- What types of activities and costs qualify for Ontario's R&D tax incentives?
- I'm currently in a loss position. Why should I care about deductions that are just going to expire?
- How do Canada's R&D incentives compare with other leading industrial countries?
- What if my head office wants to retain ownership of the intellectual property developed in Ontario?
- Will my options for structuring my R&D investment be limited?
- How to access R&D incentives and programs
1. What types of activities and costs qualify for Ontario's R&D tax incentives?
A wide range of activities qualify for Scientific Research and Experimental Development (SR&ED) benefits in Ontario. Eligible activities* include:
- new product development
- development of new or improved materials
- manufacturing process improvements
- software development
- clinical trials of new drugs or medical devices.
| Qualifying Costs for R&D tax credits |
| |
Ontario |
United States |
| Wages and salaries |
Yes |
Yes |
| Capital equipment |
Yes |
No |
| Materials |
Yes |
Yes |
| Overhead |
Yes |
No |
| Contract expenses |
Yes |
65 - 75% |
Compared to the United States, Canada has a much broader range of costs that qualify for the tax credits.
In addition, the Canadian investment tax credit generally applies to every dollar of R&D. In the U.S., the federal R&D tax credit generally applies to incremental R&D expenses. In other words, in the U.S. you generally do not earn any R&D tax credits if your current R&D expenses do not exceed your base amount derived from your past gross receipts and past R&D spending.
Notes:
* Provided three key criteria are met:
- R&D must demonstrate scientific or technological advancement. In other words, it must involve experimentation or analysis beyond standard practice, and it must "push the barriers."
- R&D must focus on areas of scientific or technological uncertainty where it is unclear whether or how goals can be achieved.
- R&D must have scientific and technical content as evidenced by systematic, well-documented investigation.
- A U.S. taxpayer can elect to claim the alternative incremental credit for R&D, which is determined on a different basis.
2. I'm currently in a loss position. Why should I care about deductions that are just going to expire?
Write-offs of R&D costs may be deferred in Ontario. If an Ontario company does not need to take the deductions in the year they are incurred, the R&D expenses can be carried forward indefinitely.
In the U.S., R&D costs must be expensed in the year they are incurred. They then become losses, subject to expiry.
3. How do Canada's R&D incentives compare with other leading industrial countries?
An international study comparing the cost of conducting R&D showed that Canada's R&D incentives are among the most generous in the industrialized world. The table below ranks costs of conducting R&D among G7 countries. The higher the number, the more generous the R&D incentives
| Canada's R&D incentives vs. G7 countries |
| Country |
Index |
| France |
98.8 |
| Canada |
100.0 |
| Japan |
106.9 |
| U.K. |
109.2 |
| U.S. |
112.1 |
| Italy |
119.7 |
| Germany |
120.3 |
Source: Warda, Jacek, Rating Canada's R&D Tax Treatment, Updated Sept 20, 2007
Cited: Think Canada, August 2008 (9/2008)
4. What if my head office wants to retain ownership of the intellectual property developed in Ontario?
Your head office can do that. An Ontario corporation can claim R&D tax incentives even if its R&D costs are covered, in whole or in part, by payments from a foreign corporation or government.
The Ontario subsidiary could do R&D under contract for its foreign parent and still claim the 20% federal investment tax credit. In certain cases, the Ontario subsidiary may also be able to claim the 10% refundable Ontario Innovation Tax Credit. The 20% refundable Ontario Business-Research Institute Tax Credit may also be available where the Ontario subsidiary subcontracts some of the R&D to an eligible research institute.
A foreign corporation paying for R&D performed by an unrelated Ontario company can benefit indirectly, since the Ontario company will be able to provide the service at a lower cost due to the tax benefits it receives.
5. Will my options for structuring my R&D investment be limited?
No. You have significant flexibility in structuring your R&D investment. Foreign and Ontario companies can benefit under a variety of scenarios:
- the foreign parent can contract with its Ontario subsidiary to perform R&D.
- the Ontario subsidiary of a foreign company can undertake R&D on its own.
- a foreign company can contract with an unassociated Ontario company to do R&D on its behalf.
- a foreign company can set up or acquire a minority interest in a small Canadian-controlled private corporation (CCPC) that performs R&D.
6. How to access R&D incentives and programs
General information, user guides, forms and business support services are easily available.
Details about the Government of Canada's Scientific Research and Experimental Development (SR&ED) tax incentive program are available here.
Details about the Province of Ontario's business support programs can be found here.
Or contact us for more details.
