Ontario: Canada

Ontario offers the Ontario innovation tax credit and the Ontario research and development tax credit, administered by the CRA through T2 schedules. Both are built on the federal SR&ED claim: the work must be SR&ED under the federal definition, it must be carried out in Ontario, and the expenditure base starts from the federal qualified expenditures on Form T661. One credit is refundable and aimed at smaller corporations; the other is non-refundable and open to larger ones. A corporation can be entitled to both in the same taxation year, and each reduces the federal base.

Overview

Who can claim

For the OITC, a corporation must have a permanent establishment in Ontario during the taxation year, carry out SR&ED in Ontario, be eligible for the federal investment tax credit under section 127, not be exempt from Ontario corporate income tax, and file Form T661 and Schedule 31. The taxable income and taxable capital tests mean that, in practice, the refundable credit reaches smaller corporations and falls away as the corporation and its associated group grow.

For the ORDTC, a corporation must have a permanent establishment in Ontario, carry on SR&ED in Ontario and file Form T661, and must not be exempt from Ontario corporate income tax. There is no size test, so a large or foreign-controlled corporation with Ontario work can use it against Ontario tax.

Rate and calculation

The order of calculation matters. Provincial R&D tax credits are government assistance that reduces the qualified expenditures on which the federal investment tax credit is calculated, under subsection 127(18). Within Ontario, the OITC is itself government assistance that reduces the expenditures on which the ORDTC is computed. So the OITC comes first, then the ORDTC on the reduced amount, then the federal credit on what remains.

Illustrative example. Lakeshore Instruments Inc., a hypothetical CCPC with federal taxable income and taxable capital well below the Ontario thresholds, has C$1,000,000 of qualified expenditures, all current, for SR&ED carried out in Ontario.

A loss-making company in this position receives the OITC and the federal refund but carries the ORDTC forward until it has Ontario tax to pay.

How to claim

1. Prepare Form T661 and Schedule 31 for the federal claim, with each project's costs split by the province where the work was performed.
2. Confirm the permanent establishment in Ontario and, for the OITC, the associated group's taxable income and taxable capital.
3. Compute the OITC on Schedule 566 and the ORDTC on Schedule 508, in that order.
4. Enter both Ontario credits as government assistance in the federal calculation and recompute the federal qualified expenditures.
5. The OITC is claimed on Schedule 566 with the T2 return; file everything with the T2 return.

A corporation can waive all or part of either credit for the year.

Working with the federal claim

Most provincial R&D credits adopt the federal definition of SR&ED and the federal determination of eligible work, and Ontario is no exception. Ontario's credits are based on the qualified expenditures determined for the federal SR&ED claim. If a CRA review reduces the federal qualified expenditures, the Ontario credits are reduced with them, and the federal credit is then recomputed on the new net figure. A reassessment of one layer therefore moves all three, and the workpapers should be built so that a change to a project's costs flows through the OITC, the ORDTC and Schedule 31 together.

Location is the point most often missed. Only work carried out in Ontario counts, so a corporation with teams in several provinces needs time records that show where each person worked, and contracts that show where the contractor performed the work.

Common questions

Can we claim both Ontario credits on the same costs? Yes, in sequence. The OITC is computed first and reduces the base for the ORDTC, so the two are not simply added together.

We grew past the taxable capital threshold. What changes? The OITC expenditure limit shrinks and then disappears, but the ORDTC remains available against Ontario tax.

Do we need to apply to Ontario separately? No. Both credits are claimed on T2 schedules with the federal return.

Does a non-refundable credit still reduce the federal base? Yes. Qualified expenditures are reduced by government assistance the claimant has received, is entitled to receive or can reasonably be expected to receive, whether or not the credit is used in the year.

Related pages

• Provincial credits and the federal claim
• How assistance reduces qualified expenditures
• Form T661, where the base comes from
• The federal CCPC refund
• How CRA reviews flow through to Ontario
• In-House Finance Team Program: Canada track