The Development of E-Business tax credits (CDAE) program has become in the last several years a must for the IT industry, supplying over $450M per year in subsidies to over six hundred companies.
The application process to the program comes, however, with numerous subtleties and hides a few pitfalls that are important to know. In this presentation, we will discuss the most common problems encountered while applying to the program, from fiscal, administrative, as well as legal aspects.
We will also suggest a few solutions to help your company meet the qualifying requirements and to maximize your credits.
We already covered the impacts of the Canada Emergency Wage Subsidy (CEWS) in a previous article. However, the federal government announced that it would be extending the program to June, 2021, and that major changes would be made to both the program eligibility criteria and subsidy rates. Full details are available on the Department of Finance website.
The changes that have been announced will have a greater than previously anticipated impact on your future Scientific Research and Experimental Development (SR&ED) and E-Business (CDAE in French for crédit d’impôt aux Affaires Électroniques) tax credit claims. It should be recalled that, normally, such subsidies are excluded from tax credit calculations, given that the same salary expenditure cannot be funded by the public sector twice (no double dip).
To fully understand your specific situation, and thus provide you with the best possible advice, we have created a simulator which allows us to obtain a relatively accurate computation of this impact and of how much your tax credit will be. The Emergex financial coordinator assigned to your company will be able to answer any related questions you may have.
What precisely is that impact, in concrete terms?
Regarding the SR&ED credit, the wage subsidy paid to each employee eligible for the credit should be deducted from the eligible wage when calculating the tax credit, at a rate proportional to the time spent on SR&ED activities. The calculation of general costs (commonly known as proxy) remains unchanged since the aid received is only deducted after this calculation. In analyzing the results obtained from modelling different potential revenue losses, we can conclude that, on average, a company benefiting from the CEWS will face a loss of 30% of SR&ED tax credits for the entire duration of the program.
For the E-Business, the full subsidy received for each employee will be deducted from their salary. For the credit calculation, the eligible salary cap ($83,333) will apply, and remains unchanged. That means there could be a very low to no impact for high-wage employees, whereas the impact will be greater for lower-wage employees. Our analyses lead us to conclude that there will be a reduction of about 40% for the E-Business.
We will conclude by reiterating our recommendation that you make sure you retain all documents pertaining to any emergency aid you receive. These documents are invaluable when it comes to calculating your SR&ED and E-Business tax credits, as well as their justification in case of an audit by the fiscal authorities.
Contact us! Our simulator is available now. Together, we can thus prepare and plan for your future claims as thoroughly as possible. That’s one of the multiple added values you get from Emergex, at no additional cost!
Continuing with our series of articles on government emergency measures, we will now continue by talking about non-subsidy COVID-19-related aid programs. Once again, we will look at the likely impact of any such aid on your future Scientific Development and Experimental Development (SR&ED) and E-Business (CDAE in French for crédit d’impôt aux Affaires Électroniques) tax credit claims.As already recommended previously, it is important to keep any emergency aid documents you will receive safe and handy. They will be needed when calculating future SR&ED and E-Business tax credits and could be requested by tax authorities in the event of an audit.
Emergency aid resulting in reduction of time spent on eligible activities
Laid-off employees who earned wages totalling at least $5,000 over the last 12 months and who did not receive any income for a consecutive period of 14 days due to COVID-19 can receive the CERB. This benefit provides $500 per week for a maximum of 16 weeks. What this means for the employer is that employees receiving this benefit are no longer in the company’s payroll.
