Principal Issues: Interpretation of TA 49(7). What does the "adjusted Ontario incentive balance" represent? What does variable "Q" in the formula to calculate the adjusted Ontario incentive balance represent?
Position: The "adjusted Ontario incentive balance" represents the federal ITCs that would have been available for the incentive under 11.2 of the CTA. Variable "Q" determines the ITCs that expire in the following year.
Reasons: As determined under TA 49(7)
May 3, 2010
Joyce Tong Julie White Provincial Legislative Affairs Section Income Tax Rulings Directorate Legislative Policy Directorate Ontario Corporate Tax Division Legislative Policy & Regulatory Affairs Branch (905) 721-5202
2009-033890
Adjusted Ontario SR&ED Incentive Balance
I am responding to your email dated August 14, 2009 in which you requested confirmation of your interpretation of subsection 49(7) of the Taxation Act, 2007 (TA).
Specifically, you have asked what the "adjusted Ontario SR&ED incentive balance" represents. You have also asked what variable "Q" in the formula used to calculate the adjusted Ontario SR&ED incentive balance represents.
Subsection 49(7) of the TA calculates the adjusted Ontario SR&ED incentive balance. The adjusted Ontario SR & ED incentive balance includes in the "total Ontario balance" a corporation's unused federal investment tax credits (ITCs) in respect of Ontario SR&ED expenditures calculated at the end of the taxation year ending before its 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 balance compensates for the loss, on harmonization, of section 11.2 of the Corporations Tax Act (CTA). If Ontario had continued to administer its own corporate income tax, a corporation would have been entitled to the section 11.2 incentive. Section 11.2 included in the Ontario SR&ED expenditure pool federal ITCs in respect of qualified Ontario SR&ED expenditures claimed in the previous taxation year. The ITCs were included in the Ontario SR&ED expenditure pool the year following the claim to reverse, for Ontario purposes, the effect of including the ITC as taxable government assistance. The increase in the SR&ED expenditure pool provided Ontario corporations with a larger SR&ED deduction for income tax purposes.
The formula in section 49(7) of the TA calculates the adjusted Ontario SR&ED incentive balance. This formula removes from the unused federal ITC's at the corporation's transition time, amounts which would not have been available for the CTA section 11.2 incentive had Ontario continued to administer its own corporate income tax, including ITCs that expire in the following year. The formula also removes ITCs which are carried back to the taxation year as these ITCs were earned in a following year and not before the corporation's transition time.
The amount of a corporation's adjusted Ontario SR&ED incentive balance is determined by the formula (M - N - P) / C. The variables of this formula are described below:
"M" represents the corporation's "adjusted gross federal investment tax credit" at the end of the year as defined by subsection 49(1). The adjusted gross federal investment tax credit is the investment tax credit pool in respect of qualifying Ontario SR&ED expenditures, at the end of the taxation year immediately prior to the corporation's transition time excluding any amounts carried back from the following years (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.
"N" the amount, if any, by which "Q" exceeds "R" where,
"Q" the corporation's adjusted gross federal investment tax credit at the end of the year (2008) less the adjusted gross federal investment tax credit at the end of the following taxation year (2009) if the additions to paragraph (a.1), (e), (e.1) and (e.2) in the definition of "investment tax credit" in subsection 127(9) of the Income Tax Act (Canada) (federal Act) were ignored for the following year. In other words, "Q" determines the amount of the ITCs expiring in 2009 which would not have been available for the incentive under section 11.2 of the CTA had Ontario continued to administer its own corporate income tax.
"R" reduces "Q" by any claims in the current year (2008). Any amount expiring in 2009 will first be used in the 2008 claim.
"P" adjusts the "adjusted gross federal investment tax credit" for the ITCs claimed by the corporation in the preceding taxation years (normally only in 2007). These amounts are available in 2008 to be claimed under CTA 11.2(3).
"C" the corporation's relevant Ontario allocation factor
Using the example provided in your email, I am making the following assumptions:
- The taxation year of the corporation is December 31, 2008
- The adjusted gross federal investment tax credit as of December 31, 2008 is $110 and includes the ITC of $10 earned in 2008.
- No ITCs expired in 2009
The variables of the formula would then be as follows:
M = $110
Q = $110 - $110
R = $50
N = nil (nil - $50)
P = $40
The adjusted Ontario SR&ED incentive balance is equal to $70 ($110 - $40). It should be noted that in determining variable "Q", any ITCs earned in 2009 are excluded from the adjusted gross federal investment tax credit determined for December 31, 2009. As no ITCs expired in 2009, the adjusted gross federal investment tax credit for December 31, 2009 remains the same as December 31, 2008.
In answer to your specific questions, the adjusted Ontario incentive balance represents the amount that would have been available for the section 11.2 of the CTA incentive had Ontario continued to administer its own corporate income tax. Variable "Q" in the formula used to calculate the adjusted Ontario incentive balance determines the amount of the ITC expiring in 2009.
I trust the above answers your queries.
Roger Filion, CA
For Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch