Year: 2024

Shareholder Purchasing Asset: Input Tax Credit (ITC)

Posted on by dflanagan

An August 20, 2024, Tax Court of Canada case reviewed whether a corporation could claim ITCs of $8,874 related to the purchase of two vehicles that were used by the corporation. One vehicle was purchased by the shareholder and the other was purchased by the shareholder and his spouse.

Taxpayer loses

To be eligible for an ITC, the corporation must meet all of the following conditions:

  1. the corporation must have acquired the vehicles;
  2. the GST/HST in respect of the vehicles must be payable or must have been paid by the corporation; and
  3. the vehicles must have been acquired in the course of the corporation’s commercial activities.

The Court found no evidence that the corporation acquired either vehicle; the corporation’s name was not on the sales agreements, bill of sales, vehicle registrations, or proof of insurance. In addition, there was no evidence of any trust, agency or assignment agreement. As such, criterion (a) was not met.

The Court also found that the corporation was not liable to pay consideration under the purchase agreement for either vehicle; therefore, GST/HST was not payable by the corporation. As such, criterion (b) was not met.

While the corporation argued that the vehicles were used or available for use by the corporation, the vehicles were not actually acquired in the course of the corporation’s commercial activities. As such, criterion (c) was not met.

While only failing one of the above criteria would be fatal to the claim, the corporation failed all three. The ITC was appropriately denied.

Care should be afforded to acquire assets in the proper entity such that GST/HST can be recovered as an input tax credit, if appropriate.

Trust Distributions: Violating Trust Terms

Posted on by dflanagan

A March 30, 2023, Tax Court of Canada case reiterated the importance of the trustee of a trust properly understanding the terms of the trust. In this case, the trust had paid $100,000 to two beneficiaries, both under age 18, from capital gains eligible for the capital gains exemption. However, the terms of the trust prohibited payments to beneficiaries under age 18.

Taxpayer loses

The Court ruled that amounts paid in violation of the trust terms were not payable for income tax purposes and were therefore neither income to the beneficiaries nor deductible from the trust’s income

If acting as a trustee of a trust, ensure to fully understand the terms of the trust to avoid a surprising tax consequence.

 

Approaches to Value Customer-Related Intangibles

Posted on by dflanagan

This is the third article in a series on intangible assets and the various valuation methodologies and considerations. Please see our Spring 2024 FSAT newsletter for the first and second articles in our series, ‘Unlocking the Value: Understanding Intangible Assets in Business Valuation’ and ‘Determining the Economic Benefits of Customer-related Intangible Assets.’

In the previous article, we discussed the economic benefits of cultivating customer-related assets. In this article, we will explore the various approaches to value these benefits. The most common approach is the Multi-Period Excess Earnings Method (MEEM), which is often used to value customer-related, technology-related intangible assets, or other intangible assets that could be considered essential to the business. Ideally, the MEEM is selected when the company only has one key intangible asset. The MEEM employs market-participant assumptions and Contributory Asset Charges (CAC) to identify the cash flows directly associated with the intangible asset. CAC are essentially notional charges that are unique to the business and represent the reliance on other assets to support the intangible asset to generate earnings. The assets relied on include working capital, fixed assets, brand/trade name, assembled workforce, non-compete agreements, and more.

As the MEEM is based on the identification of the cash flows directly associated with the intangible asset, such as customer relationships, it is important to consider historical and projected information to develop reliable cash flows. This analysis should consider how long future cash flows from these customer relationships are expected to last. Factors such as the length of the historical customer relationships, renewals, cancellations, and customer switching costs, help us estimate the annual customer attrition rate, which reflects the expected decline in purchases over time. For technology-related assets, this may be referred to as a technological decline that reflects replacement of existing technology or migration to other products.

