Changes to the C3i Tax Credit: Fostering Business Investment and Innovation

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In the Fall 2023 budget update, the Quebec government announced an investment of $1.3B into the Investment and Innovation Tax Credit (C3i), extending its support for businesses for another five years until January 1, 2030. Initially introduced in the March 2020 budget to replace prior investment and innovation tax credits, the C3i tax credit aims to boost productivity in Quebec businesses while encouraging increased investments in economically disadvantaged areas.

Alongside the 5-year extension, several modifications have been announced to better serve the needs of Quebec businesses and bolster their efforts to improve productivity. This article will explore these changes.

Eligible Businesses and Expenses

The C3i tax credit remains accessible to businesses across diverse industries, with certain exceptions such as aluminum producers and oil companies. Eligible businesses, which are investing in equipment to improve their processes and increase productivity, can benefit from the C3i tax credit. This includes Quebec businesses that acquire manufacturing or processing equipment, general-purpose electronic data processing equipment, or eligible management software packages between March 10, 2020 and January 1, 2030.

As before, two exclusion thresholds apply. For manufacturing and processing equipment, only expenses over $12,500 are eligible for the tax credit. For the purchase of computer hardware and management software packages, a lower minimum, $5,000, applies.

Businesses claiming the C3i credit are also subject to a cumulative $100 million limit on eligible expenses over four years—an update compared to the previous five-year period.

Enhancement of Tax Credit Rates

The improvements to the tax credit rates are perhaps the most prominent change announced. C3i rates have increased by 5%, across all regions of Quebec. The tax credit rates vary depending on the location of the business, offering higher rates to businesses operating in areas deemed to have “low economic vitality”. These regions have been assigned an economic vitality index amongst the lowest 25% in the province.

As announced in the Information Bulletin 2023-4, RCM Appalaches and Témiscamingue are now included in the lowest quartile, while RCM Matawinie and Argenteuil are no longer included. These regional changes will apply to expenses incurred after June 30, 2025, ensuring a proper transition period for affected businesses. Consult the latest Regional Economic Vitality Index for the classification of regions across Quebec.

Below are the new rates for the regions across Quebec, applicable beginning January 1, 2024:

These new rates apply to eligible expenses incurred after December 31, 2023; or after March 25, 2021, and before January 1, 2024, for equipment acquired after December 31, 2023.

Please note, however, that some exceptions apply. Please consult Information Bulletin 2023-6 for more details.

Fully Refundable Tax Credit

Before the amendments to the C3i, the ability to receive a refundable tax credit was dependent on the businesses’ assets and gross income. Only businesses with assets and gross income below $50 million were eligible for a fully refundable tax credit.

However, in the recent budget update, requirements related to assets and gross income were removed. Now, all eligible companies can fully benefit from the refundable nature of the Investment and Innovation Tax Credit regardless of their assets or gross income.

Final Thoughts

The recent changes to the C3i Tax Credit represent a step forward in supporting Quebec businesses and fostering innovation and investment across the province. With the extension of the tax credit until 2029, increased rates, and various improvements, businesses, especially those in regions with low economic vitality, now have greater incentives and opportunities to improve productivity and expand their operations.

As businesses continue to navigate challenges and seize opportunities, the C3i Tax Credit stands as a valuable tool for driving progress and success in Quebec’s evolving economy.

SR&ED vs CDAE: Everything You Need to Know

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For innovators in Canada, investments in research and development (R&D) are vital; however, funding innovation often proves challenging, especially for growing companies with limited resources.

The Canadian and Provincial Governments have several programs to help propel investment in R&D in companies across the country. Among them are the Canada Revenue Agency’s Scientific Research and Experimental Development (SR&ED) tax credit and Revenu Quebec’s Tax Credit for the Development of E-Business (TCBE), often referred to as “CDAE,” its French-language abbreviation.

We will explore the key similarities and differences between the two programs available to companies operating in Quebec so that you can get a better idea of whether the programs are the right fit for your company. Keep in mind that CDAE and SR&ED are not necessarily mutually exclusive—we will explore this later.

Nature of funding

Both the SR&ED and CDAE programs are tax credits.

A tax credit is an amount of money that a company can subtract from the taxes they owe the CRA and their provincial agency or it can be a direct refund regardless of taxes paid or owing.

In the case of a refundable tax credit, a company will receive a cash reimbursement at the end of the year, deducting any taxes due. Meanwhile, non-refundable tax credits are capped at the company’s tax liability—even if the credit exceeds the owed taxes, the company will not receive any additional reimbursements and the full value of the credit will not be used. Having said that, non-refundable tax credits can often be carried forward or back.

SR&ED is generally a refundable tax credit for Canadian-controlled Private Corporations (CCPCs). When claimed by non-CCPCs, the program offers a non-refundable tax credit. On the other hand, CDAE offers a combination of refundable and non-refundable tax credits.

Eligibility Criteria

Eligible Companies

Most significantly, SR&ED supports companies across Canada, while CDAE only offers credits to companies in Quebec.

The CDAE requires that eligible companies be focused on developing and selling software licenses or services. Your company’s gross revenue must be at least 75% derived from IT sector activities; 50% of these activities must be related to a core subset of the IT sector, as defined here.

Additionally, to qualify for CDAE credits, your company must have at least 6 full-time, eligible technical employees for the entire fiscal year of the claim.

This minimum requirement is more flexible for startups that have existed for less than 2 years. For these companies, they will meet the eligibility criteria once they reach 6 eligible technical employees in the fiscal year.

The SR&ED credit does not have revenue requirements, nor does it require a minimum number of employees.

Beyond the eligibility of the company, there is a second level of eligibility for CDAE: the eligibility of employees and their salaries.

Eligible Activities

SR&ED supports R&D activities in any industry. R&D activities must demonstrate a systematic approach, an attempt at technological advancement, and technological uncertainty. As such, projects related to technology that have already been validated and for which there is readily accessible information cannot be claimed.

Contrarily, the CDAE covers activities in E-business, SaaS, and B2B software companies. While CDAE’s revenue requirements are more restrictive, its eligible activities are less rigid and can include routine development.

