Intro to the Tax Credit for the Development of E-Business (CDAE)
5 min read
5 min read
The Tax Credit for the Development of E-Business, commonly referred to as “CDAE” (its French-language abbreviation), was introduced in Quebec to encourage activities considered economically and socially strategic within the IT industry. Companies building and selling B2B software solutions are excellent candidates for this unique program.
Within the context of CDAE, the term e-business extends beyond the purely transactional nature of e-commerce and is regarded, rather, as the incorporation of the internet or other network technologies into standard business processes, such as HR, finance, procurement, accounting, etc.
In exchange for undertaking the development of e-business software solutions within the province, Revenue Quebec refunds companies for a portion of the salaries paid to engineers, developers, data scientists, UI/UX designers, and other employees performing technical functions.
This tax credit has attracted many foreign B2B companies to Quebec. In fact, given that no other Canadian province offers an equivalent program, out-of-province Canadian companies are setting up development teams in Quebec to take advantage of the credit.
Contrary to the popular Scientific Research & Experimental Development tax credit (SR&ED) and its rigid eligibility criteria, CDAE makes no distinction between routine development and R&D activities. CDAE is therefore often a solid alternative to SR&ED, but, as we will see later, this does not necessarily mean that CDAE and SR&ED are mutually exclusive, nor is CDAE easier to claim.
In order to be eligible for the CDAE, your company must be focused on developing and selling software licenses or software services. More specifically, at least 75% of your company’s gross revenue must be derived from activities in the IT sector and 50% of this activity must relate to a core subset of activities in the IT sector (outlined here).
What’s more, throughout the year, you must maintain at least six full-time employees who devote 75% of their time to eligible IT activities. Employee turnover is permissible so long as the same, eligible positions are re-filled or in the process of being filled. Startups (or companies that have been in operation for less than two years) are subject to an exception to this rule, whereby they can claim CDAE from the moment they hire their sixth employee onward.
You can receive a refundable tax credit of up to 24% and a non-refundable tax credit of up to 6% for each eligible employee’s salary; however, the CDAE reinforces a salary cap of $83,333 , meaning that a maximum of $20,000 refundable and $5,000 non-refundable credit can be claimed per each eligible employee. Another notable exemption concerns co-founders or significant shareholders; those in possession of over 10% of the company’s shares are not eligible to receive the tax credit.
The application and refund process is annual and comprised of two steps.
First, you must submit an application for eligibility certificates to Investment Quebec. This must be done by the last day of the 15th month after the fiscal year and will require that you submit both company and employee applications as well as financial statements and balance sheets. If you’re deemed eligible, you must pay Investment Quebec a minimum fee of $1,743 (the total price will depend on the number of employees included in your application), after which you will receive the corporate and employee certificates necessary to submit your claim to Revenue Quebec.
Once you have received your certificates from Investment Quebec, you must submit your tax credit request to Revenue Quebec by either the last day of the 18th month after the fiscal year, or the last day of the 3rd month following the issuing of your certificates by Investment Quebec.
Though CDAE can be claimed in combination with SR&ED, only one credit can be claimed per expense and your ability to optimize both will depend primarily on your employees’ salary level, the number of days worked in the year, the percent of work that qualifies R&D, and the size of your company While R&D applies only to the portion of a salary spent on SR&ED, CDAE applies to the entirety of an eligible employees’ salary. This means that, if CDAE and SR&ED are combined optimally, you can potentially claim more than the theoretical maximum credit of 74% that can be claimed by combining federal and provincial SR&ED for CCPP.
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.