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Tax Incentives

Last update : July 2016

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. 

Federal level:

  • Basic tax credit rate of 15% and possible tax credit rate up to 35%.
  • Refundable or non-refundable income tax credit.
  • Only SR&ED activities carried out in Canada are admissible.
  • The unused portion of the tax credit can be carried backward (3 years) or forward (20 years).

Québec level:

  • Tax credit rate ranging from 14% to 30%.
  • The tax credit is refundable.
  • Only SR&ED activities carried out in Quebec are admissible.

 Generally speaking:

  • The applicable credit rate is determined based on the tax attributes specific to your corporate group.
  • The credit claim has to be filed no later than 18 months following the end of the fiscal year the expenses were incurred.
  • Eligible work can be directly undertaken by the taxpayer or by a third party on his behalf.
  • At both federal and provincial levels, the federal credit will be taxable in the year following its use while the provincial credit will be taxable in the year of claim.

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% 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% 80%1
INO, a preferred partner
  • INO has obtained a special status from Revenu Québec as a prescribed body.
  • When an advanced ruling is obtained, 80% of a research contract entered into with INO can be eligible for the tax credit.
  • Without an advanced ruling, 50% of the contract will be eligible to the tax credit.
  • It is not necessary to operate a business in the Québec province to take advantage of the tax credit on a contract awarded to INO.
  • The research contract entrusted by a taxpayer carrying on a business in Canada to INO qualifies for the calculation of the federal tax credit.
Advanced 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 the signature of the research contract agreement with INO.

Requests must be sent to:

Direction générale de la législation 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 $300 made out to Revenu Québec to cover the minimum consulting expenses charged. To obtain further details, consult the Revenu Québec website or call (418) 659-4692 or 1-800-567-4692.

References

As a reference, we suggest that you consult the following websites:

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 adapted to your particular situation.

APPENDIX

EXAMPLES OF CALCULATIONS FOR YEAR 2016.

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%)2

 
Total cost of contract awarded to INO $100,000
Québec income tax credit (refundable)
($100,000 X 80% X 30%)
(24,000)
Federal income tax credit (refundable)
((($100,000 X 80 %) - $24,000) X 35%)
(19,600)
Net cost after income tax credits 56,400
Income tax savings arising from the deductibility of expenditures
(Income tax rate of 10.5% at the federal level and 8.0% at the Québec level).
(10,434)
Net cost for business $45,966

Example #2 - Corporation ineligible for investment tax credit that gives entitlement to the increase in the basic rate (15%)2

 
 
Total cost of contract awarded to INO $100,000
Québec income tax credit (refundable)
($100,000 X 80% X 24%)
(11,200)
Federal income tax credit (non-refundable)
((($100,000 X 80 %) - $11,200) X 15%)
(10,320)
Net cost after income tax credits 78,480
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).
(21,111)
Net cost for business $57,369
Substraction of the expenditure amount below an exclusion threshold

The government of Québec has introduced a minimum threshold for R&D tax credits. Therefore, businesses will only benefit from these tax incentives for eligible expenditures exceeding a certain threshold.3

1Subject to obtaining a favourable advance ruling – see the following section.

2For this example, no threshold was applied since the threshold applies to all qualified expenditures.

3The minimum eligible expenditure thresholds will be:

  • $50,000 for corporations with assets less than or equal to $50 million;
  • between $50,000 and $225,000 for corporations with assets between $50 million and $75 million;
  • $225,000 for corporations with assets of $75 million or more.

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