Ontario Research and Development Tax Credit Increase (2018)

Published by Dilara Boyd on

Queen's Park, Toronto, Ontario by Benson Kua. Used under CC BY-SA 2.0. Retrieved from https://commons.wikimedia.org/w/index.php?curid=10803582.
Queen's Park, Toronto, Ontario by Benson Kua. Used under CC BY-SA 2.0. Retrieved from https://commons.wikimedia.org/w/index.php?curid=10803582.

Queen’s Park, Toronto by Benson Kua. Used under CC BY-SA 2.0. Retrieved from https://commons.wikimedia.org/w/index.php?curid=10803582.

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.” 1 The ORDTC is claimed by corporations filing Schedule 508 with their T2 Corporation Income Tax return.2 Prior to March 28, 2018, the ORDTC offered corporations a 3.5%, non-refundable tax credit on “eligible R&D expenditures” 3 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, 2018.4 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.” 5 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% 6

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).7 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.8

“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);9 and,
  • can be attributed to work conducted at a “permanent establishment” in Ontario.10

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.11

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,” 12 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.

 

Have any questions, successes to share, or horror stories about claiming the ORDTC?
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Show 12 footnotes

  1. Ontario Minister of Finance. (March 29, 2018.) Ontario Research and Development Tax Credit. Retrieved April 30, 2018, from: https://www.fin.gov.on.ca/en/credit/ordtc/.
  2. Ontario Minister of Finance. (March 29, 2018.) Ontario Research and Development Tax Credit. Claiming the tax credit. Retrieved April 30, 2018, from: https://www.fin.gov.on.ca/en/credit/ordtc/.
  3. Ontario Minister of Finance. (March 29, 2018.) Ontario Research and Development Tax Credit. Claiming the tax credit. Retrieved April 30, 2018, from: https://www.fin.gov.on.ca/en/credit/ordtc/.
  4. Ontario Minister of Finance. (March 28, 2018.) Budget 2018. Budget Papers. Chapter V: Taxation (Section A. Chapter V, Section A: Tax Measures). Retrieved April 30, 2018, from: http://budget.ontario.ca/2018/chapter-5a.html?_ga=2.94473566.350905561.1525102094-693944459.1525102094#s-1.
  5. Ontario Minister of Finance. (March 29, 2018.) Ontario Research and Development Tax Credit. Example 2. Retrieved April 30, 2018, from: https://www.fin.gov.on.ca/en/credit/ordtc/.
  6. Ontario Minister of Finance. (March 29, 2018.) Ontario Research and Development Tax Credit. Example 2. Retrieved April 30, 2018, from: https://www.fin.gov.on.ca/en/credit/ordtc/.
  7. Messier, D. (April 26, 2018.) Spurring innovation in the Ontario economy through tax credits: Ontario Liberals proposes to invest in R&D. ITAC Industry Insider Newsletter. Retrieved April 30, 2018, from:http://itac.ca/wp-content/uploads/2018/04/April-26-Newsletter-Ontario-Budget-Update-Final.pdf. (PDF Document.)
  8. Ontario Minister of Finance. (March 29, 2018.) Ontario Research and Development Tax Credit. Do I qualify? Retrieved April 30, 2018, from: https://www.fin.gov.on.ca/en/credit/ordtc/.
  9. Government of Canada. (April 10, 2018.) Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)). Section 127. Retrieved April 30, 2018, from: http://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-127.html.
  10. Ontario Minister of Finance. (March 29, 2018.) Ontario Research and Development Tax Credit. Eligible expenditures. Retrieved April 30, 2018, from: https://www.fin.gov.on.ca/en/credit/ordtc/.
  11. Ontario Minister of Finance. (March 29, 2018.) Ontario Research and Development Tax Credit. Eligible expenditures. Retrieved April 30, 2018, from: https://www.fin.gov.on.ca/en/credit/ordtc/.
  12. Zochodne, G. (March 28, 2018.) Ontario budget proposes grants and tax credits, but no corporate tax cut to keep up with Trump. Financial Post Online. Retrieved April 30, 2018, from: http://business.financialpost.com/news/economy/ontario-budget-proposes-grants-and-tax-credits-but-no-corporate-tax-cut-to-keep-up-with-trump.

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