The work sharing (WS) program is designed to help employers and employees avoid lay-offs when the company is experiencing a temporary slump in its business operations. The benefit provides employment insurance (EI) to eligible employees who agree to a reduction in their normal working hours and to share work with their colleagues as the company recovers. Self-employed workers and shareholders holding more than 40% of voting shares are ineligible.To receive this aid, the targeted employees must consent to a 10% to 60% reduction in their working hours. The employer will continue to pay the employees for the regular hours worked. EI fills the gap by paying such employees directly for the hours not worked. These direct payments are generally equal to 55% of the employees’ weekly wage and can go up to a maximum of $573.To apply for the program, the employer needs to complete the appropriate forms available on the Service Canada website and submit them by e-mail. The e-mail address differs according to the province in which the company is located. Employers are requested to submit their application 10 calendar days before their requested program start date. Simplified measures implemented by Service Canada during the crisis should reduce the processing period to 10 calendar days. Application forms and relevant documents must be preserved carefully for future reference.Conclusion:These two programs will have an impact on eligible SR&ED activities, which will either see a drop in volume or could be completely put on hold. As companies emerge from the crisis, they will therefore be faced with two possible scenarios. SR&ED activities may recover at a pace exceeding the normal growth rate during regular periods, with minimum impacts on credits, or conversely, such activities may lag significantly, which may in turn have a major negative impact on credits. In any case, it is crucial that any effort invested in eligible SR&ED activities be properly documented.Temporary lay-offs and the work sharing program greatly affect the E-Business tax credit and its eligibility criteria (which require a minimum of 6 employees, 40 weeks of employment and 26 working hours per week). Investissement Québec has not yet made any official pronouncement on the matter, but our experience tells us that it could be relatively relaxed if everything is well documented. We will communicate details as soon as we have an official response on the issue.It should further be noted that your company could be eligible for the work sharing program as well as the two subsidies covered in our previous publications (CEWS and 10% temporary subsidy). If that is the case, the CEWS shall be reduced by the amounts paid or reimbursed under the 10% temporary wage subsidy and the work sharing program for the same period.
Emergency aid potentially affecting your E-Business claim
The Ministère du Travail, de l’Emploi et de la Solidarité sociale du Québec has set up the above program, which enables reimbursement of 100% of expenses for eligible employee training and competency improvement activities totalling $100,000 or less and 50% of those between $100,000 and $500,000. The program will remain in effect for the duration of the crisis. The program’s eligibility criteria are expansive, which means many companies can apply for it.Reimbursable expenses include wages of employees in training up to $25/h, professional trainers, and on-line course registration fees up to $150/h, or the cost of training equipment and supplies. To apply for this aid, contact your Local Employment Centre.If your company is receiving government subsidies (CEWS and 10% subsidy), the reimbursement will not be up to 100%, but 25 or 90%, depending on the subsidy received.This program deals with training, which is an ineligible activity under the E-Business tax credit. As a reminder, employees must spend more than 75% of their time on eligible activities to maintain eligibility for the credit. Under this aid, employees could be excluded from the credit if they spend too much time in training.Again, Investissement Québec has not announced a decision on the matter. Our advice remains the same for such situations: retain proper documentation in order to prove and support any action taken, if needed. We will communicate any details as soon as we have an official response on the issue from Investissement Québec.
Closing remarks
Since we are currently living through very exceptional and fluid conditions, the programs discussed and information provided in this article could change at any time. Eligibility criteria and approved expenses are equally likely to change.We ask you to rest assured that Emergex SR&ED Subsidies is closely monitoring the situation and is always on top of any new information put out by the governments that could have a significant impact on your claims. We remain available to support you and secure the highest possible returns in your future tax credit claims, considering any potential emergency aid obtained and the unique situation your business will face.
As experts in financing technology companies, Emergex SR&ED Consultants closely monitors ongoing government announcements concerning business subsidies. In a previous article, we had mentioned the different actions taken by the Canada Revenue Agency (CRA) regarding the processing time of your current Scientific Research and Experimental Development (SR&ED) and E-Business (CDAE in French) tax credit claims. It is now Revenu Quebec who is changing its processing delays for current claims.
In order to increase the cash flow of businesses, the provincial agency is speeding up the payment of refundable credits. A portion of the SR&ED and E-Business tax credits is thus paid in a very short time without going through the usual examinations. The balance will be paid at a later date after the necessary reviews. So, do not be surprised if you receive a lower-than-expected refund.
