In the 1997 Budget, Ontario announced the Ontario New
Technology Tax Incentive (the "ONTTI") to encourage
the development and transfer of new technology. The
rules discussed in this bulletin are contained in sections 11.1 and
13.1 of the Corporations
Tax Act (CTA)
and in section 203 of Regulation 183 under the CTA.
This bulletin is provided as a guide for taxpayers.
It is not intended as a substitute for the
legislation or the regulations. For precise details,
the reader should consult the CTA and the regulations.
Prior to the May 6, 1997 Ontario Budget, taxpayers were
generally entitled only to a gradual deduction of the
costs of intellectual property acquired for use in their businesses.
For example, corporations could
claim 25% of the capital cost of patents (Class 44)
on a declining balance basis, subject to the "half-year rule". The
capital cost of class 14 properties such as franchises or licences could
be claimed on a straight
basis over the life of the particular contract. The
portion of eligible capital expenditures for other
intangible properties that is included in cumulative
eligible capital could be deducted on a 7% declining
As announced in the 1997 Budget, the ONTTI allows
taxpayers a 100% immediate write-off of the eligible cost of qualifying
intellectual properties acquired in the course of an intellectual property
transfer. Where a corporation uses the qualifying property exclusively in
Ontario and allocates part of its taxable income to other jurisdictions, the
eligible costs can be grossed-up by the Ontario allocation factor to ensure
that the full value of the deduction is realized for Ontario income tax
2. Eligible Costs
The eligible cost of a qualifying intellectual property of
a taxpayer is the taxpayer's capital cost of the property that is included
by the taxpayer for the purposes of the Income Tax Act (Canada)
- in the undepreciated capital cost of Class 14 or Class
44 of Schedule II to the ITA; or
- in computing its eligible capital expenditures (
Reg.183 subsection 203(1)).
3. Intellectual Property Transfer
An intellectual property transfer is an acquisition of
qualifying intellectual property by a corporation from an unrelated person for
the purpose of implementing an innovation or an invention in the
corporation's business that is carried on in Ontario ( Reg.183 subsection
4. Qualifying Intellectual Property
A qualifying intellectual property is a patent (whether
domestic or foreign), a licence, a permit, know-how, a commercial secret, a
process, a formula or other similar property constituting knowledge that is
acquired in the course of an intellectual property transfer, but it does not
- a property that is used primarily to earn rent or
- a trademark, an industrial design, a copyright, or
other similar property constituting the expression of knowledge ( Reg.183
5. Ontario New Technology Tax Incentive
The eligible costs of qualifying intellectual properties
are included in a Class 12 capital cost allowance ("CCA") pool and
allowed as a 100% deduction from income in the year of acquisition (Reg.183
To claim the ONTTI, a taxpayer must meet the following
- the taxpayer acquired the qualifying intellectual
property after August 31, 1997 in an intellectual property transfer under a
contract entered into after May 6, 1997;
- the property is first used by the taxpayer in carrying
on its business in Ontario within a reasonable time following acquisition and
continues to be used during the entire period in which the innovation or
invention is being implemented;
- for federal income tax purposes, the eligible cost of
the qualifying intellectual property is included by the taxpayer in the
undepreciated capital cost of its Class 14 or Class 44 assets or is included in
computing its eligible capital expenditures;
- for Ontario tax purposes, the eligible cost of the
qualifying intellectual property is included by the taxpayer in the
undepreciated capital cost of its Class 12 assets and a separate class is
established for each property.
- the total of all eligible costs included in Class 12
assets for ONTTI purposes for a year must not exceed the taxpayer's
expenditure limit for that year.
A taxpayer's total ONTTI deduction for a taxation
year is equal to the total amount of CCA allowed in respect of each ONTTI
property. Neither the "half-year" rule nor the "available for
use" rule applies for ONTTI purposes (Reg.183 subsection 203(10)).
6. Ontario New Technology Tax Incentive Gross-up
The ONTTI is a deduction in computing income for Ontario
tax purposes. Taxpayers that use a qualifying intellectual property exclusively
in Ontario are entitled to a special gross-up in order to reflect the value of
the ONTTI that would otherwise be reduced to the extent that the taxpayer earns
income outside Ontario (section 13.1). The gross-up is calculated according to
the following formula:
A = B/C - B, where
"A" is the taxpayer's ONTTI gross-up for
"B" is the amount of ONTTI for the year before
applying the gross-up; and
"C" is the taxpayer's Ontario
allocation factor for the year.
