Ontario Innovation Tax Credit Extended to Public and Foreign Controlled Corporations

Updated March 9, 2006

Ontario provides an innovation tax credit (the OITC). The credit is earned at a rate of 10% on current expenditures and 4% on capital expenditures for research and development carried out in Ontario. The credit is fully refundable, and companies can receive a refund even where they have no liability to pay Ontario corporate income tax. An Ontario tax return must be filed to claim the credit.

The rules have gone through a number of changes since their introduction. What appears below are the changes, and thier effective dates.

For Taxation Years Ending Prior to May 4, 1999

To be eligible for an OITC, for taxation years prior to May 4, 1999, the claimant had to be a small to medium-sized Canadian controlled private-corporation (CCPC). The federal taxable income of the claimant corporation and its taxable capital (for federal large corporations tax (LCT) purposes) in the preceding year could not exceed $200,000 and $10,000,000, respectively. Where a corporation exceeded these thresholds, the annual limit on qualifying expenditures was phased out on a graduated scale.

For Taxation Years Ending After May 4, 1999 and before 2003

he Ontario government made a number of changes to these rules that affected taxation years ending after May 4, 1999. Included in these changes was the extension of the availability of the OITC to all public and private companies. Prior to that date, foreign controlled and publicly controlled companies did not earn OITCs.

Prior to the change the phase out of the OITC started when a corporation’s taxable capital for federal LCT purposes exceeded $10,000,000. After the effective date the federal taxable capital for LCT purposes is no longer be a limiting factor. Corporations are eligible to claim the full OITC where they have up to $25,000,000 of taxable paid-up capital for Ontario capital tax purposes. The annual limit on qualifying expenditures is now subject to a phase-out when taxable paid-up capital is $50,000,000 or more.

These measures apply to taxation years ending after May 4, 1999 and the benefits are prorated for taxation years that straddle May 4, 1999.

Effective December 9, 2002

Effective December 9, 2002 associated non-resident corporations with no permanent establishment in Canada were required to be considered part of an associated group.

For Taxation Years Ends After December 31, 2002

Public and private corporations may claim the OITC.

In order to be eligible for the maximum OITC of $200,000 a corporation must have at least $2,000,000 of qualifying expenditures eligible for the OITC. For this purpose current expenditures are counted at 100% and capital expenditures are counted at 40%. Also, the Ontario taxable paid up capital of the corporation must be less than $25 million and federal taxable income in the preceding taxation year of the corporation must be less than $300,000. The maximum OITC is reduced to zero on a straight line basis for prior year federal taxable income levels of between $300,000 and $500,000 and prior year Ontario taxable paid up capital levels of between $25 million and $ 50 million.

Where the corporation is part of an associated group the federal taxable incomes and the Ontario taxable capital levels of all corporations in the group must be considered. Note, associated non-resident corporations with no permanent establishment in Canada must be considered in determining eligibility for the OITC. Special rules apply to credits unions and insurance companies.

For Taxation Years Ended After March 22, 2004

The federal goverment relaxed the associated rules for the purposes of determining the expenditure limit where two corporations are associated solely because they are both controlled by any two persons. Ontario adopted this same approach.

The Strategy
These changes added many foreign corporations and public companies to the list of eligible OITC claimants. All companies performing R&D in Ontario should consider the applicability of these tax credits to research projects that were underway on or after May 4, 1999.

Links

• OITC Claim Guide and Form after February 27, 1995 and before 2002 [2]
• OITC Claim Guide and Form for 2003 and subsequent taxation years [3]

Provincial Web Sites and Provincial Forms

Web Sites

BC - http://www.rev.gov.bc.ca/itb/Bulletins/cit_007.pdf [4]

SK - http://www.gov.sk.ca/finance/taxation/rtrbulletin2002.pdf [5]

MB - http://www.gov.mb.ca/iedm/invest/busfacts/redev/research5.html [6]

ON - http://www.2ontario.com/facts/fact11.asp#2 [7]

PQ - http://www.investquebec.com/en/index.aspx?page=339 [8]

NB - http://www.gov.nb.ca/nbfirst/rd/credit.htm [9]

NS - http://www.gov.ns.ca/finance/taxpolicy/taxcredits/rd.aspl [10]

NL - http://www.gov.nf.ca/fin/scientific.html [11]

YK - http://www.economicdevelopment.gov.yk.ca/general/rdtaxcredit.html [12]

Tax Credit Forms

BC - T666 [13]

SK - Schedule 403 [14]
MB - Schedule 380 [15]

ON - Ontario Innovation Tax Credit (OITC) Claim Form [16]

PQ - Deduction Respecting Scientific Research and Experimental Development Expenditures

• (form RDW-222-V [17])
• Tax Credit for Salaries and Wages (form RDW-1029.7-V [18])
• Tax Credit for University Research or Research Carried Out by a Public Research Centre or Research Consortium (form RDW-1029.8.6-V [19])
• Tax Credit for Fees or Dues Paid to a Research Consortium (form RDW-1029.8.9.03-V [20])
• Tax Credit for Pre-Competitive Research (form RDW-1029.8.10-V [21])
• Additional Tax Credit for Scientific Research and Experimental Development
• (form RDW-1029.8.16.6-V [22])

NB - Schedule 360 [23]

NS - Schedule 340 [24]

NL - Schedule 301 [25]

YK - Corporate form Schedule 442 [26]
Individual form Schedule 1232 [27]

R&D Income Tax Incentive Rates Across Canada

This article has been moved to R&D Tax Incentive Rates Across Canada [28].