It is important to note that CDAE does not cover programs that involve software that controls hardware or is built into hardware. As such, projects in the IoT or robotics are essentially ineligible because they involve software that controls mechanical elements.

Additionally, projects that rely on external data sets, such as AI or AI-adjacent projects, are ineligible for CDAE as well. To be eligible, data used in the project must be internally owned and generated by your clients.

Interested in learning more about SR&ED Eligibility? Read our guide here.

Eligible Expenses and Amounts

Both tax credits cover salaries; however, they have different requirements and credit amounts.

CDAE covers only the salary of employees in technical roles across the product development life cycle – including developers and QA. The CDAE offers a refundable tax credit of up to 24% and a non-refundable tax credit of up to 6% of each eligible employee’s salary. These credits are applied to the total salary, regardless of the portion that is directly related to the CDAE activities.

Note, however, that the CDAE only covers salaries up to $83,333, meaning that companies can only receive up to $20,000 in refundable credit and up to $5,000 in a non-refundable credit per employee salary. There are no restrictions on the number of employees that can be covered by CDAE; however, a fee must be paid to Invest Quebec for the annual eligibility certificates requested and this fee varies based on the number of employees claimed.

Unlike CDAE, companies applying to SR&ED can only claim tax credits on expenses such as salaries, wages, materials consumed or transformed, subcontractor expenses, and overhead.

The SR&ED tax credit covers only the portion of employee salaries and subcontractor expenses that are related to eligible R&D activities in Canada. In other words, the SR&ED refundable tax credit is based on the percentage of time spent on R&D activities relative to the employee’s salary. However, there is a tradeoff: this program also covers the salaries and wages of support employees, such as HR or payroll employees who specifically spend time recruiting engineers for the SR&ED project or handling payroll for project employees. This is known as indirect SR&ED and is claimed in different manners federal and provincially.

Note that, unlike CDAE, SR&ED tax credits are not restricted by a maximum eligible salary amount for non-owners.

Application Process

The CDAE’s application process is done in two levels: first, you must apply to Invest Quebec within 15 months of the fiscal year-end in which the expenses were incurred to receive an eligibility certificate confirming eligibility of the company and for all employees for which a tax credit is being requested. These CDAE applications automatically get reviewed—the process is standardized and systematic. Then, you must submit an application to Revenue Quebec (RQ) within 18 months of the same fiscal year.

Meanwhile, SR&ED tax credit must be claimed within 18 months of the fiscal year within the tax return to CRA and RQ and do not always get audited, but you can expect at least a first-year visit by the CRA.

SR&ED vs CDAE

So, we’ve discussed the two programs and their differences. Now, which one will be more beneficial to your business?

CDAE can help companies that are more advanced and are looking to scale up. Many companies receive more SR&ED tax credits in the early days of their innovation projects and then move towards increasing their CDAE funding amounts as SR&ED covers fewer of their activities.

Because routine development activities are covered under CDAE, businesses that are looking to maintain or improve existing technology will benefit. Meanwhile, these activities are not covered under SR&ED.

CDAE is also more beneficial to large or foreign companies since its tax credits are fixed regardless of size or ownership structure, unlike SR&ED which offers lower, non-refundable credits to non-CCPC and larger companies.

Stacking SR&ED and CDAE

If both programs seem like they’d benefit your business, how do you choose which one to claim? There’s good news: it is possible to claim both SR&ED and CDAE.

A few options exist if you want to benefit from both programs. Claiming federal SR&ED tax credits and provincial CDAE tax credits is a great combination. It is also possible to optimize both CDAE and SR&ED on the provincial level to maximize the tax credit amount, but this is tricky.

If you like to learn more about how to stack SR&ED and CDAE or need some help, speak with our experts to find the best option for your company’s specific needs.

Still Have Questions?

Read what our experts have to say in our SR&ED FAQ and CDAE FAQ articles.

If you’re considering submitting a CDAE claim or combining credits, don’t hesitate to contact R&D Partners at 1-800-500-7733 for more information or to schedule a meeting with one of our expert consultants.

Disclaimer: The views expressed in this article are provided for informational purposes only. It is not intended to nor can it replace the evaluation of your specific SR&ED or e-business tax credit claim by a dedicated professional.

Changes to the Tax Holiday Program for Foreign Researchers and Foreign Experts

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The Ministère de l’Économie et de l’Innovation (MEI) recently announced changes to the eligibility criteria for the Tax Holiday Program for Foreign Researchers (FR) and Foreign Experts (FE). This program is designed to facilitate the recruitment of foreign researchers or foreign experts capable of aiding in the commercialization of innovation activities or the advancement of technology, respectively, within private companies in Quebec. Quebec companies remain competitive by attracting highly qualified researchers/experts to perform scientific research and experimental development (SR&ED).

What’s New?

1. The tax holiday is applicable as of the date of hire on contract.

The tax holiday is now based on the hiring date and the number of months that pass after this date, rather than in calendar years following the year in which the hiring date fell – making it much more beneficial.  If a candidate is hired October 9, 2021, the tax holiday begins on October 9, 2021, and lasts for 60 months, i.e., October 9, 2026.

2. Applications must be submitted prior to moving to Quebec.

The rules also state that candidates now need to apply before their arrival to Québec. This means that employers should apply prior to the candidate’s hiring date and arrival into Québec. Those who are already in Québec and that have not yet applied should move forward with applications as soon as possible to avoid any issues. These changes are on-going and may be further refined in the next couple months.

3. The comparative evaluation requirement has been updated.

Previously, the approval of the tax holiday depended on the receipt of the comparative evaluation certificate. Going forward, the comparative evaluation may not be required for approval. However, it may be requested during the review process on a case-by-case basis; it is therefore recommended to apply in advance to minimize the processing time as the comparative evaluation issuance process is the longest part.

