In the 2016 budget proposal released Feb 25, 2016, Ontario has indicated a decrease in the tax credits it will provide for companies performing SR&ED. Currently, qualifying companies can receive a refundable Ontario Innovation Tax Credit (OITC) equal to 10% of qualifying costs as well as a non-refundable Ontario Research and Development Tax Credit (ORDTC) of 4.5% to offset Ontario taxes payable. The 2016 budget proposes to reduce the OITC to 8% and the ORDTC to 3.5%. These changes are set to apply to corporations with years ending after June 30, 2016. For corporate year ends that straddle June 30, 2016 the rate will be prorated based on number of days.
This is an interesting move for a government that is trying to grow its economy and workforce considering that SR&ED tax credits have been one of the key reasons that international companies have setup development hubs in Ontario. These hubs don’t only create jobs they create the types of jobs that all governments are looking for, that of researchers (aka the knowledge-based economy). The employees then pay personal tax increasing Ontario’s tax revenues.
To offset these decreased credits and still promote innovation the budget proposed to increase the direct funding it provides to companies via the Ontario Centres of Excellence and others. There are a few problems associated with the direct funding method. One such problem is that direct funding requires pre-approval, a process that can be burdensome for companies. Another problem is that the ultimate decision to provide cash is left to a government agency rather than the marketplace, often resulting in missed ideas and opportunities. Add to this the fact that the government can stop funding that agency, project or program and there is a risk that the amount of funding will decrease further.
The changes to the OITC and ORDTC are not official yet, but the majority government is unlikely to vote against its own budget.