who meet the following criteria can claim the ORDTC:

[…] If the corporation:

has a permanent establishment in Ontario

carries on scientific research and experimental development in Ontario during the year

is eligible to claim the federal investment tax credit under section 127 of the federal Income Tax Act (Canada)is not exempt from corporation income tax; and,

has filed a scientific research and experimental development expenditures claim on federal form T661 for the tax year.⁹

“Eligible expenditures” according to the website are expenditures that:

are incurred for SR&ED conducted in Ontario;
qualify as expenditures under section 127 of the federal Income Tax Act (Canada);¹⁰ and,
can be attributed to work conducted at a “permanent establishment” in Ontario.¹¹

Corporations who wish to claim the ORDTC can only do so if they also file a claim for the federal SR&ED tax credit and file all of the necessary forms and schedules with their T2 corporate tax return. The SR&ED tax credit does not reduce a corporation’s eligible expenditures; however, “government assistance, non-government assistance and contract payments” will reduce a corporation’s eligible expenditures, including if they have also filed a claim for the Ontario Innovation Tax Credit.¹²

Conclusion

The introduction of an enhanced rate is welcome, although Ontario’s R&D credits for businesses have “fallen in recent years and still [lag] competitors,” ¹³ and the late-March timing of the policy implementation could cause some corporations to undertake extra financial planning. In order to mitigate any issues corporations should maintain contemporaneous documentation so they can easily calculate their expenditures from before and after March 28, 2018.