One of the following documents must now be submitted with the tax holiday application:

  1. Copies of post-secondary diplomas with a list of courses taken for each diploma and a certified copy of the applicant’s last relevant diploma, OR;
  2. Comparative evaluation of studies completed outside Quebec issued by the Ministry of Immigration, Francisation and Integration (MIFI) and sent directly to MEI

4. No annual renewal is required for FRs, but it is still required for FEs.

Foreign researchers only need to submit one application to receive the full tax holiday, no longer needing to submit annual follow-ups. For foreign experts, annual renewal applications are still required for the five-year duration of the tax holiday. Once the initial expert certificate has been issued and the candidate is employed in Québec, the employer must submit an annual application for the expert certificate annually before March 1 of the calendar year following the tax year for which the applicant is taking the tax holiday.

Additional information on the comparative evaluation

Along with the comparative evaluation document, the candidate should include certified copies of all post-secondary diplomas they wish to have evaluated by the Ministry, noting that the minimum education requirement for the tax holiday is a graduate degree for foreign researchers and a first cycle university degree (bachelor’s) for foreign experts. If you would like to learn more about the tax holiday program requirements, please read our previous article.

To find recognized authorities to certify your degree as a true copy please see the List of authorities recognized by the Ministère for certifying documents. It explains how to obtain a certified copy of your diploma depending on the country or territory where your documents were issued. A copy certified by the issuer of the document (your university) is always the preferred format.

Further reading

If you have any questions about the Tax Holiday Program that this blog post left unanswered, or if you are considering submitting a claim, don’t hesitate to contact our team at:  1-800-500-7733, ext.102.

 

Disclaimer: The views expressed in this article are provided for informational purposes only. It is not intended to nor can it replace the evaluation of your specific tax credit claim by a dedicated consultant.

Your Questions About CDAE, Answered by an R&D Partners Expert

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Introduction

The Tax Credit for the Development of E-Business, commonly referred to as “CDAE” – its French-language abbreviation – is a provincial tax credit available in Quebec for businesses developing e-business software solutions in the province.

To be eligible, a business must have a minimum of 6 eligible employees spending 75% or more of their time on technical activities, and 75% of the company’s gross revenue must be coming from IT sector activities.

The funding is structured as a maximum 24% refundable and 6% non-refundable tax credit for each eligible employee’s salary.

This quick overview does not cover every detail of the CDAE tax credit. For more information on the program, read our dedicated blog post.

We often get questions about CDAE, so we’ve asked a member of our team of experts to answer the most common ones for you below.

The expert

Sahar Ansary, M. Eng.

Sahar has assisted hundreds of small to large-sized organizations across Canada with SR&ED and E-business tax credit programs for over ten years and has led work on over $50M in related claims.

She specializes in identifying and optimizing the technical and financial aspects of various funding programs, maximizing overall tax credits, and managing major accounts. Sahar has significant experience in the aerospace, medical device, and software industries.

The questions

What is meant by “e-business” when it comes to the CDAE credit?

The CDAE Tax Credit criteria defines “e-business” much more broadly than just e-commerce.  It is not limited to the transactional side of e-commerce that we traditionally think of; the program guidelines state that it “concerns the organization of work in a company as well as how the company communicates and exchanges data with its customers, subcontractors, suppliers and partners.”

Eligible companies are therefore those who develop software for other businesses to evolve in that direction and digitize their operations at various levels – HR, procurement, accounting, and more. Traditional e-commerce is also eligible if a company is developing a software solution allowing monetary transactions, but the program includes a lot more than this under the umbrella of “e-business.”

Who can be considered an eligible employee?

Eligible employees for the CDAE tax credit are full-time indeterminate salaried employees in Quebec that work a minimum of 26 hours per week and spend over 75% of their time on technical activities.

When an individual is temporarily absent from his or her work for grounds considered to be reasonable (e.g. temporary illness, maternity leave, paternal etc.), Investissement Québec (IQ) may deem that the employee continued to work throughout the period of absence for the purpose of determining tax credit eligibility. For instance, someone who worked  20 weeks during the fiscal year because they were on sick leave during the rest will still be considered as an eligible full-time employee.

What counts as a “technical activity”?  

The CDAE eligibility guidelines stipulate that an employee must be devoting at least 75% of his/her time to carrying out, supervising, or directly supporting eligible activities to be eligible. Those activities must be technical and some examples include the following:

  • Design and development of e-business solutions
  • Quality control (testing, 2nd and 3rd level support)
  • Maintenance and evolution of e-business solution
  • IT consulting services for e-solution (customization, integration, deployment)
  • Technical coaching and supervision of technical employees/team.

If an employee spends more than 25% of their time on non-eligible activities during the fiscal year, then that employee will not be eligible for the CDAE tax credit because they won’t respect the 75% rule (ex. an HR employee or a CEO would not be eligible, because they spend a lot of time on administrative tasks and very likely do not spend 75% of their time on eligible technical work).

Do you need to continuously have 6 technical employees or more to remain eligible for the CDAE credit?

Yes, and no. What you need are 6 eligible positions maintained throughout the year. The requirement is not tied to any individual employee because you obviously do not control if someone leaves the company during the year.

For example – if one back-end developer leaves, and you fall below the 6 required eligible employees, you do not suddenly become ineligible. As long as you have the intention to replace this employee with another back-end developer (i.e. someone in the same position) and do so within around 6 months, everything should work out fine. You will essentially have had two employees in one role in the year, and both will be eligible.

Past the 6 month timeline, you may need to provide stronger arguments to explain why a replacement could not be found. However, note that none of this applies if you “lay off” an employee (i.e. ROE indicates code A in box 16 ) as no replacement can be justified in this case.

Can employees join during the year and still be eligible?

If an employee was hired towards the end of the fiscal year and, as such, worked for less than 40 weeks, they are eligible if they still hold the same position at the company beyond the fiscal year end. If an employee worked less than 40 weeks and quit during the fiscal year, they will only be eligible for the tax credit if the company found a replacement or if the company is still actively looking for one. The rule stating that they must have spent 75% of their time on eligible technical activities also still applies, of course.

How is the CDAE calculated if an employee joins during the year?