A disadvantage of the MEEM arises in situations where there are potentially multiple key intangible assets. For example, a business that has built a strong customer base and as a result has a valuable customer relationship intangible asset. This business may also have an exclusive distribution agreement which generates significant revenue. Thus, both the customer relationship and distribution agreement could be key intangible assets of the business. In this case, it can be challenging to isolate and allocate cash flows among the intangible assets, making it difficult to assess the value of the intangible assets separately. Furthermore, proper consideration of the CAC should be analyzed to avoid double counting charges.

An alternative option to the MEEM is the Disaggregated Distributor Method or Distributor Method (DM) which is similar to the MEEM but uses market-based distributor data for the CAC charges and discount rate. This is commonly used in manufacturing industries where sales are transactional in nature and the cost of switching to a competitor is not significant. The DM is only intended to value customer relationships; however, this allows the MEEM approach to be used to value another intangible asset. In addition, it reduces the risk of double counting the CAC which arises when using the MEEM to value two assets. The disadvantage of the DM is the lack of available distributor-related market information.

A third and least common option to value customer relationships is the With-or-Without method which calculates the value of the business with the intangible asset (scenario 1) and without the intangible asset (scenario 2). The difference in value between the two scenarios would be attributed to the customer relationship. This method requires careful consideration of the discount rate for each scenario to ensure risk is not double counted in the cash flows, particularly in the without scenario. Similar to the DM, this allows the MEEM approach to be used to value another intangible asset.

In conclusion, customer-related intangible assets are often valued using the MEEM but occasionally the DM or the With-or-Without method are applied. Properly assessing the unique traits of the intangible asset is essential to facilitate the identification of the approach that would most accurately reflect the value of the customer-related asset.

If you have any questions or require assistance regarding business combinations and valuing distribution agreements, please contact a member of our Financial Services Advisory Team (FSAT) team.

 

Professional Corporations: Are They Still Effective?

Posted on by dflanagan

Background

Historically, Professional Corporations (PCs) have been used by professionals as a vehicle to enjoy significant tax advantages, particularly through the deferral of personal taxes. By incorporating their practices, professionals are able to earn income within the corporation and take advantage of lower corporate tax rates on retained earnings. This structure is only available to individuals in regulated professions, such as accountants, lawyers, and doctors, among others. With the support of trusted advisors, professionals are able to implement tailored tax planning strategies to minimize their tax liabilities and achieve their cash flow objectives.

Benefits of Using a Professional Corporation

Deferral of Personal Tax

One of the primary benefits for professionals to incorporate is the ability to take advantage of the lower corporate tax rates compared to the higher personal income tax rates on active business income. By retaining a portion of their professional earnings within the corporation, professionals can defer paying personal tax on their earnings until a later date when the funds are withdrawn from the corporation as dividends.

Income that is taxed in the PC may be eligible for the small business deduction and be taxed at the lower corporate rate. Income above that threshold will be taxed at the general corporate rate, which is still significantly lower than the higher marginal personal tax rates.

The Small Business Deduction (SBD) applies to active business income (income earned from professional activities) under $500,000 and is taxed at a combined federal and provincial rate of 12.2% in Ontario (2024). This provides for a tax deferral on profits left in the corporation versus unincorporated professionals earning the same income and paying personal tax on the entire amount.

Lifetime Capital Gains Exemption

The Lifetime Capital Gains Exemption “LCGE) is an invaluable tax and estate planning tool and can be utilized on the sale of shares or the death of the shareholder. If the shares of the PC meet certain criteria, this exemption provides the ability to shelter a significant portion, if not all of the capital gains on the sale of the shares or the deemed disposal of the shares on death. To qualify for this exemption, the shares must be held for certain periods of time and no significant non-business assets can accumulate. Tax planning can be done to ensure that the PC shares qualify for this exemption. There is no similar deduction for unincorporated practices. This is primarily a benefit to professionals with saleable practices.

