Ontario & federal budgets |
Ontario – Harmonization to federal rules
Federal – Identification of opportunities to improve the SR&ED program
R&D Tax Update, April 2007 (07-2)
Ontario
In December 2006, the Ontario government introduced a bill proposing to harmonize the Ontario corporate tax system with the federal corporate tax system, allowing for a single administration of both regimes by 2009.
Under the current Ontario tax system, a corporation resident in Ontario is entitled to have certain elective deductions (e.g., capital cost allowance, deduction for scientific research & experimental development (SR&ED) expenses) different than federal deductions. These differences can lead to tax pools (e.g. undepreciated capital cost, SR&ED pools, etc.) in Ontario that are different from federal pools. The rules introduced in December 2006 included transitional provisions to deal with the different federal and Ontario pools.
Generally, if the balance of the federal tax pool is greater than the balance of the Ontario tax pool, an additional Ontario tax will be charged evenly over a five-year period beginning with a corporation’s first taxation year ending after 2008. If the Ontario balance is greater than the federal balance, a tax credit is provided, again distributed evenly over the same five-year period. The amount of tax charge and tax credit is based on a rate of 14% and applied on the difference in the amount of the federal and Ontario pools.
In the 2007 provincial budget tabled March 22, 2007, three changes were made to the Ontario SR&ED rules:
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The Ontario government proposed to provide relief for SR&ED performers by allowing a corporation to defer any tax liability (subject to certain restrictions) that might arise in 2009, due to the excess of the federal SR&ED pool over the Ontario SR&ED pool. Those corporations that continue to carry on SR&ED in Ontario could defer tax liability relating to different SR&ED pools for at least seven years.
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Under the current system, Ontario provides a deduction equal to the portion of the federal investment tax credit (ITC) that relates to Ontario SR&ED expenditures. With the upcoming tax harmonization, this incentive will automatically expire for taxation years ending after 2008 and will be replaced with a 4.5% non-refundable tax credit for SR&ED performed through a permanent establishment in Ontario. This new credit will qualify for a 20-year carryforward and a three-year carryback, although no carryback to a taxation year that ends before 2009 will be permitted.
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In addition, any unused federal ITCs will be added to the Ontario balance.
Federal
On March 19, 2007, the Minister of Finance tabled the 2007 federal budget.
While some changes to the SR&ED program were anticipated, nothing related to SR&ED was announced in the budget. In fact, the only reference to SR&ED in the budget was that, over the coming year, the government will identify opportunities to improve the SR&ED program, including its administration, to further encourage research and development activities within the business sector in Canada.
About R&D Tax Update
Opportunities, issues and developments affecting the federal and provincial scientific research and experimental development tax incentive programs.
R&D Tax Update
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