Overview of Ontario and Québec tax credits for technology companies
Companies that engage in research and development or are in the business of creating media can benefit from the wide range of tax incentives to maximize their revenue efficiency. Here’s a brief overview of some tax credits available in Ontario, Québec and a federal tax credit your company should know about.
(i) Scientific Research and Experimental Development tax credit (SR&ED)
SR&ED is a federal tax incentive program that aims to encourage Canadian businesses in all sectors to conduct R&D in Canada. This is the largest single source of federal government support for industrial R&D. To qualify, the work your business conducts must advance the understanding of scientific relations or technologies, address scientific or technological uncertainty, and incorporate a systematic investigation by qualified personnel. This work includes experimental development, applied research, basic research and support work.
A Canadian-controlled private corporation (CCPC) will receive the greatest benefit from the SR&ED tax credit. CCPCs can receive an investment tax credit (ITC) of 35% up to the first CA$3 million of qualified expenditures and 20 percent on any excess amount. Canadian companies that are not CCPCs (i.e., sole proprietorships, partnerships and certain trusts) may also qualify for the credit, but will garner a less attractive rate capped at 20 percent of qualified expenditures. Refund anyone? The SR&ED credit is refundable for CCPCs, proprietorships and certain trusts. ITCs earned by a Canadian corporation that is not a CCPC are non-refundable.
Regardless of the structure of your business, the ITC is only for qualified expenditures carried out in Canada. These qualified expenditures include wages, materials, [machinery, equipment,] some overhead, and SR&ED contracts. Although the list can cover a seemingly broad range of business activities, the Canada Revenue Agency (which administers the program) has specifically excluded certain activities from credit eligibility in order to maintain focus on activities that qualify. Some of the activities that are not eligible include social science and humanities research, commercial production of a new or improved material or product, data collection, and exploring for petroleum, minerals or natural gas.
A CCPC will clearly receive the greatest benefit from the SR&ED credit program. However, even if your company is not a CCPC, you will still be able to benefit from the inclusive qualification criteria provided by the program. See our detailed article on SR&ED s here.
(ii) Tax credits in ontario
The province of Ontario, through the Ontario Innovation Tax Credit (OITC), also provides a refundable tax credit calculated as 10 percent of qualifying SR&ED expenses. The OITC is available to all corporations that perform scientific research and experimental development in Ontario. Qualifying expenses include 100percent of current expenses and 40percent of capital expenses. The maximum annual credit is CA$300,000. For general eligibility, a qualifying corporation must have a permanent establishment in Ontario, and carry on SR&ED work in Ontario during the year in which the credit is claimed. The structure of your business has no bearing on your credit eligibility – it is the work in which your business is engaged that is determinative. Just like the federal SR&ED credits, any business involved in basic or applied research, or in developing new or improved materials, devices, products or processes may qualify.
Another Ontario-based incentive for technology-related corporations is the Ontario Research and Development Tax Credit (ORDTC). Like the OITC, this credit is administered by the Canada Revenue Agency. The ORDTC is non-refundable and provides a 4.5% tax credit based on eligible expenses for work carried out in Ontario. The timing of this credit is more flexible in nature, as any unused credit may be carried back three years to tax years ending after December 31, 2008, or carried forward up to a maximum of 20 years. To qualify, a corporation must incur eligible expenses. An eligible expense must be on account of SR&ED work carried on at a permanent establishment in Ontario, and must also qualify as an eligible expense under the federal SRED Investment Tax Credit.
The Ontario Interactive Digital Media Tax Credit (OIDMTC) is also worthy of mention. This is a refundable tax credit for interactive digital media products. The credit is based on eligible Ontario labour, marketing and distribution expenses. To qualify, your company must be a Canadian corporation (that is Canadian or foreign-owned) operating out of a permanent establishment in Ontario, and file an Ontario tax return. Eligible products must be an interactive digital media product whose primary purpose is to educate, inform or entertain. This includes games, and educational or informational programs. For software development companies, note that operating system software (OSS) is not eligible for the tax credit.
(iii) Québec tax credits
Québec also has a variety of tax credits ranging from SR&ED-based credits, Technological Innovation and Knowledge-Based Economy credits, and E-commerce credits. There are different tax credits for each broad category. To be generally eligible for most tax credits under the Technological Innovation category, the corporation has to be a taxpayer in Québec and hold an unrevoked certificate issued by Investissement Québec (IQ), which is a certification agency. To be eligible for certain tax credits, IQ certification essentially establishes that your business carries out the work that qualifies for the desired credits. Although a seemingly cumbersome task at the initial stages of your business, the qualification criteria do not require your business activity to fall under a specific category. For example, to be eligible for a biotechnology development centre (BDC) credit, IQ will certify any innovative activity conducted in a BDC. However, the Québec R&D tax credit for salaries and wages does not require IQ certification. Other Québec credits such as the E-commerce credit requires that the corporation has an establishment in Québec whose activities are part of the information technology sector. There are many tax credits offered in Québec that will likely meet the broad range of needs for technology companies.
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