Income Splitting

While the opportunity to split income among family members, such as spouses and children, through a PC is still available, it has become more restrictive with the passing of the “tax on split income” or TOSI rules in 2018. These rules stipulate certain conditions that must be met by the family members receiving dividends from the PC or via a family trust. If these conditions are not met, the individual will be taxed at the highest personal rate on the income received from the PC.  The main eligibility criteria is that the family member being compensated must be actively engaged in the business on a “regular, continuous, and substantial basis” in either the current or preceding five years. Guidance has been provided to indicate that an average of 20 hours a week will satisfy this criterion. Additionally, once the professional is 65 or over, the PC is able to pay dividends to the spouse of the shareholder without the TOSI rules applying. There are other limited circumstances where TOSI rules are not applied.

Limited Liability

Since a corporation is a separate legal entity, a PC provides limited liability to its shareholder, similar to other corporations.  This offers the professional protection of their personal assets if the PC faces any financial difficulties. It provides them with creditor protection, as creditors can only go after the assets of the corporation and not the personal assets of the professional (shareholder). However, the limited liability protection applies primarily to the business operations and the corporation’s debts and liabilities, not the professional responsibilities of the shareholder. Professionals can still be held personally liable for any malpractice or negligence.

Flexibility in Remuneration Planning

A PC provides professionals flexibility in their remuneration planning. Depending on their financial goals and needs, they can take a salary, or a dividend, or a combination of both. Working with a tax professional, enables individuals to optimize their tax planning and helps them achieve their specific financial goals, such as managing cash flow, retirement planning, or reducing personal tax liabilities. For instance, many professionals will take a sufficient salary to generate contribution room and contribute to their RRSP, enabling them to maximize their retirement savings while minimizing their personal taxable income.

Disadvantages of Using a Professional Corporation

Sharing the Small Business Deduction (SBD)

When a professional corporation is part of a partnership, this advantage could be reduced or lost if income of the partnership is greater than the $500,000 limit because all corporate partners must share the $500,000 SBD.

Restriction on Business Activities

While there are limitations on the ability of a professional corporation to use accumulated wealth in other revenue generating activities, they can invest retained earnings inside their PC as long as these activities are considered ancillary to the practice of the professional. Rules vary by professional regulation boards, so it is important to consult federal and provincial regulations specific to the profession before any investments are undertaken in the PC. A further caveat is that the SBD does not apply to investment income, and it is taxed at the highest corporate rate which is only slightly lower than the highest personal rate; however, there is an opportunity to receive a portion of that tax back once dividends are paid out to the shareholder. Additional consideration is needed, if planning to claim the Lifetime Capital Gains Exemption (LCGE). The PC will need to ensure investments are not significant enough to prevent it from qualifying. It is important to consult a tax advisor for any additional tax planning needed to meet the eligibility criteria in a tax-efficient manner. There are alternative structures and tax planning opportunities available for PC’s looking to invest surplus funds.

Additionally, when earning significant passive income, the SBD can be reduced. Specifically for every $1 of passive income earned above the $50,000 threshold, then $5 of the SBD is clawed back for the PC and any associated corporations. Once the passive income is greater than $150,000, the SBD is eliminated.

Additional Costs and Compliance

There are additional costs incurred when a professional incorporates instead of operating as a sole proprietor or as part of a partnership. Among these costs are the legal fees to incorporate and maintain corporate records, and accounting fees related to annual compliance and filing requirements such as financial statements, corporate tax returns, T5 slips for any dividends paid, and T4 slips and returns for salaries. These additional reporting requirements can be both cumbersome and costly to the professional.

A PC must also comply with both federal and provincial regulations specific to their profession which could result in extra paperwork related to regulatory approvals, and adherence to specific operational guidelines.

Proposed Changes to Capital Gains Inclusion Rate and Why it Matters

As part of the 2024 Canadian federal budget, the government proposed to increase the inclusion rate on capital gains above $250,000 for individuals and on all capital gains by corporations and trusts from one-half to two-thirds. This proposed change will apply to capital gains incurred on or after June 25, 2024.