Based on information provided to our team, Revenu Quebec pays an initial amount corresponding to 50% or 80% of the total amount of refundable credits requested while reserving the right to review the claim at a later date. This allows, in some cases, to accelerate the payment of a portion of the credits by up to five months (i.e. 30 days instead of the usual 180 days).
Our recommendations therefore stay the same. Do not delay the filing of your SR&ED and E-Business claims. You can receive your refunds very quickly, either from the CRA or Revenu Quebec.
As the situation we are experiencing is exceptional and constantly evolving, the information contained in this article may be subject to change. Emergex SR&ED Consultants is closely monitoring the situation and staying apprised of any new information that could significantly impact your claims. We remain at your disposal during this crisis and are ready to answer any questions you may have.
The Government of Canada’s emergency support plan for businesses facing hardship as a result of the COVID-19 crisis is quite generous and will benefit a large number of businesses.
We would like to share our first impressions about these government subsidies with our clients, especially as concerns any likely impact the subsidies may have on your future Scientific Development and Experimental Development (SR&ED) and E-Business (CDAE in French for crédit d’impôt aux Affaires Électroniques) tax credit claims. Normally, such subsidies are excluded from tax credit calculations, given that the same salary expenditure cannot be funded by the public sector twice (no “double dipping”, to use this expression popularized by the TV show, Seinfeld).
We therefore believe that this guideline should always be followed when calculating your future tax credits. However, given that exceptional situations call for exceptional emergency measures, a question therefore arises: will the government not also make an exception to this rule in the near future? This is one of several questions we are closely monitoring from the government’s regular announcements.
Before delving too deep into the various subsidies available, we recommend that you keep any emergency aid documents you will receive safe and handy. They will be needed when calculating future SR&ED and CDAE tax credits and could be requested by tax authorities in the event of an audit.
Canada Emergency Wage Subsidy
Under the Canada Emergency Wage Subsidy (CEWS), eligible employers can request a wage subsidy of 75%, with a maximum weekly limit of $847. Granted for a maximum period of 24 weeks and retroactive from March 15, 2020, this subsidy is aimed at preventing job losses. Eligible employers can apply for the CEWS through the Canada Revenue Agency’s My Business Account portal from April 27.
Eligibility for this program is subject to demonstrable income loss. Depending on the application and reference times, a drop in revenue due to COVID-19 must be shown of at least 15% in March 2020 and at least 30% subsequently. As indicated by the Finance Minister last April 11, processing timelines could range between 3 and 10 days once the application is submitted.
In addition to the 75% wage subsidy, employers are also entitled to claim the total refund of some employment insurance payments and contributions to the Canada Pension Plan, the Quebec Pension Plan and the Quebec Parental Insurance Plan for eligible employees on paid leave. This reimbursement can be requested concurrently with the CEWS claim for any period during which workers are eligible for paid leave.
If you wish to apply for the CEWS as soon as it opens, but have not yet created a My Business Account, you are advised to create one as soon as possible. This tool has become essential.
10% Temporary Wage Subsidy for Employers
The 10% temporary wage subsidy is a three-month measure (from March 18 to June 19, 2020) enabling eligible employers to reduce payroll deductions payable to the CRA. This grant amounts to 10% of the wage paid for the period cited above, with a maximum of $1,375 per eligible employee and $25,000 per employer. Once the 10% calculation is made, the employer can directly deduct this sum from federal tax deduction remittances at the usual moment for their payment.
However, to be eligible for this subsidy, a very important criterion must be met. A for-profit corporation must be a Canadian-controlled private corporation (CCPC) with a business limit greater than zero over the most recent tax year ending March 18, 2020.
Conclusion: The two subsidies above are government aid and should be subject to the usual tax credit processing. Therefore, the wage subsidy paid to each employee eligible to the SR&ED tax credit should be deducted from the eligible wage when calculating the tax credit at a rate proportional to the time spent on SR&ED activities. The calculation of general costs (commonly known as proxy) remains unchanged since the aid received is deducted only after this calculation.
