The Ontario Made Manufacturing Investment Tax Credit (OMITC) is a new refundable tax credit that allows qualifying Canadian Controlled Private Corporations (CCPC) to claim a 10% credit on eligible investments in buildings, machinery and equipment used for manufacturing or processing within Ontario. The annual maximum tax credit is $2 million, with expenditures capped at $20 million per taxation year for associated corporate groups.
Ontario Bill 85, which includes the OMITC, received Royal Assent last month and purchase eligibility has been backdated to March 23rd, 2023. Details on eligibility and qualifying expenditures can be found on the Ontario government website.
Although the OMITC appears straightforward on the surface, it’s actually a bit complicated. According to S+C Partners Client Service Partner Greg Rawn, there are several potential stumbling blocks to be considered. Here are the three we think will be the most relevant for our clients:
- Who is making the purchase?
The credit is only available to the specific entity that purchased the asset. It is not transferrable across a group of associated companies. This may not be as significant when considering the purchase of machinery or equipment—as these expenditures are usually made by an operating company whose eligibility for the credit is easier to determine—but real estate is often purchased by a holding company for use by the operating company. If the holding company falls outside the eligibility requirements, the credit may be lost.Note: We recommend consulting with a CPA to ensure the purchasing entity is eligible for the credit before making a significant expenditure with the intention of qualifying for the OMITC.
- Potential renovation costs to meet usage requirements
In order for a building expenditure (whether purchased, built, or renovated) to qualify for the OMITC, 90% of the square footage of the building needs to be used directly for manufacturing or processing. Eligibility for the credit may have been considered as part of the financing plan, but unexpected renovation costs could put the project in the red. When considering the acquisition of real estate, the cost and timing of renovations required to meet the 90% usage rule should be included in the calculations.
- Allocation between land and building
Land is excluded from the OMITC. When an eligible company purchases real estate, a reasonable allocation of the purchase price between land and building is required, with only the building portion (subject to the 90% test) eligible for the credit. This could result in a significant gap between the expected value of the credit and the actual credit received.
OMITC taxation options
As a refundable ITC, the OMITC is considered a government grant or subsidy. As such, the resulting refund would be considered taxable income and would need to be reported in the year it is received. However, income tax elections may be available that would allow the cost of eligible investments to be reduced by the amount of credit received instead. The end result is similar, but the timing of the taxation is different.
Note: The correct approach would be dependent on the specific circumstances of the company and the expenditure. We recommend consulting with a CPA to determine the best approach.
S+C Partners is committed to helping you
Our dedicated tax team is here to support you. Please call us at 905-821-9215 or email us at firstname.lastname@example.org if you have any questions or require any assistance regarding the Ontario Made Manufacturing Investment Tax Credit.
Looking for more information on tax planning considerations in Canada? Explore our comprehensive tax services.
Read our most recent Insights.
S+C Partners is a full-service firm of Chartered Professional Accountants, tax specialists, and business advisors with in-house expertise that extends well beyond traditional CPA services. In addition to audit, accounting, and Canadian tax services, we also offer business advisory services, comprehensive IT solutions, Human Resource consulting, and in-house expertise within highly focused areas such as US taxation, business valuations, and estate planning. We provide all the technical expertise of a large CPA firm, but with the personal touch and partner-level attention of a boutique accounting and advisory firm.