While these proposed changes have not yet been passed into law, it is important to consider the impact they will have on PC’s. Traditionally, PCs were an attractive tax planning tool due to the deferral of personal tax; however, some of this advantage is lost with the proposed increase to the capital gains inclusion rate if the PC holds certain investments.

Historically, the tax system in Canada has relied on the concept of integration. The concept of tax integration ensures that whether the taxpayer earns the income as an individual or by way of dividends through a corporation, the total income tax paid is similar. However, under the proposed legislation, individuals will benefit from the lower inclusion rate of one half on their first $250,000 of capital gains. Corporations and trusts do not have this carved out and will have an inclusion rate of two-thirds on all capital gains incurred. This presents an issue to integration and could result in higher taxes paid overall on certain income if it is earned in the PC first and then distributed as a dividend to the shareholder. It reduces the advantage of deferring personal tax when paying tax in the PC at a higher rate. This change to the inclusion rate could impact how professionals invest through their PC or structure any associated corporations.

Takeaway

While a PC may still offer valuable benefits, such as the deferral of tax via lower corporate tax rates on active income; the proposed capital gains inclusion rates does reduce some of the tax advantages of this structure. Strategic tax planning is essential to help mitigate the impacts of the proposed new capital gains inclusion rate.

For more detailed advice on whether a professional corporation is right for you or how to adapt your tax planning in light of the recent changes, please contact one of our trusted advisors. 

 

 

Corporate Tax Return Filed Late: Ability to Get a Tax Refund

Posted on by dflanagan

A July 22, 2024, Federal Court case found that CRA’s refusal to accept and provide tax refunds for corporate tax returns filed more than three years after the relevant year-end was reasonable. While a specific provision allows CRA to accept requests (at their discretion) for refunds after the three-year deadline for individuals, there is no parallel provision for corporations.

While no tax refund can be provided where corporate tax returns are not filed within three years of the fiscal year-end, CRA has discretion to re-appropriate the refund to another account of the taxpayer (e.g. the taxpayer’s GST/HST, payroll or income tax account). However, this re-appropriation is fully at CRA’s discretion, based on factors such as CRA error or delay, natural or man-made disasters, death, accident, serious illness, or emotional or mental distress.

Ensure that corporate tax returns are filed in a timely manner to avoid risking the loss of the tax refund.

Reminder: Prompt Payment Toolkit and Resource Centre

Posted on by Edixon

Prompt payment and adjudication are processes provided under Ontario’s Construction Act to help contractors to get paid on time. Prompt payment legislates mandatory timelines for payment and adjudication.  It is a dispute resolution process that allows a contractor or subcontractor to enforce claims for payment in a more efficient and less expensive way than going through the court system.

To further support the process, the Council of Ontario Construction Associations (COCA) recently launched a Prompt Payment and Adjudication Toolkit as an online resource centre.

The Prompt Payment and Adjudication Toolkit features downloadable documents with clear, concise information for owners, contractors, and subcontractors alike. Prompt Payment Adjudication 101, provides an overview of the act in layman’s terms, covering information about holdbacks and proper invoicing. The webpage also has a prompt payment webinar and links to government resources.

The intention of the resource centre is to get contractors and owners familiar with the legislation so that they can create their own internal processes and easily access the tools if and when there is a dispute over payment.  The online resource centre is intended to provide information and should not be considered legal advice.  We encourage those with further questions to contact a lawyer.

For more information and to access the toolkit, please visit: https://www.coca.on.ca/advocacy-prompt-payment/

Valuing Economic Loss for Realtors in the Current Realty Market

Posted on by dflanagan

In calculating the economic loss for an employed, or self-employed individual, we typically compare the person’s pre-accident potential earnings (being what they would likely have earned had the accident not occurred) to their expected post-accident actual earnings (being what they will likely now be able to earn, if anything, given the injuries they suffered in the accident).