When employees join during the year and they meet the 75% rule, their maximum eligible salary cap of $83,333 is prorated based on the number of days they worked in that fiscal year.

For example, if an employee is hired at the beginning of Q3 and worked 100 days before the end of the fiscal year, their salary cap will be prorated by the following ratio:  Once we apply it to the maximum cap offered by the program, we get 100/365 x $83,333 = $22,830.

 

If you have any questions about CDAE that this blog post left unanswered, or if you are considering submitting a claim, don’t hesitate to contact our team at:  1-800-500-7733, ext.102.

 

Disclaimer: The views expressed in this article are provided for informational purposes only. It is not intended to nor can it replace the evaluation of your specific e-business tax credit claim by a dedicated consultant.

Overview of Quebec’s C3i Tax Credit for Investment and Innovation

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The Quebec provincial government first introduced the Tax Credit for Investment and Innovation – or C3i for short – in its March 2020 budget. It was initially intended as a replacement for prior investment and innovation tax credits, with more advantageous rates and broader eligibility.  

This article offers an overview of the tax credit’s criteria, reimbursement rates and other relevant details. It will also examine the changes the 2021-2 Budget introduced to the tax credit in response to the COVID-19 pandemic to further support economic revitalization and recovery.  

Company Eligibility 

The C3i tax credit is not restricted by industry – with a few notable exceptions we will touch on later. Its first stated goal is to encourage the purchase of manufacturing and processing equipment. It can also be used to purchase enterprise resource management software packages – ERP for short – and computers. The broader goal is to help Quebec businesses digitize their operations and modernize their equipment, and accelerate these investment projects by reducing the financial burden on the corporations that undertake them.   

Quebec “qualified corporations” – that is corporations carrying business and with an establishment in the province – are eligible for this credit. A few exceptions apply to certain aluminum producers and oil companies. Additionally, certain businesses engaged in partnerships that operate aluminum production sites or oil refineries may not qualify either.  

All businesses in Quebec are eligible regardless of location, but the economic vitality index for each region affects tax credit rates under this program. This means that businesses in more economically developed areas will have lower tax credit rates, and those in economically underdeveloped areas will have higher tax credit rates. We will examine these different rates in detail below.  

Tax Credit Rates 

Businesses with assets and gross income below $50 million can benefit from a fully refundable tax credit. Those with assets and gross income exceeding $100 million are instead eligible for a non-refundable tax credit. Finally, the C3i tax credit is partially refundable for businesses that fall in between the $50 and $100 million thresholds.  

As mentioned earlier, businesses located in areas considered to have “low economic vitality” are eligible for higher tax credit rates. Those areas are those with an economic vitality index amongst the lowest 25% in the province. The complete list of regions eligible for the highest tax credit rate, as well as a map showing the original tax credit rate for each administrative region of Quebec can be found in section C-42-43 of Budget 2020. Three new territories can also qualify as having low economic vitality for eligible purchases made after June 2021: Le Domaine-du-Roy, Maskinongé and Papineau. 

It is important to note the difference between the original tax credit rates that came with the tax credit’s original 2020 Budget announcement, and the temporarily bonified rates announced in the 2021 budget in response to the COVID-19 pandemic. The bonified rate is simply double the original rate.  

All eligible equipment purchased outside of the bonified tax credit rate period (March 25, 2021 to January 1, 2023 exclusively) will still be eligible for the tax credit at its original non–bonified rates – as long as it is purchased before January 1, 2025, the current final end date for this tax credit. At the time of publication, eligible businesses have a little bit less than a year to purchase equipment and software that will qualify for the bonified rates. 

Expenses 

All eligible equipment must have been purchased after March 2020, but before January 2025 in order to qualify for the tax credit.  

However, two exclusion thresholds apply. For manufacturing and processing equipment, only expenses in excess of $12,500 are eligible for the tax credit. A lower minimum $5,000 expense threshold applies to computer hardware and management software packages purchases.  

Businesses claiming the C3i credit are also subject to an overall $100,000 cap on eligible expenses over five years.  

C3i’s Interaction with Other Tax Credits  

First, the new C3i fully replaces the tax credit for the integration of IT in SMBs. This older tax credit was retired because ERP software packages are covered under the C3i. Expenses incurred on or after January 1st, 2021, are no longer eligible for the integration of IT in SMBs tax credit.  

The other tax credit that the C3i partially or fully replaces, depending on a business’s situation, is the tax credit for investments relating to manufacturing and processing equipment – ITC for short. Unlike the tax credit for the integration of IT in SMBs, however, the ITC tax credit remains available to businesses in specific resource regions at rates ranging from 4% to 24%. The businesses that are still eligible for the ITC will have the choice to continue using that tax credit for the time being or switch over to the new C3i credit. Businesses that are eligible for both will need to examine their specific circumstances and identify which credit maximizes their government funding.  

 

To find the C3i tax credit on our free, AI-powered funding search engine, click here.  

 

How R&D Partners can help

If you have any questions about this or other tax credit programs, do not hesitate to contact Dominik Klein at dklein@rdpartners.com, or at 1-800-500-7733 ext. 103.

Further Reading: 

2020-1 budget PDF  

2021-2 budget PDF  

 

This article is intended for general informational purposes only and does not constitute professional accounting or tax advice.  

Enhancements to Quebec’s University Research R&D Tax Credit

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Two major changes to the University Research Tax Credit were announced in the latest Quebec budget in March 2021. These changes will make the credit more accessible and advantageous for startups and smaller research projects.

In this article, we will go over the tax credit basics, changes recently announced, and the impact on your next university research tax credit claims.

You can also read this previous article for more details on incentives found in the 2021 Quebec budget.

University Research Tax Credit Basics

The Tax Credit for University Research or Research Carried out by a Public Research Centre or a Research Consortium – more commonly referred to as the University Research Tax Credit – is one of the four components of Quebec’s provincial research and development tax credit. The other three components are the Tax Credit for Salaries and Wages (R&D), the Tax Credit for Private Partnership Pre-Competitive Research, and the Tax Credit for Fees and Dues paid to a Research Consortium.

