The recent 2018 Ontario budget announcement includes some changes designed to make it easier to grow your business. Ontario-based businesses can benefit from increases to the provincial funds available under the Scientific Research & Experimental Development (SR&ED) tax incentive program that drastically reduces their cost of performing research and development. The March 28, 2018 Ontario government budget announcement proposes to enrich the SR&ED tax incentives for companies that are making significant investments in research and development.
Ontario offers two components in its provincial SR&ED funding: the Ontario Research and Development Tax Credit (ORDTC) and the Ontario Innovation Tax Credit (OITC). Both programs are administered by the Canada Revenue Agency (CRA). They follow the same eligibility guidelines as the Federal SR&ED program, with one exception: to become eligible at the provincial level, R&D activities must take place in Ontario and be carried out by Ontarians. The ORDTC is a 3.5% non-refundable Tax Credit. Qualifying corporations can claim it for their eligible scientific research and experimental development expenditures that are performed in Ontario. The OITC is an 8% refundable Tax Credit for small to medium sized companies on eligible R&D expenditures.
Proposed Changes to ORDTC
For businesses that qualify for the ORDTC, the proposed changes include an enhanced rate for companies that make significant annual investments in R&D, on a continuous basis. Effective March 28, 2018, businesses that qualify for the ORDTC could be eligible for an enhanced rate of 5.5% on expenditures over $1 million in a taxation year. The $1 million threshold will be prorated for short taxation years and the enhanced tax credit rate will be prorated for taxation years that straddle March 28, 2018.
The enhanced tax credit rate will only be available to businesses where eligible R&D expenditures in the current taxation year are equal to at least 90% of eligible R&D expenditures in the prior taxation year.
Proposed Changes to OITC
Effective March 28, 2018, businesses that qualify for OITC may be eligible for enhanced rates that could increase their tax credit from 8% to 12%. In order to determine the amount of the enhanced rate that a qualifying business can receive, a ratio of gross revenues to eligible R&D expenditures will be used that gives preferential rates to businesses that spend more on R&D relative to their revenue. The table below outlines the criteria for the enhanced rate.
For the purposes of this calculation, both gross revenues and R&D expenditures must be attributed to Ontario operations and aggregated among associated corporations. The rate enhancement would be prorated for taxation years straddling March 28, 2018.
This enhancement can provide significant benefits to early-stage Ontario businesses that carry out a high degree of pre-commercial research activities, a welcome change given this is typically the most challenging point in time for growth-stage businesses to obtain funding from government or private investors alike.
Christine Tzimika is a senior financial analyst at RDP with over ten years of experience in SR&ED and other tax credit services.