New Information Released Regarding The Ontario 2015 Budget Changes
The changes proposed by the Ontario budget on April 23, 2015 relate to the definition of eligibility of a product, specifically around the primary purpose and development requirements. Here is a summary of the changes.
Primary purpose
Prior to the recent budget, the primary purpose was defined as products that must be to entertain, educate or inform the user, with general exclusions, for example products that promoted the products or services of the corporation.
The change to the primary purpose is significant in terms of what defines an eligible product and what is specifically excluded. Products only qualify now if they entertain the user or educate children under the age of 12. No longer are informational products allowed such as new & public affairs websites, content aggregators and databases. Websites are no longer eligible unless they satisfy the new primary purpose rules.
This change has a significant impact on the types of products that qualify; and thus many products of companies that have qualified in the past and received tax credits will no longer be eligible.
There are additional restrictions introduced with respect to promotional products in that a product fitting the primary purpose must generate revenue in the current or future periods. The new primary purpose rules will be effective as of the budget date (once the legislation is passed). Products prior to the budget date can still qualify under the old rules.
Development Requirement
OMDC’s requirement to qualifying a product for the tax credit required that all-or-substantially-all (ASA), defined as 90% or more, of the development had to be performed in Ontario by the corporation claiming the credit. The rule existed for multiple reasons but was very penalizing for companies that co-developed digital media products and/or used subcontractors. The rule was also not well documented and created significant confusion and delays during the review process.
The Ontario 2015 budget attempts to relax and simplify the development requirement by introducing a 25% and 80% requirement. Both requirements must be satisfied.
25% Requirement: the ratio of eligible salaries to total labour expenditures for creation of the product must be 25% or greater. So, a company must supply a minimum of 25% of the eligible labour costs for the eligible product.
80% Requirement: the ratio of eligible labour expenditures (salaries, personal services corporations, sole proprietorships) performed in Ontario to total labour expenditures for creation of the product must be 80% or greater. So, a company must use a minimum of 80% of Ontario-based labour for development of the eligible product.
Interestingly, this change would apply retrospectively to claims prior to the budget date. This opens the door to submit claims for products that meet the former Primary Purpose requirements but did not meet the former Development Requirements.
Clearly these changes are significant to previous and future claimants of this tax credit. Ontario is clearly trying to reduce the amount they are spending on this tax credit. By introducing these changes, they are reducing the amount of fiscal commitment; and a by-product is a reduction of the wait time in getting claims processed. In the short term, wait times are likely to increase while companies scamper to file their final claims under the old rules, and perhaps resubmit old claims that could qualify given the relaxation (and retrospective applicability) of the Development Requirement.
Joshua Smith
Business Incentives Leader
