Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Do 2008 federal investment tax credits in respect of scientific research and experimental development (SR&ED) expenditures that are claimed in a corporation's 2009 taxation year reduce the eligible expenditures of a corporation for purposes of calculating the ORDTC in the corporation's 2009 taxation year?
The Ontario taxable income of a corporation includes a deduction for federal SR&ED expenditures and at the same time the taxpayer is claiming the ORDTC which is based on SR& ED expenditures. Your question is, is this allowed or is there a mechanism that reverses the federal SR&ED expenditures for Ontario tax purposes?
Position: No. No.
Reasons: The definition of government assistance for purposes of the ORDTC. The definitions of income and taxable income for a corporation under the Ontario Taxation Act, 2007.
June 14, 2013
Frederick Montle Nancy Shea-Farrow
Canada Revenue Agency 905-721-5099
200 Town Centre Crt
Scarborough ON M1P 4Y3
2013-047833
Ontario research and development tax credit
This is a response to your e-mail on February 11, 2013 asking a couple of questions with respect to the Ontario research and development tax credit (ORDTC) under section 38 on the Ontario Taxation Act, 2007 (TA) with respect to a 2009 taxation year of a corporation.
Questions
Your questions are as follows:
Do 2008 federal investment tax credits in respect of scientific research and experimental development (SR&ED) expenditures that are claimed in a corporation's 2009 taxation year reduce the eligible expenditures of a corporation for purposes of calculating the ORDTC in the corporation's 2009 taxation year?
The Ontario taxable income of a corporation includes a deduction for federal SR&ED expenditures and at the same time the taxpayer is claiming the ORDTC which is based on SR&ED expenditures. Your question is, is this allowed or is there a mechanism that reverses the federal SR&ED expenditures for Ontario tax purposes?
Federal investment tax credit
The Ontario research and development tax credit is a 4.5% non-refundable tax credit that is deductible from Ontario corporate income tax payable for a taxation year. Generally speaking, the 4.5% rate is multiplied by the amount of the corporation's Ontario SR&ED expenditure pool at the end of the year.
The Ontario SR&ED expenditure pool is composed of amongst other things, eligible expenditures incurred by the corporation in the year. Subsection 38(1) of the TA states that an eligible expenditure means in respect of a corporation an expenditure attributable to a permanent establishment in Ontario that would be a qualified expenditure for the purposes of section 127 of the Income Tax Act (Canada) (ITA) in respect of scientific research and experimental development carried on in Ontario if section 127 of the ITA were read without reference to subsections 127(18) and 127(21) of the ITA.
A qualified expenditure which is defined in subsection 127(9) of the ITA includes both current (paragraph 37(1)(a) of the ITA) and capital expenditures (subparagraph 37(1)(b)(i) of the ITA) and first term or second term shared-use equipment or a prescribed proxy amount in respect of scientific research and experimental development carried on in Canada by the corporation for a taxation year.
Section 41 of the TA generally speaking states that if on or before the filing-due date for a taxation year of a corporation, the corporation has received, is entitled to receive or can reasonably be expected to receive an amount that is government assistance, non-government assistance or a contract payment that can reasonably be considered to be in respect of SR&ED, the corporation should reduce the otherwise eligible expenditures incurred in the year in respect of SR&ED by that amount.
Government assistance under the TA for the purposes of the ORDTC has the same meaning as in section 127 of the ITA, except that the ORDTC is deemed not to be government assistance.
The term "government assistance" is defined in subsection 127(9) of the ITA as assistance from a government, municipality or other public authority whether as a grant, subsidy, forgivable loan, deduction from tax, investment allowance or in any other form other than the investment tax credit claimed under subsection 127(5) or 127(6) of the ITA.
Subsection 127(5) of the ITA provides for amongst other things, a corporation's investment tax credit in respect of SR&ED. Therefore since government assistance under the TA is defined under the ITA and the definition under the ITA does not include federal investment tax credits in respect of SR&ED, a corporation is not required to reduce eligible expenditures for the ORDTC by federal investment tax credits in respect of SR&ED.
Income for Ontario income tax purposes
According to section 1 of the TA income in respect of a corporation for a taxation year is the corporation's income for the year as determined for the purposes of the ITA, if the taxation year ends after December 31, 2008. Section 26 of the TA states that taxable income in respect of a corporation for a taxation year, means the corporation's taxable income as determined for the purposes of the ITA, if the taxation year ends after December 31, 2008. Therefore, there is no mechanism to reverse the SR&ED expenditures deducted for federal purposes in determining income and taxable income for Ontario income tax purposes for taxation years of a corporation ending after December 31, 2008. In our view this is an intended result as part of the initiative under the Corporate Tax Administration Project for Ontario whereby the administration of the Ontario corporate taxes, that are now a part of the T2 Corporation Income Tax Return filing, was transferred to the Canada Revenue Agency.
Finally, you will note as explained above that the legislation provides for both, the deduction of the SR&ED expenditures in computing income for Ontario income tax purposes and the deduction of the ORDTC in computing the Ontario income tax payable.
We trust our comments will be of assistance.
Sharmini Ratnasingham
for Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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