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: What do the variables "M" and "P" in the formula that calculates the adjusted Ontario incentive balance represent?
Position: Variable "M" represents the ITCs earned in respect of qualified Ontario SR&ED expenditures under paragraphs (a.1), (b), (c), (e), (e.1) and (e.2) of the definition "investment tax credit" in subsection 127(9) of the ITA. Variable "P" represents ITCs claimed under subsection 127(5) or (6) of the ITA in a previous year.
Reasons: As determined under TA 49(7)
DATE October 13, 2011
TO Loretta Prior FROM Income Tax Rulings Directorate
Training Facilitator DE Ontario Corporate Tax Division
Toronto Centre TSO Julie White
905 721 5202
FILE 2011-039599
DOSSIERSUBJECT: Adjusted Ontario SR&ED Incentive Balance
OBJET:
I am responding to your emails dated February 10, 2011 and February 24, 2011, in which you requested confirmation of your understanding of the variables "M" and "P" in the calculation of the adjusted Ontario SR&ED incentive balance as provided in subsection 49(7) of the Taxation Act, 2007.
The adjusted Ontario SR&ED incentive balance includes in the "total Ontario balance", for purposes of the calculation of the transitional tax debit/credit, unused federal investment tax credits (ITCs) in respect of Ontario SR&ED expenditures calculated at the end of the taxation year ending immediately before a corporation's transition time. The adjusted Ontario SR&ED incentive balance will reduce a corporation's transitional tax debits or increase the transitional tax credits.
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 federal 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 Ontario SR&ED incentive balance in the "total Ontario balance", the benefit which would have been available under section 11.2 of the CTA in respect of ITCs earned, but not claimed nor expired before 2008 would have been lost.
Subsection 49(7) of the TA provides the formula to calculate the adjusted Ontario SR&ED incentive balance as:
(M - N - P) / C
The variable "M" is the "adjusted gross federal investment tax credit" at the end of the 2008 taxation year. This amount can not be taken from box 590 of the 2008 Ontario CT23 schedule 161. The amount shown in box 590 represents ITCs, in respect of qualified Ontario SR&ED expenditures, earned but not claimed nor expired for taxation years ending prior to 2008.
The term "adjusted gross federal investment tax credit" is defined in subsection 49(1) as the sum of paragraphs (a.1), (b), (c), (e), (e.1) and (e.2) of the definition "investment tax credit" insubsection 127(9) of the Income Tax Act (Canada) (ITA) that are in respect of qualifying Ontario SR&ED expenditures. This amount is cumulative and is calculated at the end of a taxation year.
For purposes of determining the adjusted gross federal investment tax credit the amounts determined under paragraph (c), (e), (e.1), and (e.2) do not include amounts in respect of taxation years following the year or in respect of taxation years ending before the time that control of the corporation was last acquired by a person or group of persons. Each of the amounts included in the adjusted gross federal investment tax credit is an inclusion in the ITC pool, the adjusted gross federal investment tax credit is not reduced by ITCs claimed in a previous year.
From the value of variable "M", the value of "N" is deducted, which represents ITCs that expire in 2009. This amount 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. The difference represents the ITCs expired in 2009. Variable "R" which is deducted from variable "Q" represents the ITCs claimed under subsection 127(5) in 2008. If the amount of the ITCs claimed in 2008, exceed the amount of the ITCs expiring in 2009, it is assumed that the expiring ITCs have been claimed in 2008 and as a result the value of "N" will be nil as none of the ITCs will actually expire in 2009.
The last amount to be deducted from variable "M" is variable "P". Variable "P" represents the cumulative amounts claimed under subsection 127(5) or (6) of the ITA for a previous year (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 11.2(3) of the CTA. These amounts must therefore be excluded from the value of variable "M".
Variable "C" represents the corporation's relevant Ontario allocation factor as determined by subsection 49(5) of the TA.
Although the amounts of variables "M", and "P" are not readily available on CT23 Schedule 161 you can arrive at an amount equal to "M" - "P" by taking the ending balance from box 590 on the 2008 CT23 Schedule 161, that represents the amount of the ITCs which would have been earned and not claimed by the end of 2007, and add to that amount, the ITCs earned in 2008. You then have to calculate variable "N" and deduct that amount, if any, to arrive at the "adjusted Ontario SR&ED incentive balance".
To summarize, the "adjusted Ontario SR&ED incentive balance" represents at the end of 2008 the ITCs earned and not expired that have not been claimed prior to the start of the year ending immediately before the corporation's transition time and which would not have expired in 2009. It is this amount which would have been available for the incentive under section 11.2 of the CTA had Ontario continued to administer its own corporate income tax.
Roger Filion CA
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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