Principal Issues: 1.Whether variable "M" in the formula provided in subsection 49(7) can ever be zero or a negative amount. 2. Whether variable "M" is the ITC pool at the end of 2008. 3. Whether the ITCs claimed in 2008 are included in the "adjusted Ontario SR&ED incentive balance".
Position: 1. No 2. No 3. Yes
Reasons: 1. Variable "M" consists of cumulative unexpired ITCs earned at the end of 2008, it is not reduced by ITCs claimed. Variable "M" can not be zero or a negative amount 2. Variable "M" does not represent the ITC pool at the end of 2008 as it is not reduced by ITCs claimed. 3. Variable "M" includes ITCs earned up until the end of 2008, variable "P" generally excludes ITCs claimed in 2007 and prior years, and therefore the ITCs claimed in 2008 are included in the "adjusted Ontario SR&ED incentive balance".
December 17, 2012
Debbie Cudney Income Tax Rulings Directorate
Auditor Ontario Corporate Tax Division
Kitchener TSO Julie White
905 721 5202
2011-042380
Ontario Transitional Tax Debit/Credit
This is in reply to your email in which you asked for clarification on the interpretation of the "adjusted Ontario SR&ED incentive balance" as defined in subsection 49(7) of the Taxation Act, 2007 (Ontario) (TA) for purposes of the Ontario transitional tax debit/credit calculation.
Specifically you have asked whether the variable "M" in the formula provided in subsection 49(7) can ever be nil or a negative amount, whether variable "M" is the investment tax credit ("ITC") pool at the end of 2008, and whether the ITCs claimed in 2008 are included in the "adjusted Ontario SR&ED incentive balance".
Subsection 48(6) of the TA provides the calculation of the "total Ontario balance". Variable "W" of that calculation includes a corporation's "adjusted Ontario SR&ED incentive balance" at the end of the taxation year ending immediately before its transition time. This will increase a corporation's transitional tax credit or reduce the transitional tax debit.
The adjusted Ontario SR&ED incentive balance reflects the incentive under section 11.2 of the Corporations Tax Act (Ontario) (CTA) to which a corporation would have been entitled if Ontario had continued to administer its own corporate income tax. Section 11.2 of the CTA included in the Ontario SR&ED expenditure pool, the amount of ITCs claimed federally in the prior year in respect of qualified Ontario SR&ED expenditures. This increased the Ontario SR&ED expenditure pool and the deductions available for Ontario income tax purposes. It also reversed the Ontario income tax effect of including the ITC as taxable government assistance in the taxation year following the taxation year in which the ITC claim is made.
If not for the inclusion of the adjusted Ontario SR&ED incentive balance in the total Ontario balance for the purpose of the transitional tax debit/credit, the benefit that would have been available under section 11.2 of the CTA for 2009 and subsequent years would be lost.
Subsection 49(7) of the TA provides the calculation of the adjusted Ontario SR&ED incentive balance. The adjusted Ontario SR&ED incentive balance is calculated using the following formula:
(M N P) / C
Variable "M" represents the "adjusted gross federal investment tax credit" as defined in subsection 49(1) of the TA. The adjusted gross federal investment tax credit is the sum of the amounts described in paragraphs (a.1), (b), (c), (e), (e.1) and (e.2) of the definition "investment tax credit" in subsection 127(9) of the Income Tax Act (Canada) (federal Act) that are in respect of qualifying Ontario SR&ED expenditures. These paragraphs include amounts in the investment tax credit pool on a cumulative basis and are not reduced by investment tax credits claimed. The description of variable "M" excludes amounts determined in paragraphs (c), (e), (e.1) and (e.2) in respect of taxation years following the year (or in respect of taxation years ending before the time control of the corporation was last acquired by a person or group of persons). This adjustment is necessary because the definition of investment tax credit in subsection 127(9) allows for a 3 year carry back of ITCs. Where a taxpayer has earned ITCs in the 2008 and prior taxation years, the value of "M" will not be nil nor will it be a negative amount.
Variable "M" does not represent the ITC pool at the end of 2008. The investment tax credit pool is defined in subsection 127(9) of the federal Act and includes all ITCs earned that have not expired including ITCs carried back from following years and is reduced by ITCs claimed against Part I tax. Variable "M" as explained above, does not include ITCs carried back from subsequent years nor is it reduced by ITCs claimed. Therefore variable "M" is not the ITC pool at the end of 2008.
Variable "N" is arrived at by the formula "Q" "R". Variable "Q" compares the adjusted gross federal investment tax credit at the end of the year (2008) to what would be the adjusted gross federal investment tax credit at the end of the following year (2009) ignoring amounts which would be added to the adjusted gross investment tax credit in 2009. In our view, this difference will always be nil as a result of subsection 127(9.01) of the federal Act.
Subsection 127(9.01) of the federal Act provides the formula for the transition from the 10 year carry forward to the 20 year carry forward of the federal ITCs. Subsection 127(9.01) provides that the reference to "10" in paragraphs (c), (e), (e.1) and (e.2) is to be read as the reference to a number that is the lesser of (a) 20, and (b) 10 plus the number of taxation years after 1997 that exceed 11. The number of preceding taxation years to include in determining the 2008 ITC balance would be 10 years (1998 to 2007). In addition, the current year amounts under paragraph (a.1) of the definition "investment tax credit" would form part of the 2008 ITC balance and the adjusted gross federal investment tax credit.
The number of preceding taxation years to consider in determining the 2009 ITC would be 11 years. Therefore the 1998 to 2008 years would be considered. The description of variable "Q" provides that the current year amounts under paragraph (a.1) of the definition "investment tax credit" are ignored. Since Q2008 and Q2009 measure the adjusted gross federal investment tax credit for the same period; 1998 to 2008, variable "Q" will be nil. Variable "R", which represents the current year's ITCs claimed under subsection 127(5) in 2008 is deducted from variable "Q". Since variable "N" can not be negative, it will be nil.
Variable "P" represents the cumulative amounts claimed under subsection 127(5) or (6) of the federal Act for a previous year (generally 2007 and earlier) in respect of the corporation's adjusted gross federal investment tax credit. These amounts have been or will, in the 2008 taxation year of a corporation, be included in the Ontario SR&ED pool pursuant to subsection 11.2(3) of the CTA.
To summarize, the adjusted Ontario SR&ED incentive balance includes the ITCs claimed in 2008. Variable "M" includes the ITC earned, variable "P" in the formula reduces the adjusted Ontario SR&ED incentive balance by the ITCs claimed prior to the start of the year ending immediately before the corporation's transition time (generally claimed in 2007 and prior years). The ITCs claimed in 2008 would have been available for the incentive under section 11.2 of the CTA in 2009 had Ontario continued to administer its own corporate income tax. If not for the inclusion in the adjusted Ontario SR&ED incentive balance, the ITCs claimed in 2008 would not generate a benefit similar to the section 11.2 incentive for purposes of the total Ontario balance in subsection 48(6) of the TA.
Steve Fron CA
Acting Manager
Trust Section II
Business and Trusts Division
Income Tax Rulings Directorate