Eligible expenses for the University Research Tax Credit are limited to cash payments made to a university or research center acting as a first-level subcontractor. To be considered a first-level subcontractor, the university or research center must undertake the research themselves, meaning they cannot subcontract the research activities.

The reimbursement rates for all four components of the Quebec R&D Tax Credit were standardized in 2014. The maximum rate now varies between 14% and 30% depending on the status and size of the company. The maximum rate of 30% is for Canadian Controlled Corporations with less than $50 million in assets. This article describes the changes announced in 2014 in more detail.

The advantage of the University Research Tax Credit is a higher inclusion rates for subcontractor expenditure (80%) in comparison to the inclusion rate under the more traditional Tax Credit for Salaries and Wages (50%). For a company at the 30% refundable tax credit rate, this can make quite the difference.

Finally, the work undertaken must be eligible R&D work.  Moreover, the main researcher on the project cannot be named as a party in the contract and the company that subcontracts the research work must hold at least some rights to the research undertaken.

University Research Tax Credit Changes

First, the 2021-22 Quebec budget abolished the requirement to obtain a favourable advanced ruling (“décision anticipée”) from Revenu Québec regarding the eligibility of the research contract to claim the tax credit. This requirement was removed primarily to reduce the administrative burden on firms looking to benefit from the measure.

Previously, the need to obtain a favourable advanced ruling cost $318 plus tax in application fees paid to Revenu Québec. Besides the direct fees, the time invested in preparing all the documents required for the advanced ruling was considerable. For some prospective applicants, after all the fees, the time spent preparing the documentation, the excluded amounts, and their effective refund rate, the cost of the application outweighed the benefits.

While the reduction of the administrative burden for applicants is a net positive – especially for smaller firms and earlier stage companies – the eligibility criteria previously verified at the advanced ruling stage have not been lifted. The same documentation will be required in event of audit.

Second, Revenu Quebec has also abolished its exclusion limit when it comes to the University Research Tax Credit for fiscal years beginning after March 2020. The exclusion limit previously made the first $50,000 spent on otherwise eligible R&D expenditures ineligible for tax assistance from Revenu Québec for companies with assets below $50 million. The threshold limit could be as high as $225,000 when the company’s assets were $75 million or more.

This exclusion previously applied to all four components of the Quebec R&D tax credit. With this change, it no longer applies to the University Research Tax Credit, but remains in place for the other three components of the Quebec R&D Tax Credit. This provides an even further incentive to claim the University Research Tax Credit in comparison to the other Quebec R&D tax Credits.

This change is also beneficial for businesses claiming other Quebec R&D Tax Credits in combination with the University Research Tax Credit. This is due to the fact that the total exclusion amount remains proportionately divided among the Quebec R&D Tax Credits the business claims, and then the portion associated with the University Research Tax Credit effectively gets discarded.


 

How R&D Partners can help

If you have any questions about this or other tax credit programs, do not hesitate to contact Dominik Klein at dklein@rdpartners.com, or at 1-800-500-7733 ext. 103.

Further reading:

2021-2022 Quebec Provincial Budget (in French only): http://www.budget.finances.gouv.qc.ca/budget/2021-2022/fr/documents/Budget2122_RenseignementsAdd.pdf

Quebec’s Tax Credits for Scientific Research and Experimental Development: https://www.revenuquebec.ca/en/citizens/tax-credits/tax-credits-for-scientific-research-and-experimental-development-rd/

 

Disclaimer: This article is for informational and general guidance purposes only.

SR&ED Frequently Asked Questions, Answered by R&D Partners Experts

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Introduction

The federal scientific research and experimental development (SR&ED) tax incentive program (ITC) is one of the most generous in the world. As the largest federal funding program in support of business R&D in Canada, it awards more than $3 billion annually to companies that conduct eligible R&D activities. Compared to other programs, SR&ED is particularly accessible since it is industry agnostic and does not require businesses to be revenue-generating to be eligible for funding. However, its application process can often seem daunting – especially for new claimants – and its requirements are not always clearly understood.

We get questions about SR&ED all the time, so we decided to round up some of the more common ones and have the experts on our team answer them.

The Experts

Debbie Frail, P. Eng., MBA

Debbie has spent her professional career managing engineering, operations, and project teams in several technology fields. For over 20 years, she has successfully worked with clients ranging from entrepreneurs to multinational corporations to prepare and defend SR&ED tax credit claims. Debbie works primarily in the manufacturing, automation, and transportation sectors.

Patrick Campana , P. Eng., MBA

Patrick has been managing engineering and project teams in several technology fields for over 18 years. Patrick specializes in preparing and defending SR&ED tax credit claims for companies of all sizes operating in the telecommunications, software, and manufacturing sectors.

The Questions

How do I know if my project is eligible for SR&ED?

Patrick: SR&ED eligibility is based on a fundamental question: are you solving a technological uncertainty? If the current state-of-the-art technology available to you does not allow you to reach your technological objectives with a straightforward and known approach, your project is likely eligible for SR&ED tax incentives. However, the answer may not be that easy to ascertain depending on the situation.

Beyond technology specific criteria, the company’s size and experience in the field must be considered. Companies with extensive proprietary knowledge may have to push their experimental development efforts further than a less experimented company might need to do to qualify for the SR&ED program.  Conversely, a small company entering an unfamiliar area of technology for them may need to first go through a learning curve before reaching the state-of-the-art level of competency from where they can start working with the SR&ED program.

Ultimately, there is no one-size-fits all answer here, and each project still has to be evaluated on a case-by-case basis to determine eligibility.

Want to know more about how to evaluate your eligibility for SR&ED? Read one of our previous articles all about the topic here. 

What is the key to a successful SR&ED audit?   

Debbie: First, proper documentation is key. Keeping accurate time sheets and recording material and sub-contracting expenses is essential to a successful SR&ED claim.  Additional substantiating documentation to demonstrate the work done is also important. This can include records of tests carried out, analysis of results and conclusions made, meeting minutes, invoices, correspondence, modifications made to prototypes, and other contemporaneous information that can support the claim.

