The Ontario government’s 2018 budget included increased provincial funding through the Scientific Research & Experimental Development (SR&ED) tax incentive program. This increased funding is aimed at helping businesses engaged in scientific research and experimental development in Ontario drastically reduce costs associated with research and development, and consequently grow their business.
Ontario’s SR&ED tax incentive program offers two potential tax credit options: the Ontario Research and Development Tax Credit (ORDTC) and the Ontario Innovation Tax Credit (OITC). For qualifying companies, individuals, or corporations, the ORDTC offers a 3.5% non-refundable Tax Credit, and the OITC an 8% refundable Tax Credit for small or medium sized companies for expenditures directly associated with SR&ED work conducted in Ontario. For SR&ED conducted in Ontario to be eligible, the R&D activities must take place in Ontario and be carried out by Ontarians.
ENHANCED ORDTC RATE
For qualifying businesses, proposed changes to the ORDTC include an enhanced non-refundable tax credit rate of 5.5% on expenditures over $1 million in a taxation year. The enhanced tax credit rate will only apply to businesses with eligible R&D expenditures equal to at least 90% of eligible R&D expenditures in the prior taxation year. Of further note, the $1 million threshold will be prorated for short taxation years and the enhanced tax credit rate will be prorated for taxation years that cross over March 28, 2018, when the changes came into effect.
ENHANCED OITC RATE
Qualifying businesses may be eligible for an enhanced OITC rate of 12% (up from 8% in previous tax years). The enhanced rate a qualifying business can receive is calculated using a ratio of gross revenues to eligible R&D expenditures. This will give preferential refundable tax credit rates to businesses that spend more on scientific research and experimental development relative to their revenue.
- Qualifying companies who have eligible R&D expenses of 10% or less of gross revenue would receive a refundable tax credit of 8%.
- Qualifying companies who have eligible R&D expenses between 10 and 20% of gross revenue will see their OITC rate increase from 8% to 12%, based on a ratio of research and development expenditures to gross revenue from 10 to 20%.
- Qualifying companies with eligible research and development expenditures of 20% or more of gross revenue will see a refundable tax credit of 12%.
Both gross revenues and R&D expenditures must be attributed to Ontario operations and aggregated amongst associated corporations. As with the ORDTC, this rate enhancement would be prorated for taxation years crossing over March 28, 2018.
These rate enhancements are of particular benefit to Ontario businesses that carry out a high degree of scientific research and experimental development activities in computer science and software engineering, medical/dental, food and beverage, construction and a variety of other industries. For businesses in the early stages of developing their product, these tax credits provide funding for this critical stage of the business life cycle.