The overall impact on the tax credit amount could be less than expected. In effect, the CEWS aid carries a limit of $847 per week. This means that for all employees with an annual wage of more than $58,000, only this weekly $847 will be paid. For example, for a resource with up to a 40% SR&ED involvement and an annual wage of over $58,000, the weekly SR&ED deduction shall be $339.
For the E-Business, the entire subsidy received for each employee that will need to be deducted from their wages. For the credit calculation, the eligible wage limit then applies and remains unchanged.
Note further that your company may be eligible for the two subsidies as well as the Work-Sharing Program (to be discussed in our next article). If that is the case, the CEWS will be reduced by the amounts paid or refunded under the 10% temporary wage subsidy and the work-sharing program for the same period. We therefore believe that if a business is eligible for the CEWS, the 10% temporary subsidy would no longer be of interest.
Final Word
Since current conditions are very exceptional and fluid, the subsidies discussed and information provided in this article could change at any time. Eligibility criteria and subsidy rates are equally liable to change.
Rest assured that Emergex SR&ED Subsidies is closely monitoring the situation and is always on top of any new information put out by the governments that could have a significant impact on your claims. We remain available to support you and secure the highest possible returns in your future tax credit claims, considering any potential emergency aid obtained and the unique situation your business will face.
These are undoubtedly challenging times for many companies, and we would like to provide our clients with our preliminary observations regarding the impacts of the COVID-19 crisis on your existing Scientific Development and Experimental Development (SR&ED) and E-Business (CDAE in French) tax credit claims. As experts in financing technology companies, Emergex SR&ED Subsidies closely monitors ongoing government releases concerning business subsidies.
For starters, regarding delays in the processing of existing applications, the Canada Revenue Agency (CRA) has clearly indicated that the SR&ED program continues to be a priority. To ensure that the highest levels of support are provided to businesses that are neither publicly nor foreign-owned, i.e., Canadian-controlled private corporations (CCPC), processing of their refundable tax credits will be prioritized. For now, no new reviews or audits will be conducted, and those already in progress will be finalized as soon as possible to ensure that businesses receive their credits faster. Nevertheless, applications that are approved during this period could subsequently be reviewed or audited for a posteriori eligibility confirmation.
As for taxpayers, even though rules have been relaxed to allow the deferral of tax payments, the deadlines for SR&ED and E-Business claims remain unchanged. Finally, the onsite visit normally undertaken by Investissement Québec (IQ) following the first E-Business application will now only take place when subsequent claims are made. As a relief measure, IQ will issue tax credit eligibility certificates without the payment of fees which are postponed to a future unspecified date. Finally, Revenu Québec has not announced any changes in how it processes credit applications.
The following are some recommendations we believe you should be following right now:
In the present context, you must not delay filing your SR&ED and E-Business claims! The sooner you file after the end of your financial year, the faster you will receive your refunds. Take advantage of the slowdown in activities to accelerate your cash inflows and boost your working capital.
To facilitate communications with the CRA, we recommend that you create an account at My Business Account as soon as possible. It takes about ten days to complete the account creation process, during which you will receive a code by mail. You will need it for effective communication with the CRA in case of future audits or to apply for The Canada Emergency Wage Subsidy. We will soon be putting out an article with details of this program, so watch for our email blasts!
If your business is applying for one or more government aids, we invite you to hold on to all relevant documents, as they will be needed when calculating future SR&ED and E-Business tax credits, and could be requested by tax authorities in the event of an audit. This subject will also be covered in full in a future article we will be putting out.
Finally, since we are currently living through very exceptional and fluid conditions, the information provided in this article could change at any time. We ask you nevertheless to rest assured that Emergex SR&ED Subsidies is closely monitoring the situation and will always be on top of any new information put out by the governments that could have a significant impact on your claims. We remain at your disposal during this crisis and are ready to answer any questions you may have.
The Journal de Montréal reports that the E-Business tax credit (CDAE in French) is too difficult to claim for smaller companies in the information technology industry […] due to its rules that are so complex.”
Don’t worry! Emergex can help you! We have filed hundreds of e-business claims since the program’s inception in 2008. For an opinion on your eligibility, ask about our personalized assessment, free of charge and without any obligation!