Additionally, it is important to be well prepared and knowledgeable as to the SR&ED program technical and financial tax requirements. For example, you can only claim the portion of an employee’s salary that is proportional to the amount of time they spent on eligible SR&ED activities – and not their entire salary for the year – unless they spent at least 90% of their time on activities that are eligible for SR&ED.

Want to know more about SR&ED audits and how to face them? Read our article dedicated to the subject here. 

What is the best way to track my project activities?

Patrick: The CRA doesn’t ask for any specific ways to track the project. The most important thing is to always have dated documentation, and there are a few ways to make it as simple and useful as possible.

Tracking individual tasks with a project management tool like Jira is not always the most helpful: this keeps the focus on low-level individual tasks and often lacks linkages to claimed SR&ED activities. Using an overall project map that gives a bird’s eye view of the project – its stages, who is assigned to which tasks and the general timeline – can be a simple and very useful tool. It can help anyone who is not familiar with your project – like a CRA auditor – understand it as a whole.  It is also a valuable resource to identify and justify which expenses can be claimed.

How should SR&ED program time be tracked? 

Debbie: You can only claim the salaries directly related to SR&ED eligible activities. This would exclude work that does not directly support experimental development, such as routine software development and routine quality control testing. It is important to track both eligible and non-eligible SR&ED program time to ensure you can demonstrate full work periods, and also to enable you to reclassify time in the event eligible SR&ED program time was improperly classified.

The worst way to track your time is of course to not track it at all: it often leads to either a refusal or underestimation of the time spent on eligible SR&ED work. This means that you are potentially losing money you could have been entitled to.

We recommend and work with three different kinds of time tracking systems: 1) intelligent spreadsheets we have developed for very small R&D teams; 2) our very popular, automated pull time tracking solution (contact us for a demo!) that requires very little training or work; and 3) established, customized web and ERP time tracking tools. This last option works best in large enterprises with well installed systems and methods.

How do I differentiate between SR&ED hours and non-SR&ED hours in my timesheets? 

Patrick: In most cases, it is not productive to ask individual contributors to classify their work as SR&ED or non-SR&ED in their timesheets, unless a project can be clearly circumscribed and identified as SR&ED work ahead of time.

Often, when a project encompasses both SR&ED and non-SR&ED activities, the final distinction can only be made retroactively, once one can determine what work went beyond the current state-of-the-art in an attempt to solve a technological uncertainty. Therefore, the important thing is to consistently label activities so they can later be easily retrieved and included in your SR&ED claim.

Artifacts naturally generated throughout the duration of the project – if they are dated and identify contributors and associated labels, will efficiently corroborate timesheet data down the road.

What is the best way to track my material expenses? 

Debbie: We often suggest that clients set up specific G/L codes for material and sub-contracting expenses that are related to a SR&ED claim in their internal accounting system. Tagging them and keeping track for when the claim is filed – and in case of audit – is crucial.

What should I do if I already received government funding for the project? Am I still eligible for SR&ED?

Debbie: Yes, you are still likely eligible for SR&ED even if you received other government funding – a grant, for example – for your project. However, you have to be aware of the stacking limits and of how the government aid you received or are expected to receive could reduce your eligible SR&ED expenses – or even your ability to claim the SR&ED tax credit.

The important element is understanding the stacking limits of every source of government funding, as well as the allowable interactions between these sources of funding.  Generally, more funding and funding programs are preferable. However, the cost of applying for, tracking, and reporting on the funding programs should be taken into consideration, as at some point additional funding programs will have diminishing or negative net funding returns.

Want to find out more about what to keep in mind when you apply for potentially competing government funding programs? Read our blog post all about it here. 

 

If you have any questions about SR&ED that this blog post left unanswered, or if you are considering submitting a SR&ED claim, don’t hesitate to contact our team at:  1-800-500-7733, ext.2

 

Disclaimer: The views expressed in this article are provided for informational purposes only. It is not intended to nor can it replace the evaluation of your specific SR&ED claim by a dedicated consultant. 

Intro to the Tax Credit for the Production of Multimedia Titles

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The tax credit for the Production of Multimedia Titles has been in place since 1996 and was created to develop the multimedia sector in Quebec and make the province an attractive place to develop video games and interactive digital media applications. A variety of interactive media products can be considered eligible for this credit, with varying rates.

This credit is refundable and applies to the salaries of eligible employees or subcontractors for work done on eligible multimedia productions in Quebec. This work can include any stage of the production, with activities including initial design, writing, game development and user community management all being possibly eligible.

In this article, we will take a deep dive into Quebec’s Tax Credit for the Production of Multimedia Titles and go over the details of the funding as well as the specifics of the eligibility criteria.

Eligibility Criteria

First, this tax credit can only be claimed by businesses that meet specific criteria and that undertake eligible work. The work also needs to be done by eligible employees or subcontractors in Quebec. Therefore, several criteria must be met to claim the credit.

To be eligible for the Multimedia Tax Credit, companies must operate a corporation that has an establishment in Quebec and be the main producer of an eligible multimedia title. Only the producer of a title may claim the credit, so if a title is being developed in total or in part at the request of another corporation, Investissement Québec will not recognize the corporation as having produced the title.

A corporation that produces a portion of the eligible multimedia title on behalf of the main producer of the title can also claim the tax credit on the portion that they worked on, but only if the main producer of the title does not have an establishment in Quebec.

Eligible labour expenses related to production work can often be claimed in full – excluding any other source of government or non-governmental funding covering the same expenses – for salaried employees and subcontractors not at arm’s length. Eligible production work done by a subcontractor at arm’s length can be claimed at 50% of its total cost. In all these cases, the employee or subcontractor has to be based in Quebec for the tax credit to apply.

Eligible production work includes all activities necessary to design and produce the title, from the beginning of the design stage and continuing indefinitely, including after the title is initially commercialized. This includes principal development of the title’s interactive structure, architecture and programming, the core design of the title’s interactivity loops, and the production of the title’s content – art, text, scenario, sound design, music and more.

