The Québec 2016-2017 Budget introduces an Innovative Companies Deduction
March 22, 2016
By Carmela De Luca and Amy Dam
Last week’s announcement of Québec’s 2016-2017 Budget included an exciting new tax relief initiative for qualifying innovative Québec manufacturing corporations. The Innovative Companies Deduction (ICD), also commonly referred to as the patent box or IP box, provides tax relief to manufacturing firms for patent attributable revenue from products marketed in Québec that include a feature protected by patent and developed in Québec. The measure is designed to promote Québec commercialization. It aims to ensure that patented innovations developed in Québec will also be marketed in Québec.
As of January 1, 2017, eligible manufacturing companies generating revenues on goods (either from sale or rent) that include a patented innovation developed in Québec will benefit from a tax rate decrease of 11.8% to 4.0% for income attributable to that patent. The income generated from the patent however cannot exceed 50% of the revenue of the goods manufactured in Québec.
The Budget report estimates that the ICD is expected to provide $135 million in tax breaks over the next five years to innovative companies.
The Budget report highlights some interesting examples and includes a comparison of the competitiveness of Québec’s and Ontario’s tax systems. In the hypothetical example, at least for the scenario provided, the conclusion is that the tax burden would be similar.
Who is eligible?
The ICD specifically targets companies that cannot claim the small business deductioni. It is available to companies which have more than $15 million in paid-up capital and which operate a business in Québec whose Québec activities consist primarily of manufacturing and processing activitiesii.
What patents are eligible?
To be eligible, the patent must protect an invention that resulted in whole or in part from R&D work that was carried out in Québec by either the company accessing the tax credit, or by an entity with which the company accessing the tax credit was associated with at the time the R&D was being carried out. In both cases the R&D must have been carried out in Québec. Also, the company or associated entity must have been granted a refundable R&D tax credit in respect of the R&D expendituresiii.
A qualifying patent does not have to have been granted, but must have been applied for in any competent jurisdiction on or after March 18, 2016. Further, the applicant must be a corporation with an establishment in Québec.
Other innovation assistance measures
The ICD complements other existing measures supporting innovation including Québec’s R&D tax credits, the First Patent Program, the Development and transfer support Program, the Design tax credit and the Créativité Québec Program.
The ICD differs from R&D tax credits and the First Patent Program. The ICD is directed to the later steps of commercialization whereas R&D tax credits incentivize companies to invest in research while the First Patent Program, launched in 2015, and reported here, offers financial and technical assistance to Québec-based SMEs that are filing their first patent application.
This initiative, while limited in several aspects, is undoubtedly a welcome addition for the innovative manufacturing community. Some details remain to be fine-tuned. The measure, which is believed to be the first of its kind in Canada, should help to achieve the government’s stated goals of encouraging investment in innovative manufacturing, retaining intellectual property in Québec, encouraging production and marketing of goods that result from patents protecting Québec inventions, and improving competitiveness of Québec businesses.
The 2016-2017 Budget as well as the ICD initiative (see in particular section 5.2 of the Budget and section 2.5 of Additional Information on the Fiscal Measures) can be found here.
i The small business deduction is a tax rate reduction available to eligible Canadian-controlled private companies with paid-up capital of $10 million or less for the first $500 000 of annual income.
ii A company having primarily manufacturing and processing activities in Québec means that at least 50% of its activities, as measured by labour cost, carried out in Québec consist in activities in the manufacturing and processing sector.
iii For the five-year period preceding the year in which an application for a patent was filed, the total eligible R&D expenditures paid by the company or associated company must be at least $500 000.
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