Ontario Innovation Tax Credit

Definition

The Ontario Innovation Tax Credit (OITC) is a refundable provincial tax credit for qualifying corporations that incur scientific research and experimental development (SR&ED) expenditures at a permanent establishment in Ontario. The credit is calculated on Schedule 566 of the T2 return and paid out as a refund even when the corporation has no Ontario tax payable. OITC is one of two main Ontario SR&ED incentives, alongside the non-refundable Ontario Research and Development Tax Credit (ORDTC) claimed on Schedule 508. The two credits interact: the ORDTC reduces the base on which OITC is calculated.

Key rules

• The OITC rate is 8% on eligible SR&ED expenditures incurred in Ontario. The credit is fully refundable.
• Only corporations that qualify as CCPCs and meet size tests are eligible. The expenditure limit of $3 million is reduced for taxable income between $500,000 and $800,000 (prior year) or taxable capital between $25 million and $50 million (prior year), and eliminates entirely above those thresholds.
• Eligible expenditures are those that qualify for federal SR&ED under ITA section 37 and Regulation 2900, incurred at a permanent establishment in Ontario. Capital expenditures are excluded.
• Assistance received, including federal SR&ED Investment Tax Credits, reduces the OITC base under the grind-down rules.
• The OITC must be claimed within 18 months of the tax year-end; it is not available on a late-filed claim beyond that deadline.

Example

A Waterloo-based CCPC incurs $500,000 of eligible SR&ED expenditures in 2026, all at its Ontario location. Federal ITC is $500,000 × 35% = $175,000, refundable. The ORDTC at 3.5% produces $17,500 (non-refundable, but used to reduce Ontario tax). The OITC base is reduced by the federal ITC and ORDTC received, yielding approximately $500,000 − $175,000 − $17,500 = $307,500. OITC at 8% is $24,600, fully refundable. The combined federal and Ontario SR&ED assistance totals approximately $217,100 on a $500,000 spend.

Common mistakes

• Claiming OITC on expenditures incurred outside Ontario. Only costs at a permanent establishment in the province qualify.
• Forgetting the grind for assistance received. The federal 35% ITC and any provincial grants reduce the OITC base.
• Exceeding the $3 million expenditure limit without recognizing that the limit itself may be reduced by prior-year taxable income or taxable capital of the associated group.
• Missing the 18-month filing deadline. Unlike federal SR&ED (where the deadline is 12 months after the T2 due date, totalling 18 months from year-end), the Ontario deadline is strict and cannot be extended.

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