Activities necessary for further development and improvement of the title after it has been commercialized are also eligible. This can include developing and maintaining a community of users who can provide feedback on issues, additions to a title post-commercialization and the analysis of quantitative data to optimize the title.

Project Eligibility

Corporations can claim the Multimedia tax credit if they produce an eligible interactive digital media title in Quebec and intended for commercial release. Titles that are produced for internal use are not eligible, they must be available for sale. Interactive digital media titles can include video games, educational software, professional simulators, and more.

To be eligible, projects must include at least 3 of the following 4 media: text, sound, fixed images and animated images.

One important thing to keep in mind is that interactivity must be integral to the product’s functionality. Most – if not all – of the interactive elements should be contained within the electronic medium.

Investissement Québec specifies that the types of media – text, sound, fixed images and animated images – must be present in “appreciable quantity”, and they must all be an integral part of the functionality of the game, mobile app or another type of multimedia title. The loss of one of the elements should fundamentally affect the functionality of the software.

In addition to the basic eligibility criteria – the title must contain at least 3 of 4 types of media – the title must meet Investissement Québec’s criteria of interactivity within the electronic medium. This is evaluated with 3 main criteria: feedback, control, and adaptation.

Feedback is measured by the response given to the user – or player – of the title whenever an action is taken. This could be an audiovisual cue that an action has been completed, or a text-based comment on the quality of an answer given by the user for a puzzle, or other ways the title indicates a user’s performance in a level and suggestions on how to improve, for example.

Control is measured by the degree of influence the user can have on the electronic medium and its content. Examples of control include moving a character around, making choices between options provided by a game, or implementing a strategy to achieve a goal.

Adaptation is measured by the degree of variability of the actions available to the user of the title depending on specific situations. The presence of specific events that can only be engaged according to a user’s skill level or the skills they selected on a decision tree as they progressed through a game can satisfy this criterion.

Investissement Québec also evaluates the scenario of the title: what reason is the title giving the user to interact with it? This criterion can be met by having a series of objectives or a storyline.

All these elements work together and drive the criteria behind “interactivity” between the player and the multimedia title. While they are used in a broad sense to determine whether any digital media title or application available electronically is eligible as a “multimedia title,” in practice the tax credit is principally intended for video game production activities.

Tax Credit Rates

This refundable tax credit can fund up to 37.5% of eligible labour expenditures. However, different maximum amounts and percentages will apply depending on specific circumstances. The main factors that affect the tax credit rate and funding amounts of this program are the language in which the interactive title is released, the nature of the title – is it entertainment or educational? – and who conducted the eligible development work.

In the vast majority of cases, the base tax credit is 30% of eligible labour expenditures on an eligible multimedia title according to the criteria discussed above. Claimants can also receive a bonus 7.5% tax credit on a commercialized title if a French-language version is available at the time of its release. It is important to note that a corporation could not launch a title exclusively in English – or any other language – and then add French text or audio after it is released and claim the full 37.5%. Because the title was not available in French at the time of its release, the company could only claim up to 30% of labour expenditures in this case.

It is important to note that a lower tax credit rate of up to 26.25% applies to titles in any language that are intended for professional training purposes only.

Maximum Funding Amounts

Once we know the company’s overall tax credit rate for the project – 37.5%, 30% or 26.25% depending on the title – it is applied to the eligible labour expenses to calculate the actual amount the company can receive claiming the credit.

Three scenarios can apply depending on who conducted the eligible development work.

First, as mentioned earlier, production work done by a subcontractor at arm’s length can be claimed at 50% of its total cost. The maximum refundable tax credit amount, therefore, corresponds to 37.5% of half of the contract value in this case.

When the work is done by an employee or a subcontractor not dealing at arm’s length with the company claiming the credit, the eligible labour expenses are usually capped at $100,000 per employee or subcontractor per year. If an employee’s salary or subcontractor’s fee is lower than $100,000, the entire salary is therefore eligible. This means a maximum possible refund amount of $37,500 per employee in most cases.

That said, there are some exceptions. This is because, for employees and non-arm’s length subcontractors, the program allows companies to exceed the $100,000 of salary expenses per year for a certain number of eligible individuals. The entire salary of even the highest-paid employees can then be considered an eligible expense, even if it is well over $100,000 a year, making the potential refund per employee more than $37,500.

The number of employees who can have more than the first $100,000 of their annual salary be considered an eligible expense is determined by multiplying the total numbers of employees and non-arm’s length subcontractors for which the company is claiming the credit by 20% and rounding the number.

Application Process

While it is granted by Revenu Québec to incentivize companies to develop video games and interactive media products in Quebec, it is important to note that much of the application process for this credit first goes through Investissement Québec, not RQ itself.

The application process for this tax credit is divided into two parts. Companies must first obtain a certificate of eligibility to assess the eligibility of the title itself, followed by an attestation of production work, where IQ will certify the number of eligible hours worked by the corporation on the title. Both are issued by Investissement Québec. The first certificate confirms that the multimedia title qualifies for the credit and only needs to be obtained once, while the production work attestation has to be renewed for every taxation year in which the corporation claims the credit.

 

How R&D Partners can help  

Still have questions about this tax credit? Contact Dominik Klein at dklein@rdpartners.com

 

Additional Resources:

Investissement Québec program page: https://www.investquebec.com/quebec/en/financial-products/smbs-and-large-corporations/tax-credits/production-of-multimedia-titles.html

Detailed program factsheet: http://www.investquebec.com/Documents/qc/FichesDetaillees/FTTITRES_general_en.pdf

Determining SR&ED Eligibility by Industry and Project Type

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Introduction:

Prior to the COVID-19 pandemic, Ibis World predicted that, over the next five years, the engineering services industry in Canada would begin to grow once more, having contracted following a drop in the price of crude oil in 2015. The field of biotechnology was similarly expected to expand. Though government assistance programs will help offset the impact of the COVID-19 pandemic, it’s unlikely that either industry will meet their original projections. Nevertheless, programs like SRED still exist to support activities within these industries, provided businesses know how to claim them.