Under relatively normal and stable economic conditions, the potential earnings are often estimated based on what the person was earning at the time of the accident, or perhaps based on an inflation-adjusted average of their pre-accident earnings. However, given the large fluctuations in real estate markets over the last few years, determining the potential and expected actual earnings for real estate agents/ brokers, has become more complex and difficult to determine.

Earnings of real estate agents are typically based on commissions on the sale price of the residential and commercial units sold. Over the past few years, the sales prices of real estate have increased dramatically. The resulting commissions on those property sales have also increased dramatically. Therefore, real estate agents are typically earning much more per home/unit sold now, than they did before these increases.

A real estate agent injured in an accident likely can’t work to the same extent as they could before their accident. Therefore, they have likely suffered a loss due to the accident because they are selling fewer homes than they were before the accident. However, because their commission income per home/unit sale is now much higher, their income may not have actually decreased, even though they are selling fewer homes. That is, had they not been injured in the accident, they likely would have sold more homes/units than they did in their injured state, and thus, they have suffered a loss, even though they may have earned as much, or more, income than they did prior to their accident.

To add to the complexity, real estate agents have also experienced somewhat inconsistent sales volumes with the interest rate increases that began in March 2022, and remained at higher levels until the recent decreases in the middle of 2024. Other external factors may also apply, with the number of homes sold throughout the Golden Horseshoe area fluctuating significantly over the last few years. For example, the annual number of residential sales in the Hamilton area increased by about 8% in 2020, and almost 14% in 2021, before decreasing sharply by about 33% in 2022, and a further 15% in 2023. Based on this, it would likely not be reasonable to assume that any specific real estate agent’s sales would have remained constant throughout this period. Rather, it is likely that their number of sales would have fluctuated somewhat consistent with the market. We need to consider these fluctuations in estimating the person’s potential earnings.

Based on the above, when estimating a real estate agent’s potential earnings during this period, we would want to consider both the change in real estate prices (and thus commission income) and the fluctuations in the market. We can then compare this to the actual number of units sold, and income earned, by the real estate agent to estimate the loss suffered due to their injuries.

Ultimately, calculating the value of lost employment or self-employment income for economic loss purposes is a complicated issue, with each case presenting its own set of unique challenges. Our Financial Services Advisory Team (FSAT) has significant experience preparing these calculations. If you have any questions or require assistance with a calculation, please contact a member of our team.

Shareholder Loan Account: Proper Bookkeeping

Posted on by dflanagan

A July 31, 2024, Tax Court of Canada case reviewed whether payments made by a corporation in 2013 and 2014 of $24,249 and $41,680, respectively, were taxable as shareholder benefits on the basis that they were for the personal expenses of the shareholder. The Court also reviewed whether payments of $13,693 and $28,131 in 2013 and 2014 were taxable to the shareholder as indirect payments on the basis that they were made on behalf of the shareholder’s son for personal mortgage payments and day-to-day expenses. The taxpayer argued that all these payments constituted non-taxable shareholder loan repayments.

Starting in 2001, and continuing over several years, the taxpayer loaned a newly incorporated entity, of which the taxpayer and his spouse were shareholders, over $600,000. The loans enabled the corporation to acquire and operate a tire/auto detailing business managed by the taxpayer’s son. As the corporation could not afford a professional to prepare the corporation’s tax returns, the taxpayer compiled the returns, although he had no accounting training other than a personal tax preparation course he took 40 years prior. In 2018, the corporation ceased operations due to financial problems.

Taxpayer loses – shareholder benefit

The Court acknowledged that the taxpayer had made a bona fide loan to the corporation. However, the Court observed that payments the taxpayer received from the corporation were not properly recorded via a debit entry to the shareholder loan account as a repayment of the shareholder loan. The taxpayer argued that he did not know how to record payments for personal expenses in the shareholder loan account. The Court found that this was not a sufficient reason for not debiting the shareholder loan account for the repayments of the shareholder loan. The Court noted that the choice was to pay for professional assistance for the books and records or learn how to do it properly, neither of which the taxpayer selected. The shareholder benefit income inclusion was upheld.

