R&D webcast: The competitive edge; 2008 Ontario budget – proposed technology-related changes
R&D Tax Update, April 2008 (08-3)
R&D webcast: The competitive edge
During this webcast our leading R&D tax practitioners Natan Aronshtam, Anil Chawla, Albert De Luca and Joanne Hausch provided updates on the evolution of R&D tax incentives in Canada and around the world. They provided an overview of the recent changes resulting from the federal and provincial budgets and shared their thoughts on future trends.
2008 Ontario budget – proposed technology-related changes
Ontario’s Minister of Finance, Dwight Duncan, tabled the 2008 provincial budget on March 25, 2008 with a focus on improving the province’s infrastructure, job retraining and making it cheaper to do business in Ontario.
The medium-term fiscal outlook projects balanced budgets for the next three years, putting Ontario on track to post six consecutive balanced budgets between 2005-2006 and 2010-2011, the most consecutive balanced budgets for Ontario since 1908. Tax measures announced in this budget provide an additional benefit of almost $1.5 billion to individuals and businesses over four years.
Some of the more relevant changes proposed in the budget relating to scientific research and experimental development (SR&ED) and in the technology-related areas are outlined below:
Ontario Innovation Tax Credit (OITC)
The government proposes to extend the OITC to more small- and medium-sized corporations and expand the tax credit to more qualifying SR&ED expenditures.
The extension of the OITC will parallel the SR&ED enhancements proposed in the 2008 federal budget. Ontario proposes to increase the OITC expenditure limit to $3 million of qualifying SR&ED expenditures and to extend the taxable income phase-out range under the OITC to a new upper limit of $700,000 of taxable income. Ontario’s current taxable capital phase-out range of $25 million to $50 million for the OITC will remain unchanged
The required amendments will be introduced once the implementing federal legislation is enacted; the effective dates and phase-in rules will parallel the federal amendments.
Ontario Interactive Digital Media Tax Credit (OIDMTC)
The budget proposes to increase the OIDMTC for corporations that exceed the size test (annual gross revenues in excess of $20 million and total assets in excess of $10 million) and for fee-for-service work, to 25% from 20%, for qualifying expenditures, incurred after March 25, 2008 and before January 1, 2012.
The enhanced 30% OIDMTC rate for small corporations will be extended to qualifying expenditures incurred after December 31, 2009 and before January 1, 2012. In addition, the budget proposes to extend the eligibility period for eligible labour expenses for qualifying digital media products for the OIDMTC from two to three years. This will apply to products completed after March 25, 2008.
Commercialization of intellectual property
The government has proposed a 10-year tax exemption from Ontario corporate income tax and corporate minimum tax for new corporations that commercialize intellectual property developed by qualifying Canadian universities, colleges or research institutes in priority areas such as bio-economy/clean technologies; advanced health technologies; and telecommunications, computer and digital technologies.
This exemption is available to qualifying corporations established after March 24, 2008 and before March 25, 2012. A qualifying corporation should be incorporated in Canada and derive all or substantially all of its income from eligible commercialization activities carried on in Ontario. Eligible commercialization activities include the development of prototypes and the marketing and manufacturing of products related to intellectual property.
Elimination of capital tax
The government is proposing to retroactively eliminate capital tax one year earlier, effective January 1, 2007, for Ontario companies primarily engaged in manufacturing and resource activities.
The proposed elimination of capital tax will apply to corporations whose salaries and wages relating to manufacturing and processing, mining, logging, farming or fishing activities in Ontario represent 50% or more of their total salaries and wages in Ontario.
For corporations whose salaries and wages in Ontario for these activities are less than 50% but more than 20%, the capital tax will be reduced proportionately on a straight line basis. The proposed elimination for 2007 will apply to a qualifying corporation that has employees reporting to a permanent establishment in Ontario on March 25, 2008.
About R&D Tax
Opportunities, issues and developments affecting the federal and provincial scientific research and experimental development tax incentive programs.