Last update : 2013
CANADA AND QUÉBEC ARE RECOGNIZED AS BEING AMONG THE MOST ATTRACTIVE PLACES IN THE WORLD FOR RESEARCH AND DEVELOPMENT.
In an effort to enable Canadian and Québec companies to become and remain innovative, the Canadian and Québec governments have implemented tax incentives to support these companies in their research and development initiatives. Therefore, Canada and Québec are recognized as being among the most attractive places in the world for research and development.
The SR&ED program
The federal income tax credit program for Scientific Research and Experimental Development (hereinafter “SR&ED”) sets out the conditions that must be respected for basic and applied research or for experimental development to qualify for tax incentives. Accordingly, a project and its activities must meet all three of the following criteria, namely: scientific or technological advancement, scientific or technological uncertainty, and, finally, scientific or technical content. The government websites provided as references will provide you with detailed explanations on the meaning of each of the criteria.
At the federal level, qualified expenditures are deductible in addition to giving rise to refundable or non-refundable income tax credit at a rate of 20% or 35%. The applicable credit rate is determined based on the tax attributes specific to your corporate group1.
At the Québec level, qualified expenditures are also deductible and giving rise to refundable income tax credit at a rate ranging from 17.5% to 37.5% based on the size of your corporate group.
The table below is a summary of the eligibility percentages of the main expenditures in the calculation of tax credit for each program:
|
Calculation of federal
tax credit |
Calculation of Québec’s
tax credit |
| |
| Salaries and wages of SR&ED employees |
100 % |
100 % |
| SR&ED subcontractors |
80 %2 |
50 % |
| Materials consumed or transformed |
100 % |
0 % |
| Certain general expenses |
Choice of methods |
100% of the salary portion
50% of the subcontracting portion |
| University research contract |
80 %2 |
80 %3 |
In general, only SR&ED activities carried out in Canada qualify at the federal level. Only SR&ED activities carried out in Québec qualify at the Québec level. Qualifying work may be directly undertaken by the taxpayer or by a third party on his behalf. For more details on qualified expenditures and the payment requirements of these expenditures, consult the government websites presented as references.
Finally, it should be noted that in order to receive SR&ED tax benefits, you must file the tax forms and provide a description of the work carried out no later than 18 months following the end of the taxation year in which the expenditures were incurred.
INO, a preferred partner
As part of completing your eligible SR&ED project, the research contract entrusted by you to INO qualifies for the calculation of the federal tax credit.
Also, INO has obtained special status from Revenu Québec, i.e. a prescribed body. Regardless of your company’s size or status, you may obtain a Québec tax credit for university research and for research conducted by a public research centre or a research consortium (credit for university research) of 35% applicable to 80% of the contract or the portion of the contract representing the subcontracting work subject to obtaining a favourable advance ruling by Revenu Québec.
It should be noted that a taxpayer carrying on a business in Canada can be eligible for the Québec's tax credit for an SR&ED expense incurred in the Québec province, and this with no obligation to operate a business in the Québec province.
A contract entrusted to INO and for which no favourable advance ruling is obtained will receive the same tax treatment as a subcontracting contract (see table of the previous section). Examples of calculations can be found in the Appendix.
Advance ruling
The university research tax credit is an important tax benefit for you. In order to benefit from this credit, you must make a request for an advance ruling generally 90 days following signature of the research contract agreement with INO.
Requests must be sent to:
Direction générale de la législation, des enquêtes et du registraire des entreprises
Décisions anticipées
Revenu Québec
3800, rue de Marly, secteur 5-2-6
Québec (Québec) G1X 4A5
The request must specify the dates the work is carried out as well as the total budget of the contract. Also a copy of the contract must be included as well as a cheque in the amount of $266 made out to Revenu Québec to cover the minimum consulting expenses charged. To obtain further details, consult the Revenu Québec website site or call (418) 659-4692 or 1-800-567-4692.
References
As a reference, we suggest that you consult the following websites:
APPENDIX
EXAMPLES OF CALCULATIONS FOR YEAR 2013
The following tables illustrate the net cost of a research contract awarded to INO which has been subjected to a favourable advance ruling:
Example #1 - Corporation eligible for investment tax credit that gives entitlement to the increase in the basic rate (35%)4
|
| Total cost of contract awarded to INO |
$100 000 |
Québec income tax credit (refundable)
($100,000 X 80% X 35%) |
(28 000) |
Federal income tax credit (refundable)
(($100,000 X 80 % - $28,000) X 35%) |
(18 200) |
| Net cost after income tax credits |
53 800 |
Income tax savings arising from the deductibility of expenditures
(Income tax rate of 11.0% at the federal level and 8.0% at the Québec level. Québec's income tax credit is not taxable in Québec) |
(12 462) |
| Net cost for business |
$41 338 |
Example #2 - Corporation ineligible for investment tax credit that gives entitlement to the increase in the basic rate (20%)
|
| |
| Total cost of contract awarded to INO |
$100 000 |
Québec income tax credit (refundable)
($100,000 X 80% X 35%) |
(28 000) |
Federal income tax credit (non-refundable)
(($100,000 X 80 % - $28,000) X 20%) |
(10 400) |
| Net cost after income tax credits |
61 600 |
Income tax savings arising from the deductibility of expenditures
(Income tax rate of 15.0% at the federal level and 11.9% at the Québec level. Québec's income tax credit is not taxable in Québec) |
(19 902) |
| Net cost for business |
$41 698
|
This document is of a general scope and is used for informational purposes only. The information contained herein is under no circumstances intended to be a substitute for the competent professional advice of a tax specialist and adapted to your particular situation.
___________________________________
1The federal budget proposes that certain tax measures pertaining to the applicable credit rate. The 20% rate will decrease to 15%for taxation years ending after 2013. The 35% rate remains unchanged. After 2013, SR&ED expenditures in excess of the $3 million expenditure limit will earn credit at the reduced rate of 15%.
2For amounts paid for expenses incurred before January 1, 2013, taxpayers may claim 100% of the SR&ED contract.
3Subject to obtaining a favourable advance ruling – see the following section.
4A corporation is eligible for investment tax credit at a rate of 35% when a corporation was throughout its taxation year a Canadian-controlled private corporation, its taxable income and that of its associated corporations is less than $500,000 for the previous taxation year and its taxable capital employed in Canada and that of its associated corporations is less than $10 millions for the previous taxation year. The extra 15% investment tax credit is phased out as taxable income increases from $500,000 to $800,000 and is also phased out as group taxable capital employed in Canada increases from $10,000,000 to $50,000,000.