On September 23, the Ontario government released the Ideas for the Future Act, 2008,1 fulfilling a promise included in the 2008 Ontario Budget to provide a 10-year Ontario corporate tax holiday2 for new corporations that commercialize intellectual property in certain new growth areas developed in conjunction with educational institutions or research institutes.

To qualify for the so-called "Ontario Tax Exemption for Commercialization" or "OTEC", a new corporation must be incorporated in Canada after March 24, 2008 and before March 25, 2012. The new corporation cannot be related to any other corporation nor be associated with any other corporation3 and the corporation must derive all or substantially all (90%) of its revenue from an eligible commercialization business.

An eligible commercialization business is defined as an active business that, in the opinion of the Ontario Minister of Research and Innovation, is:

  1. an advanced health technology business,4
  2. a bioeconomy business,5
  3. certain telecommunications, computer or digital technologies production businesses,6 or
  4. a business that satisfies conditions to be prescribed by future regulations,

and that has as its sole purpose:

  1. the sale of property that derives more than 50% of its value from eligible intellectual property,
  2. the sale of property an essential element of which is eligible intellectual property,
  3. the licensing of computer programs that are eligible intellectual property, or
  4. any other purpose as may be prescribed by future regulations.7

In turn, eligible intellectual property is defined as property:

  1. that was developed in the course of employment or academic study at a qualifying institute,8 by one or more individuals each of whom is an inventor for the purposes of the Patent Act (Canada), an author for the purposes of the Copyright Act (Canada), or an individual prescribed by the Ontario Minister of Finance,
  2. that has never been legally or beneficially owned by anyone other than one or more of (i) the qualifying institute where the research to develop the property was conducted, (ii) one or more individuals who created the property as an employee or a student of the qualifying institute, or (iii) the qualifying corporation,
  3. that was disclosed to the qualifying institute where the research was conducted in a timely manner under the institute's official intellectual property disclosure policy, and
  4. that is (i) a patent issued under the Patent Act, (ii) intellectual property in respect of which an application for a patent was filed under the Patent Act and in respect of which a patent is issued no later than 10 taxation years after the incorporation of the qualifying corporation, (iii) the copyright in a computer program that constitutes a technological advancement at the time the computer program is completed or (iv) certain intellectual property prescribed by the Ontario Minister of Finance.

The OTEC is a welcome incentive. It can provide a tax saving of 14%, based on the Ontario corporate tax rates for 2008. However, the parameters of the OTEC are very restrictive.

First, the rules would prevent a corporation from qualifying for the OTEC where the corporation is related to any another corporation. For example, an otherwise qualifying corporation that is controlled by an inventor would be disqualified simply because a family member of the inventor controlled another corporation, even where the second corporation is active in a completely unrelated field. We understand that the government intends to retain the requirement that a qualifying corporation not be related to another corporation, but that it will, by regulation, create an exception for related corporations that do not offend the OTEC policy.

Second, the rules clearly limit the ability of existing players in the field of new technologies to take advantage of the exemption. For example, the fact that the qualifying corporation must be a new corporation, coupled with the fact that the eligible intellectual property cannot have been owned by anyone other than the inventor, the qualifying institute or the qualifying corporation, means that an otherwise qualifying technology may not be sold to an existing corporate group with the capital and expertise to commercialize the property. We understand that this result was intended.

Third, the rules impose strict requirements that may limit the ability of new entrants to attract the financing necessary to commercialize an otherwise qualifying property. For example, the fact that a qualifying corporation cannot be related to, or associated with, any other corporation will require careful planning by venture capitalists prior to investing in a qualifying corporation and may limit such investors to a minority stake in the qualifying corporation. In this respect, the OTEC measures are more restrictive than the federal R&D incentives, although we understand that this result was also intended.

The government views the OTEC, being a complete exemption from Ontario tax, as fundamentally different from other incentives that take the form of a tax reduction through tax credits. Thus, the qualification rules for the OTEC are far more restrictive than other incentive programs. It remains to be seen whether the restrictions are so severe as to hamper the ability of the OTEC measure to achieve its stated objective of promoting commercialization of new technologies in Ontario. On this point, we note that several elements of the OTEC provisions are to be prescribed by regulation. This approach was intentional. By permitting much of the detail to be set by regulation, the Minister of Finance retains the ability to make the regime more permissive – or more restrictive – depending on whether taxpayers are able to utilize the program in the intended manner.


1. Bill 100, 2008, An Act to amend the Corporations Tax Act and the Taxation Act, 2007, 1st Sess., 39th Leg., Ontario, 2008, 1st Reading.

2. The measure provides an exemption from Ontario corporate tax and Ontario corporate minimum tax.

3. Within the meaning of those terms in the Income Tax Act (Canada), which includes the notion of factual control as well as legal control.

4. An advanced health technology business is a business primarily engaged in using technology (a) in the development of assistive medical devices, pharmaceutical drugs, regenerative medicine, biologics, medical procedures or surgical procedures, or (b) in human tissue engineering.

5. A bioeconomy business is one primarily engaged in (a) the production of biofuel, biogas or bioplastics, or (b) the development of technology or processes that enable the use of wind, water, a biomass resource, hydrogen, biofuel, biogas, landfill gas, solar energy, geothermal energy, tidal forces or thermal waste as a source of energy.

6. One that is primarily engaged in activities described in categories 3341 (computer and peripheral equipment manufacturing), 3342 (communications equipment manufacturing), 3344 (semiconductor and other electronic component manufacturing) or 5112 (software publishers) of the North American Industry Classification System 2007 - Canada, as published by Statistics Canada.

7. The Minister of Finance may prescribe other conditions that must be satisfied for the business to qualify.

8. A qualifying institute includes a university or college of applied arts and technology in Ontario, a college or university outside Ontario but within Canada, a hospital research institute and certain prescribed classes of non-profit organizations.

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