A taxpayer spends $100 on acquiring a patent in the
taxation year. The taxpayer's Ontario source income is 30% (the Ontario
allocation factor). Its ONTTI gross-up will be $233 ( $100/.3 - $100 = $233).
Without the gross-up the taxpayer would only have a $30
($100 × .3) reduction in its income allocated to Ontario. The ONTTI gross-up
allows the taxpayer to claim a deduction of $333 ($100 of eligible cost + $233
of gross-up) in computing its income before allocation to Ontario. As a result,
the taxpayer will have a full $100 ($333 × .3) deduction from income allocated
The ONTTI gross-up is based on CCA claimed in respect of
qualifying intellectual property. If a taxpayer only claims a portion of the
CCA available for a qualifying intellectual property in computing income for
the taxation year, the gross-up will only be available for that portion of the
CCA. Using the example above, if the taxpayer decides to claim $50 of the
deduction in a taxation year instead of the $100 allowed, only $117 ($50/.3 -
$50) of the gross-up would be allowed in the taxation year. The total ONTTI
deduction of the taxpayer in computing its income before allocation to Ontario
would be $167 ($50 + $117). The taxpayer would be able to deduct $50 ($167 ×
.3) from its income allocated to Ontario.
When the taxpayer claims the remaining $50 in a subsequent
taxation year, the amount will generate a further gross-up based on the Ontario
allocation factor of that year.
7. Ontario New Technology Tax Incentive Gross-up
Where a taxpayer sells a qualifying intellectual property
in a taxation year, all or part of the ONTTI deduction may be recaptured under
the regular CCA rules since each qualifying intellectual property is in a
separate class (section 11.1). To ensure that the appropriate benefit of the
ONTTI deduction is recaptured, the taxpayer is also required to include an
ONTTI gross-up recapture in computing income for the taxation year. The ONTTI
gross-up recapture is calculated in accordance with the following formula:
A = B/C - B, where
"A" is the taxpayer's ONTTI gross-up
recapture for the taxation year;
"B" is the amount of ONTTI
recapture for the taxation year before the gross-up; and
the taxpayer's Ontario allocation factor for the taxation year in which
the property is sold.
8. Reduction of Non-Capital Loss
Where a taxpayer's ONTTI gross-up creates a
non-capital loss which is then applied to reduce the income of other taxation
years, the amount of the non-capital loss may be subject to a reduction. Under
section 35 of the CTA, the minister may reduce the non- capital loss applied if
the Ontario allocation factor for the taxation year to which the loss is being
applied exceeds 120% of the Ontario allocation factor for the taxation year in
which the loss is incurred. This reduction is to prevent the application of
artificially increased losses to other taxation years.
9. Expenditure Limit
The expenditure limit of a taxpayer for a taxation year is
the maximum amount of eligible costs that the taxpayer may add to the
undepreciated capital cost of Class 12 assets for the taxation year in respect
of qualifying intellectual properties (Reg.183 subsections 302(6) to (9)).
- The expenditure limit for a taxation year is $20
- Where a taxpayer is associated with one or more other
taxpayers in a taxation year, the associated group shares the $20 million
limit. The expenditure limit of each associated member for the taxation year is
determined by the following rules:
- If all associated taxpayers have filed with the
Minister an agreement in a form acceptable to Minister allocating the $20
million limit between them and the total of all amounts allocated does not
exceed $20 million, the expenditure limit for the taxation for each taxpayer is
the amount allocated to it.
An agreement will be considered
acceptable to the Minister if the agreement contains the following information
for each taxpayer in the associated group:
- legal name
- Ontario corporate tax account number (not
applicable for partnerships)
- head office address
- taxation year-end (fiscal year-end for
- expenditure limit for the taxation year
- name and position (or office) of authorized
- signature of authorized officer
- If the Minister notifies in writing any taxpayer in
an associated group to file an allocation agreement for a year and no agreement
is filed within 30 days after the notice, the Minister may allocate the $20
million limit between one or more members of the group. The amount so allocated
will be the respective taxpayer's expenditure limit for the year.
- Where no allocation agreement is filed by the
associated taxpayers and no allocation is made by the Minister, the expenditure
limit for each taxpayer for the taxation year will be nil.