Taxpayer loses – indirect payment

The Court noted that all of the following conditions were met in respect of payments to or for the benefit of the taxpayer’s son:

  • the payments were made to a person (the son) other than the reassessed taxpayer (the shareholder);
  • the allocations were at the direction or with the concurrence of the reassessed taxpayer (the shareholder);
  • the payments were made for the benefit of the reassessed taxpayer (the shareholder) or for the benefit of another person (the son) whom the reassessed taxpayer wished to benefit; and
  • the payments would have been included in the reassessed taxpayer’s income (the shareholder’s income) if they had been received by them.

The taxpayer was, therefore, required to pay tax on the indirect payments benefiting his son.

Ensure that all loans to a corporation and associated repayments are properly recorded in the books and records of the corporation.

Employment Expenses: Salary to Spouse

Posted on by dflanagan

A June 17, 2024, Tax Court of Canada case reviewed a commission salesperson’s deduction for remuneration paid to their spouse for general administrative services as a self-employed contractor.

Taxpayer loses

The annual deductions of $20,000 for services, including arranging appointments with prospective clients (who completed preprinted forms at a kiosk to express interest in a salesperson’s products/services), were not supported by a contract or by any documentation such as a log or list of customers contacted. The taxpayer testified that payment was made in the form of joint household expenses that did not directly match the amounts deducted. The taxpayer testified that he left the determination of the amount deducted to his accountant.

The Court agreed that the onus was on the taxpayer to maintain books and records, such as a contract for services or actual payments for those services, to document expenses claimed. His verbal testimony alone was not adequate to support the deductions claimed – they were properly denied.

Employment expenses – regular vs. commission employee

The scope of deductible employment expenses for employees earning commission income is much broader than for non-commission employees. Expenses incurred to earn commission income are deductible provided that they are not specifically prohibited (purchase of capital assets, personal expenses or payments that reduced a taxable employment benefit) and provided that the other standard conditions for deduction are met. In contrast, only expenses specifically listed as deductible can be deducted against non-commission employment income. For example, a non-commission employee can deduct salaries paid to an assistant only if the employment contract specifically requires them to pay for an assistant; however, no provision would permit a deduction for fees paid to a self-employed assistant.

If paying an assistant such that you can earn commission income, ensure to properly pay and retain documentation to support the claim­.

Ontario Made Manufacturing Investment Tax Credit

Posted on by dflanagan
Overview

The Ontario made manufacturing investment tax credit was passed alongside Ontario 85 bill on May 18, 2023. It is a refundable investment tax credit designed to support manufacturers in Ontario. Eligible Canadian-controlled private corporations (CCPCs) can receive a 10% tax credit on qualifying investments in manufacturing and processing (M&P) property, up to a maximum $2 million per year. For investments of up to $20 million annually, corporations can claim this credit to reduce their tax liability and reinvest in their business.

Qualification Criteria: Does your corporation qualify?

The corporation must meet ALL the following criteria to claim the credit:

  1. Be a CCPC throughout the tax year;
  2. Have a permanent establishment in Ontario, actively carrying on business throughout the year;
  3. Not be exempt from Ontario corporate tax during the year
Eligible vs Ineligible Purchases

For corporations to qualify for the credit they must ensure that purchases are NOT excluded property as these properties are considered ineligible for the tax credit claim. From a general standpoint, M&P properties purchased from a third party are considered eligible. Provided below is a more detailed outlook of the M&P property purchases that are customarily considered acceptable:

There are two main classes of investment purchases that qualify for claim of this credit. These include capital cost allowances (CCA) classes 1 and 53. Below is a detailed look of the requirements for each class:

Class 1

  1. Includes buildings that become available for use after March 22, 2023.
  2. Consists of buildings that are primarily used (at least 90% of the floor space) for manufacturing or processing purposes at the end of the year. The credit may also apply to buildings under construction or undergoing renovations, provided they meet the manufacturing use requirement.
  3. The building must also be eligible for an additional 6% CCA claim.
    • To satisfy this requirement the corporation must make an election under regulation 1101(5b.1) of the Federal Income Tax Act.