Facing the prospects of a much larger deficit than anticipated, the Couillard government tabled its first budget on June 4, 2014. Given the realities of the current environment, it comes as no surprise at all that he announced major spending cuts, as he has to meet his balanced budget objective. Businesses will be particularly hard hit. Welcome to the era of austerity!
20% reduction in tax credits
The most significant measure is the generalized 20% cut in business tax credits. This will allow the province of Quebec to save upwards of $625 million between now and March 2017. However, it could prove a risky gamble in industries whose jobs are easily transferable from one jurisdiction to another. For example, the credit for the production of multimedia titles will be reduced from 37.5% to 30% for products that have a French version, whereas the equivalent tax credit in Ontario is 40% (with no restrictions on the language of the product). We may thus end up witnessing an exodus of video game companies to Toronto.
Tax Credit Program
Before June 5, 2014
After June 4, 2014
SR&ED
SR&ED salary
17.5% to 37.5%
14% to 30%
University research
35%
28%
Private partnership
35%
28%
Research consortium
35%
28%
E-Business
30%
24%
Multimedia titles
26.25% to 37.5%
21% to 30%
Industrial design
15% to 30%
12% to 24%
The various scientific research and experimental development (SR&ED) credits have not escaped this cut. However, the impact will be less significant, as the federal credit will partially compensate for the loss of assistance. In fact, the Quebec credit reduces the qualifying expenditure amount for calculating the federal credit. With a smaller provincial credit, the federal credit will consequently be higher. In the example of a $100,000 eligible SR&ED salary expenditure, a Canadian-controlled private corporation (CCPC) would have received $78,625 in credits (federal and provincial combined) in 2014. Now, with the new rate it would receive $73,750, representing a 6.2% reduction.
For a CCPC claiming $100,000 in salaries under the proxy method.
Before June 5, 2014
After June 4, 2014
Difference
Quebec SR&ED Credit
$37,500
$30,000
– $7,500
Federal SR&ED Credit
$41,125
$43,750
+ $2,625
Total
$78,625
$73,750
– $4,875
These reductions will apply to expenses incurred as of June 5, 2014. Finally, the government announced that it will be reviewing all tax credit programs over the course of the coming year. The expectation is therefore that it will be modifying certain measures and getting rid of others altogether.
Abolition and suspension of certain measures announced since September 2012
Minister Leitao also announced the abolition of certain measures proposed by the Marois government last September. Enhanced R&D tax credits for biopharmaceuticals have now been scrapped, as has the planned increase in the refundable Tax Credit ceiling for the Development of E-business (CDAE), which was scheduled to kick in in January 2016. The extension of the program to 2025 is however maintained. The axe is also falling on the Tax Credit for the Integration of IT in Manufacturing SMEs, for which no new certificate will be issued starting June 4, 2014. Enhanced investment loans for companies located in resource regions and for manufacturing SMEs are also facing a similar fate.
Holiday on the contribution to the Health Services Fund for hiring of some specialist workers
And now for some good news. SMEs with a payroll of less than $5 million will be able to take a holiday on the contribution to the Health Services Fund when hiring new specialist workers, including computer scientists. The holiday will only apply to the salaries attributable to the new hires, and will be full for companies with a payroll of less than 1 million dollars, and partial for those with payrolls of between 1 and 5 million dollars.
Mr. Pierre Savignac is the founder and CEO of Emergex SR&ED Subsidies. This expert consulting firm specializes in tax credit claims in the software and IT industries, particularly the tax credits for scientific research & experimental development (SR&ED), e-business development (CDAE) and multimedia titles. At the seminar to be held on February 6, Mr. Savignac will talk about the last changes in tax incentive programs for IT companies, in force since January 1: New version of T661 form: managing inspection risks
Changes in rates and eligible expenses
Extension and indexation of the E-Business (CDAE) program
Credit for the production of multimedia titles: expenses will now be eligible to the credit during the entire lifecycle of the product
Optimization of additional credits : tips for maximizing tax credits
