The 2023 Ontario Budget proposed a new Ontario Made Manufacturing Investment Tax Credit (“MITC”) which provides a 10% refundable tax credit to qualifying corporations that make qualifying investments in manufacturing and processing (M&P) in Ontario. The credit is available for qualifying investments up to a limit of $20 million in a taxation year (shared by an associated group and pro-rated for short taxation years). Ontario Bill 85, which included the legislation for the MITC, received royal assent on May 18, 2023. However, even though the MITC has been officially enacted for property available for use after March 23, 2023, the Ontario government has not released the prescribed form required to claim the MITC. The Ontario government will undertake a review of the credit every three years to evaluate the effectiveness, compliance burden and administrative costs.
To qualify for the MITC, the corporation must meet the following requirements:
- the corporation is a Canadian-controlled private corporation (“CCPC”) throughout the taxation year; and
- the CCPC is not exempt from Ontario corporate income tax for the taxation year; and
- it carries on business in Ontario in the year through a permanent establishment in Ontario.
Qualifying investments include expenditures for certain capital investments in buildings, machinery and equipment used in M&P included in Class 1 or Class 53 for capital cost allowance (CCA) purposes. Specific criteria and exclusions are summarized below.
Building – Class 1
Expenditures for constructing, renovating or acquiring buildings under Class 1 for CCA purposes used for M&P activities in Ontario qualify provided all of the following conditions are met:
- the building is located in Ontario; and
- the building is available for use on or after March 23, 2023; and
- the building is eligible for the additional 6% CCA rate permitted under the federal Income Tax Act for buildings used primarily for M&P.
A reasonable allocation between land and building is required on acquisitions since only the building portion is eligible for the credit. Furthermore, to meet the federal condition for the additional 6% CCA rate, 90% of the floor space of the building must be used at the end of the corporation’s taxation year for M&P and the corporation must file a valid election with the CRA to claim the additional CCA rate in the year of the acquisition or addition. Furthermore, the building must not have been used or acquired by anyone prior to March 19, 2007. The election for the additional 6% CCA rate cannot be late filed as it is not permitted by the federal Income Tax Act. If a corporation acquires an eligible building and does not make the necessary election on time, it will not be eligible for the additional CCA rate or the MITC.
Furthermore, the 90% use test must be met at the end of each year for the corporation to qualify for the additional rate. As a result, qualifying and electing for the additional CCA rate in the year the building is acquired does not guarantee the additional rate will be automatically available in subsequent years. This could jeopardize eligibility for the MITC with respect to the building. It will be important to ensure the 90% test is met throughout the qualifying period.
Machinery and Equipment – Class 53
Eligible expenditures for machinery and equipment used in the M&P of goods in Ontario are eligible for the MITC if the following conditions are met:
- Acquired after March 23, 2023 (if acquired before 2026, must be included in Class 53 for CCA purposes and in Class 43(a) for CCA purposes if acquired after 2025)
- Available for use on or after March 23, 2023
- Use test:
- The corporation is using the property primarily (more than 50%) in M&P of goods for sale or lease; or
- The corporation is leasing the equipment, in its ordinary course of carrying on business in Ontario, to a lessee who can be reasonably expected to use the property primarily in M&P of goods for sale or lease.
The following expenditures related to buildings or machinery and equipment are excluded property and not eligible for the MITC:
- Property acquired from a non-arm’s length party under a contract.
- Property owned at any time by a non-arm’s length party.
- Property that the associated group held a leasehold interest in at any time before the acquisition.
- Property purchased from a vendor who has a right/option to acquire or lease all or part of the property at any time.
- Property where the corporation grants another party the right/option to acquire it.
- Property leased to tax-exempt non-profit organizations.
- Property added to Class 1 because of a subsection 1103(1) election of the regulation to transfer assets from another class to Class 1
- Any other prescribed property determined by the Ontario Minister
Calculating and Claiming the MITC
The MITC for a taxation year is 10% of eligible expenditures for qualifying investments, up to a maximum of $2 million (i.e. 10% of the $20 million limit). The limit is pro-rated for short taxation years. If an eligible corporation acquires an eligible property and the purchase price allocated to the building is $10 million, the corporation will receive a MITC of $1 million. The MITC will be administered by the CRA as part of the corporate tax return. However, the form to claim the MITC has not been made available to date.
Any credit received is taxable as income. However, elections may be available to reduce the capital cost of the property acquired as opposed to including the amount in income.
Associated Groups & Designation Agreement
Associated groups must share the $20 million expenditure limit and they must designate the allocation of the expenditure limit across the associated group. The maximum that can be designated by an associated group is $20 million. The associated group will be deemed to have a nil expenditure limit if:
- The group fails to enter into an agreement to designate the expenditure limit; or
- The group fails to file a designation agreement; or
- The group designates more than the $20 million limit in the designation agreement; or
- The group fails to designate in accordance with the allocation rules in subsection 9 for situations where there is more than one taxation year ended in the same calendar year.
These deeming rules are punitive and can jeopardize a MITC claim. It is important to ensure the designations are filed on time and correctly to avoid the deeming rule from applying and reducing the expenditure limit to nil for the associated group.
The information in this article is of a general nature and is in summary form. Contact one of our tax professionals to discuss these matters in the context of your situation before acting upon such information.