Class 53

  1. Includes machinery and equipment that became available for use after March 22, 2023.
  2. Machinery and equipment that are used in Ontario for manufacturing or processing of the goods for lease or sale.
  3. Property that the corporation leases in the ordinary course of business that is used primarily for manufacturing or processing of goods for lease or sale will also qualify.

 

Ineligible Claims & Excluded Property

A claim will be deemed ineligible if the expenditure was acquired by the following means:

  1. If there is an existing contract with a non-arm’s length individual or partnership at the time of acquisition.
  2. For the case of amalgamation, if the predecessor corporation was deemed as a non-qualifying corporation prior to amalgamation.

An M&P property will be deemed an excluded property and will be ineligible to claim the Ontario made manufacturing investment credit if one of the following criteria are met:

  1. If at any time during the properties existence the property was owned by a non-arm’s length party or purchased from a non-arm’s length party.
  2. If the credit was previously claimed by an associated corporation or the qualifying corporation.
  3. If the reason for holding the property was for a leasehold interest by an associated corporation or the qualifying corporation.
  4. If the property was leased to a non-profit organization or a registered charity or any other property that is considered exempt from paying tax under section 149 of the Federal Income Tax Act.
  5. If the M&P property was purchased from a seller who has a right or option to either lease or acquire a portion or all the property.
  6. If the corporation that qualifies for the exemption provides a buyer with an option or right to purchase the property.
  7. If the property was transferred following an election from a Class 1 asset to a Class 2 or 12.
How To Claim the Credit

Corporations must file Schedule 572 with their corporate income tax return to claim the Ontario Made Manufacturing Investment Tax Credit. It is essential to file within 6 months after the end of the corporation’s tax year to ensure eligibility. Late filings may result in the credit being denied.

How The Credit Is Calculated

The credit is calculated as 10% of the total eligible expenditures for the year, up to a maximum of $2 million. If a corporation (or group of associated corporations) makes qualifying investments exceeding $20 million, the total credit claimed is still capped at $2 million annually.

Example:

A manufacturing corporation invests $12 million in a new manufacturing facility and $8 million in machinery during the year, for a total investment of $20 million. The corporation can claim a 10% credit on the total qualifying expenditures, resulting in a $2 million tax credit.

If this corporation is associated with another company, the total credit of $2 million must be shared between them, and the total qualifying expenditures (up to $20 million) must be allocated across both companies.

Key Takeways

The Ontario Made Manufacturing Investment Tax Credit provides a significant opportunity for manufacturing businesses or reduce their tax burden on qualifying investments in Ontario. With a refundable tax credit of up to $2 million annually, this incentive can help corporations reinvest in their operations. While there is no immediate deadline for the credit, the Ontario government plans to review the review the program in three years, which may lead to future changes.

Below are key considerations to keep in mind when applying for the Ontario made manufacturing investment tax credit:

  1. The investment limit will be prorated for short taxation years.
  2. The amount of the $20 million expenditure limit must be allocated among all associated corporations.
  3. The total claim for the credit is 10% of the amount of eligible qualifying investments for a maximum of up to $2 million dollars per year.

The Ontario Made Manufacturing Investment Tax Credit is considered a government inducement, subsidy or grant.  Therefore, the resulting refund would be considered taxable income and would need to be reported in the year it is received.  For more detailed advice on how your business can benefit from this credit, please contact one of our trusted advisors.