Ontario Made Manufacturing Investment Tax Credit

Posted on November 12th, 2024 in Domestic Tax, Manufacturing & Distribution

Overview

The Ontario made manufacturing investment tax credit was passed alongside Ontario 85 bill on May 18^th, 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^nd, 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.
   1. 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^nd, 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.