- Where a taxpayer has more than one taxation year
ending in a calendar year in which it is associated with another taxpayer, the
expenditure limit of the taxpayer for the second or subsequent taxation year
that ends in the calendar year is equal to the lesser of:
- Its expenditure limit determined under (I),
(ii) or (iii) for its first taxation year ending in the calendar year, prorated
by the ratio of the number of days in the taxation year to 365; and
- its expenditure limit determined under (I),
(ii) or (iii) for its second or subsequent taxation year ending in the
calendar, prorated by the ratio of the number of days in the taxation year to
and Y Co. are associated and both have a taxation year ending June 30. X Co.
and Y Co. choose to allocate $10 million each as their expenditure limit for
the first taxation year.
On July 1, Z Co. becomes associated with X
Co. and Y Co. Z Co.'s taxation year end is September 30. X Co. and Y Co.
change their taxation year end to September 30. The associated group allocates
the $20 million for the second taxation year as follows:
- $5 million to X Co.;
- $5 million to Y Co.; and
- $10 million to Z Co.
Since the period July 1 to September 30 is the
second taxation year of X Co. and Y Co. that ends in the calendar year, the
expenditure limit for X Co. or Y Co. for the second taxation year is $1.12
million, which is the lesser of:
- $10 million × 82/365 = $2.24 million; and
- $5 million × 82/365 = $1.12 million.
- For taxpayers whose taxation year is less than 51 weeks
(except in the case where (b)(iv) applies) the expenditure limit for the
taxation year must be prorated by the ratio of the number of days in the
taxation year to 365.
- For taxpayers whose taxation year straddled May 7,
1997, the expenditure limit for the taxation year must be prorated by the ratio
of the number of days in the taxation year ending after May 6, 1997 to the
number of days in the taxation year.
For all circumstances, the unused expenditure limit in a
taxation year may not be carried forward to subsequent years or carried back to
10. Associated Corporations
For the purpose of determining a taxpayer's
expenditure limit, corporations are associated with each other if they are
associated in the taxation year under section 256 of the ITA (Reg. 183
subsection 203(10)). A partnership and a corporation or two or more
partnerships are deemed to be associated with each other in a taxation year if
on the application of the following rules they would be associated under
section 256 of the ITA:
- A partnership is deemed to be a corporation with one
class of issued shares that have full voting rights and each partner is deemed
to own a proportionate number of the shares based on its percentage share of
the income or loss of the partnership.
- Two partnerships are deemed to be associated if each
member of one partnership is also a member of the other partnership or is
related to at least one member of the other partnership.
- A taxpayer that is deemed to be associated with another
taxpayer will be deemed to be associated with every corporation and partnership
that is deemed to be associated with the other taxpayer.
A partnership, other than a limited partnership, may claim
the ONTTI in computing the partnership's income prior to allocating the
income to its corporate partners (Reg. 183 subsection 203(1)). However, only
corporate partners are eligible for the ONTTI and their share of the ONTTI in
the partnership is based on their percentage of income or loss in the
partnership. The ONTTI gross-up is applied at the level of the partner using
the partner's Ontario allocation factor.
12. Non-arm's Length Transfer
Where an ONTTI property is transferred by a taxpayer to a
related person, the regular rules in respect of a disposition of a capital
property to a related person apply. As long as the property is acquired by the
transferee for the purpose of gaining or producing income, the property will be
deemed to be in the same class as the class in which it was last included by
the transferor (ITA regulation subsection 1102(14)). Hence, the ONTTI including
the gross-up previously available to the transferor, will be available to the
transferee if the transferred property continues to be used within a reasonable
time after the acquisition and is used during the entire period when the
innovation or invention is being implemented (Reg. 183 subsection 203(15)).
When the transferred property is subsequently disposed of
by the transferee to an unrelated party, the transferee is required to include,
in computing its income, the recapture of CCA as well as the ONTTI gross-up
recapture if applicable.
13. Failure to Use Qualifying Intellectual Property as
If a taxpayer fails to use the qualifying intellectual
property continuously throughout the implementation period of the innovation or
invention or uses the property to earn rent or royalties, the taxpayer will be
reassessed as follows:
- The ONTTI claim will be disallowed.
- The property will be deemed never to have been a
qualifying intellectual property and will be included in the appropriate CCA
class or in the eligible capital expenditure pool, so that the regular CCA or
eligible capital expenditure may be claimed (Reg. 183 subsection 203(15)).