The Federal Government offers a research and development tax credit program for businesses called Scientific Research and Experimental Development (SR&ED). Most provinces and territories have created their own versions of this program that can be stacked with SR&ED tax credits. Because this federal program has been so successful, most provinces and territories have created their own versions.
Ontario businesses that receive funding through the federal SR&ED program may be eligible to receive additional tax credits for the same R&D project through the three provincial SR&ED programs.
With Ontario being such a large hub for Canadian business innovation, the Provincial Government has created three different variants of the SR&ED program that provide various amounts of tax credits depending on the eligibility of your business’ project.
These are Ontario’s three provincial SR&ED variants:
- Ontario Innovation Tax Credit (OITC);
- Ontario Business-Research Institute Tax Credit (OBRITC); and
- Ontario Research and Development Tax Credit (ORDTC).
In this article, we will discuss the differences between these tax credit programs.
Program Snapshot: Ontario Innovation Tax Credit (OITC)
A business applying for the Ontario Innovation Tax Credit (OITC) must be conducting internal R&D projects within Ontario that will result in incremental improvements to their existing or new products, processes, or services.
Amount of Funding:
Listed below are the criteria for qualifying for OITC funding:
- Up to $3 million in expenditures can qualify for 8% refundable tax credits.
- The maximum tax credit amount is $240,000.
- Expenditure limits are gradually reduced if:
- Taxable income of the prior tax year exceeds $500,000 and is eliminated at $800,000; or
- The prior year’s taxable paid-up capital exceeds $25 million and is eliminated at $50 million.
- NOTE: SR&ED expenditures and qualified SR&ED expenditures are reduced by the OITC, which is considered government assistance.
Corporations with a permanent establishment in Ontario are eligible for the OITC tax credit.
Tax credits that can reduce your business’s tax liability can be repaid for costs already incurred under this retroactive program.
- Labour: Calculated based on eligible activities performed in Ontario.
- Contractors: Provide SR&ED services on the business’ behalf. The contractor must be a Canadian and the work must be performed in Ontario.
- Third Party Payments: Cash or in-kind payments to an entity to carry out SR&ED in Canada.
- Materials: Materials purchased outside Ontario are permitted as long as they are used for SR&ED in Ontario.
- Overhead: Determined using the proxy method or traditional method.
In order to qualify for this program, you must file your federal SR&ED claim within 18 months of the end of the tax year.
Program Snapshot: Ontario Business-Research Institute Tax Credit (OBRITC)
Businesses that can apply for the Ontario Business-Research Institute Tax Credit (OBRITC) program must have incurred qualified expenditures on SR&ED under an eligible contract with an eligible research institute (ERI) on an R&D project to be eligible for funding.
Amount of Funding:
The following benefits may be available to businesses eligible for OBRITC funding:
- Receive up to 20% refundable tax credit on qualified expenditures to a maximum of $20 million annually.
- The maximum annual tax credit a business can receive is $4 million.
- NOTE: OBRITC is considered government assistance, which reduces the federal pool of deductible SR&ED expenditures.
Companies with permanent establishments in Ontario, including corporations which hold memberships in partnerships (other than specified partners), are eligible for the OBRITC tax credit.
With this tax credit program, you can receive reimbursement for costs already incurred, allowing you to lower the amount of taxes you owe by using these credits:
- An agreement between the corporation and an eligible research institute (ERI) for the ERI to perform SR&ED on behalf of the corporation;
- There must be a connection between the expenses and a Canadian business or corporation based in Ontario; and
- SR&ED conducted under the agreement must be exploitable by the corporation.
A SR&ED claim does not need to be filed for any open tax year.
Program Snapshot: Ontario Research and Development Tax Credit (ORDTC)
Ontario Research and Development Tax Credit (ORDTC) applicants must carry out R&D efforts within Ontario to improve products, processes, or services that are either new or existing to the business.
Amount of Funding:
There are a number of benefits available to businesses that are eligible for ORDTC funding, including:
- Receive up to 3.5% non-refundable tax credit (grant) towards eligible activities.
- There can be only one use of an ORDTC tax credit: to reduce the amount of Ontario corporate income tax otherwise due.
- You can carry back three tax years and/or carry forward 20 years any unused portion of the tax credit.
- NOTE: A direct reduction of the federal pool of deductible and qualified SR&ED expenditures may result from ORDTC.
Corporations with a permanent establishment in Ontario are eligible for the ORDTC tax credit.
You can get reimbursed for already incurred costs using this tax credit program. Your business’s taxes can then be lowered using tax credits.
- Labour: Rates are determined by the amount of time spent on eligible activities in Ontario.
- Contractors: A portion of the contract related to SR&ED conducted on the business’ behalf. Contractor must be a Canadian and must perform work in the province.
- Third Party Payments: Payments (money or in-kind) to an entity to carry on SR&ED in Canada.
- Materials: A Canadian or non-Canadian supplier can provide materials.
- Overhead: Determined by proxy or traditional method.
SR&ED claims must be filed within 18 months of the end of the tax year for all open tax years.
Apply for OITC, OBRITC, and ORDTC Tax Credits
Your business should take advantage of all funding it’s entitled to receive from the federal government and the provincial government. SR&ED funding can be stacked with OITC, OBRITC, and ORDTC tax credits with the help of a professional tax consultant.
Speak our team at Mentor Works, a Ryan Company to find out how your business may qualify for these tax credits, as well as Canadian government grants, wage subsidies, and no-interest loans.
Is your business conducting internal R&D? You may be eligible to stack funding from federal and provincial SR&ED, as well as grant funding though the National Research Council of Canada’s Industrial Research Assistance Program (NRC IRAP). Find out more about the differences between these two programs by downloading our free PDF slide deck on IRAP vs. SR&ED funding.
Mentor Works is a business support organization specializing in Canadian government funding. The Ontario-based business has helped hundreds of businesses build and execute their funding strategy through a mix of federal and provincial government grants, loans, and tax credits. Mentor Works offers free online resources, funding webinars, and news via their website at www.mentorworks.ca.
Author: Matt Mongeon