Eligible manufacturers in Ontario could receive up to $2 million per year on certain purchases of manufacturing and processing property, under the Ontario made manufacturing investment tax credit. This new refundable tax credit, which was announced in Ontario Budget 2023, is intended to encourage Canadian controlled private corporations (CCPCs) to increase their investments in Ontario’s manufacturing sector.
Ontario Bill 85, which includes this tax credit, received Royal Assent on May 18, 2023.
It’s important to note that a corporation must meet several criteria to claim the Ontario made manufacturing investment tax credit and determine whether an expenditure qualifies can be complex. If you need assistance navigating these rules, we can help.
What corporations qualify?
Only qualifying corporations that make eligible expenditures in eligible property qualify for the Ontario made manufacturing investment tax credit. Specifically, the corporation making the eligible purchase must:
- be a CCPC throughout the tax year;
- carry on business through a permanent establishment in Ontario (i.e., a fixed place of business, such as an office, factory, or workshop)
- not be exempt from tax
What expenditures are eligible and when?
Qualifying corporations that purchase eligible manufacturing and processing (M&P) property from third parties are generally eligible for the Ontario made manufacturing investment tax credit, provided they are not “excluded property”. Specifically, the following M&P purchases are generally eligible:
- M&P machinery and equipment under Class 53 (or Class 43 after 2025) for capital cost allowance (CCA) purposes purchased on or after March 23, 2023, and available for use in the taxation year, provided the qualifying corporation is:
- using the property in Ontario primarily in the manufacturing or processing of goods for sale; or
- leasing the property in the ordinary course of carrying on business in Ontario to a lessee who can reasonably be expected to use it primarily for manufacturing or processing of goods for sale or lease.
- M&P buildings (or building additions) under Class 1 for CCA purposes, that are located in Ontario, provided:
- the building is available for use by the qualifying corporation on or after March 23, 2023; and
- a valid election to claim additional CCA on an eligible M&P building has been filed on time with the CRA for the property (under regulation 1101(5b.1) of the federal Income Tax Act).
It’s important to note that for a building (or building addition) to qualify for this federal election, 90% or more of the space (by square footage) must be used for M&P purposes and the property cannot have been used (or acquired for use) by anyone prior to March 19, 2007. In addition, the corporation must file the election by the deadline (six months after the tax year-end) or it will not be accepted by the CRA, as previously noted in a technical interpretation.
What is excluded property?
M&P property wouldn’t qualify for the Ontario made manufacturing investment tax credit if the property is or was one of the following:
- purchased from a non-arm's length party (at the time of the expenditure or when the contract was entered into);
- owned any time previously by a non-arm’s length party;
- held as a leasehold interest at any time previously by the qualifying corporation or an associated corporation;
- claimed previously by the qualifying corporation or an associated corporation under the Ontario made manufacturing investment tax credit rules;
- purchased from a vendor with a right or option to acquire or lease all or part of the property, or the qualifying corporation grants another party a right or option to acquire it;
- Class 2 to 12 property transferred to Class 1 under an election; or
- leased to a lessee exempt from tax under section 149 of the Act (e.g., a registered charity or non-profit organization)
The legislation allows for the Ontario Ministry of Finance to prescribe additional situations where a property would be excluded from this tax credit.
How is the credit calculated?
For a specific taxation year, the Ontario made manufacturing investment tax credit is calculated as 10% of the lesser of:
- total eligible expenditures
- $20 million expenditure limit, which must be shared amongst an associated group and is prorated for short tax years.
Associated groups need to file an agreement designating the amount of the limit allocated to each corporation.
How do qualifying corporations file a claim?
The Ontario government hasn’t yet released a prescribed form to claim the Ontario made manufacturing investment tax credit or to make the agreement to allocate the $20 million between associated corporations, as of the date of this article.
The Ontario government plans to review the Ontario made manufacturing investment tax credit every three years from the date it receives Royal Assent, so it’s unclear whether it’ll be available long-term. Other considerations include:
- This tax credit is taxable under the Act; however, an election may be available to reduce the capital cost of the M&P property instead of including it in income for tax purposes.
- When land and M&P buildings are purchased together, only the cost of eligible buildings qualify so a reasonable allocation of the purchase price would be needed.
- There are measures to prevent the misuse of this credit such as:
- corporations would be deemed to be associated if it’s reasonable to believe that one of the reasons for their separate existence is to access or increase the credit
- amalgamated companies can’t claim expenditures incurred by a predecessor that wasn’t a qualifying corporation when the expenditures were incurred.
This tax credit offers eligible CCPCs a refundable credit up to $2 million per year (shared among an associated group) on certain purchases of M&P property used in Ontario.
The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or an opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.