Resources that describe general SR&ED eligibility criteria are abundant, but it is more difficult to find information related to specific industries or project types. For example, if you are in the aerospace industry and qualification testing takes up most of your fiscal period, how eligible is this activity? In this simple guide, we break down some key concepts and questions that may help you discern between eligible and non-eligible activities in certain industries.

 

Aerospace:

Often, the recipe for R&D and technology uncertainty in the aerospace industry comes from the fact that the field is stringent, regulated, and competitive . Technological objectives are constantly changing and becoming increasingly challenging to meet. Further, these objectives are often competing (e.g., reduced costs with increased performance) and demand experimental development to determine whether or not they can be met.

If your project is fairly mature and undergoing various rounds of certification testing, determining eligibility can be trickier. However, it is also worth noting that uncertainties can often be rooted in the sensitive nature of engineered goods and services being directly utilized by humans with serious safety implications. In the aerospace industry, durability and safety are typically expressed and certified under the following terms: 1) airworthiness (flight has been certified to be operative in air with passengers) and 2) flight availability (expressed as the probability of a fault occurring every flight hour, which must meet federal standards). As such, if there are uncertainties related to flight performance and safety that have yet to be understood and resolved, SR&ED continues, and related project activities could be eligible.

If you are able to answer “yes” to any of the following questions about your project, then related activities could be SR&ED eligible:

– Are there remaining tests required to prove the flight availability of your newly developed aerospace component (e.g., engine control software) in several flight and environmental scenarios?

– Is there still technological uncertainty that requires experimentation to determine whether objectives defined at the outset can be achieved?

– Are you still learning about interactions between control laws and flight performance in various flight maneuvers and environmental scenarios?

In addition to these scenarios, unexpected failures may arise during any stage of development and certification, necessitating further experimental investigation and SR&ED eligible activities.

Electrical Engineering, Electronics, & Control Systems:

Many widely-known theoretical tools have been established to explain and model phenomena in the areas of electronics, control systems, and electrical engineering . However, novel application of these theoretical tools in various devices and contexts may uncover complexities that necessitate experimental development, as modeling tools alone cannot accurately predict outcomes. What’s more, certain modeling efforts may be too computationally intensive, implying large costs and extensive development times. From these limitations, an opportunity for SR&ED occasionally arises as newer algorithms and modeling methodologies are developed, or as assumptions are made that must be experimentally evaluated. When developing new material systems and structures for semiconductor devices, antennas, and flexible transmission lines, for example, and subjecting these to uncommon signal frequencies and extreme environmental conditions, characterization activities that attempt to fill in gaps in the available knowledgebase could be eligible.

If you answer “yes” to any of the questions below, you could recover some of your R&D costs through funding programs like SR&ED.

– Are you developing new tools and algorithms to model otherwise complex and computationally exhaustive phenomena?

– Are you attempting to advance the state-of-the-art in microwave theory, signal processing, or non-linear control theory?

– Are you exploring new materials, processes, and leveraging quantum and electromagnetic theories to build next-generation semiconductor devices?

– Have you presented the theoretical basis to your current development at an IEEE conference?

– Does your project also add new knowledge to the fields of sensing, physics, chemistry, or signal processing?

 

Biomedical & Pharmaceutical Sciences:

Drug development and medical device development can be an expensive, multi-year process, but the good news is that many of these costs can be offset by several government-backed funding programs in Canada. From a SR&ED point of view, research and development in the life science sector is eligible on many fronts, compared to other technological sectors. For example, it is often clear what the established state-of-the-art is due to a vast collection of up-to-date publications concerning syntheses and clinical trials, the systematic, scientific approach demanded by SR&ED, and the uncertainty at different stages of development related to the efficacy, safety, and performance of chemical compounds and devices that interact with the human body. Given this, if you answer “yes” to the following questions, you’re likely eligible for SRED:

– Are you developing chemical compounds that interact with the human body?

– Are you dealing with scalability issues in large-scale synthesis?

– Are you building in vivo medical devices?

 

AI/Machine Learning:

Growth in the AI/Machine Learning industry has been rapid and widespread over the past few years. Accordingly, research institutions and industries alike that leverage AI/Machine Learning continue to be rewarded with lucrative funding opportunities. Naturally, the competition for securing these funds is also growing, and the bar continues to rise, especially where SR&ED eligibility is concerned. Nonetheless, if you are advancing the field of AI/Machine Learning or utilizing it to supplement your products or processes, we identified a few questions below that may help you better understand how eligible your AI/Machine Learning based project may be. If you answer “yes” to any or all of these questions, your projects are likely eligible:

– Would some of your work be potentially publishable in top-tier conferences in machine learning or directly advances a specific machine learning topic from a published resource?

– Are you dealing with strict performance requirements that, for example, encourage you to develop scalable and untested models and algorithms that can work with less data?

– Would your AI efforts and advancements impact another field of science like biology, chemistry, or agriculture?

 

Manufacturing:

Though SRED eligibility may be less common where traditional manufacturing is concerned, opportunities could arise when significant improvements to a product or existing process are sought, especially if artificial intelligence or advanced 3D printing can be leveraged.

If you answer “yes” to any or all of these questions, your manufacturing projects may be eligible:

– Are you attempting to increase production efficiency or adhere to more strict environmental regulations by applying technologies or materials that would not be conventionally used for your application?

– Additionally, does this require extensive experimental iterations?

– Are you adding new knowledge to other fields of science and technology, for example, processing advanced thermoplastics?

 

Conclusion:

It is important to examine both the experimental tasks and industry in which they are being undertaken to evaluate the eligibility and risk of a potential SR&ED project. Certain industries lend themselves well to SRED claims, while others are less obvious and more problematic. Having said that, we have successfully claimed SRED in some of the most unlikely industries, and there are a number of elements that can be incorporated into the process of filing a claim that will increase its chance of success. Please reach out to us if we can help you navigate the eligibility of a potential claim and ensure that all the possible steps are taken to maximize it and reduce the related risk.