The tumble of Quebec SR&ED credits in numbers

The tumble of Quebec SR&ED credits in numbersDuring his economic update of December 2, 2014, Finance minister Carlos Leitao announced a second wave of cuts to the Research and Development (R&D) program in 6 months. For the fiscal years beginning after December 2, the first $50,000 in eligible expenses incurred by businesses will now be excluded in calculating the credit. This threshold could be up to $225,000 for companies with assets exceeding $75 M. These cuts come on top of the 20% cut in credits for businesses announced in Quebec’s budget of June 4, 2014, and of the gradual 65% to 55% drop of the replacement amount the federal government announced in its 2012 budget. For the 40% of SR&ED claimants with expenses under $50,000, one-third of their credits will disappear in three years. While they could expect an 82% return on their R&D investments in 2012, this amount will have dropped to no more than 54% at the end of 2015. Wealthier companies fare a lot better. For example, those that are capable of investing $250,000 will only see a 15% drop, with their effective tax credit rate dropping from 82% to 70%. In just a few months, Quebec will therefore have brought its R&D program to a level equal to or lower than what exists for most businesses in Ontario, where the effective rate for businesses stands at 68%.
Régression du taux effectif de crédits de RS&DE selon le niveau de dépenses admissibles.

Reduction of the effective rate of SR&ED tax credits for a CCPC with a fiscal year-end of December 31st based on the level of eligible expenditures.

New Quebec SR&ED cuts hit SMEs harder

New Quebec SR&ED cuts hit SMEs harder Six months after his first budget, which weakened Quebec’s traditionally advantageous research and development (R&D) position, Minister Leitao has struck a second blow to the flagship economic and technological development program. This time around, it is SMEs that are taking the most direct hit. The government will in effect be establishing a minimum expenditure threshold situated somewhere between $50,000 (for companies with less than $50 M in assets) and $225 000 (for those with assets totalling over $75 M). This first slice shall no longer be included when calculating tax credits. The fact that this exclusion applies to initial SR&ED expenditure amounts results in companies with lower expenditures being affected more than others. For the smallest companies, particularly start-ups, this loss could amount to up to 26% of the tax credits to which they would previously have been entitled.  
Assets (in $M) Exclusion Lost credits QC Additional federal credits Net loss
50 $50,000 -$15,000 $5,250 -$9,750
55 $85,000 -$22,780 $7,973 -$14,807
60 $120,000 -$28,320 $9,912 -$18,408
65 $155,000 -$31,620 $11,067 -$20,553
70 $190,000 -$32,680 $11,438 -$21,242
75 $225,000 – $31,500 $11,025 -$20,475
Table 1 – Net SR&ED loss according to company assets for a CCPC (Canadian-controlled private corporation) with taxable income of less than $800,000 The reduction of the Quebec credit gives rise to an increase in federal credits.
 
SR&ED expenses Credits before exclusion Credits after exclusion Net loss Loss in percentage
$50,000 $36,875 $27,125 -$9,750 26,4 %
$500,000 $368,750 $359,000 -$9,750 2,6 %
Percentage loss for a CCPC with taxable income of less than $800,000 and assets valued at less than $50 M
The economic impact for the province will be hard to gauge, but it could be significant. Some such companies, particularly those operating in the IT sector, where jobs are easily transferable, will be forced to take a second look at whether to set up shop and stay in Quebec now that other provinces are offering more generous programs. Given how difficult it generally is to secure financing for a start-up, the minister has likely dealt a severe blow to start-ups that were already struggling.
  SR&ED expenses Provincial credits Federal crédits Total credits
Quebec $50,000 $0 $27,125 $27,125
Ontario $50,000 $10,889 $23,314 $34,203
Table 3 – Quebec vs. Ontario credits for a CCPC with taxable income of less than $800,000 and assets valued at less than $50 M.
What’s most absurd is that the minister did not even bother to wait for the report by the Godbout Commission on the Quebec tax system, which he himself created, before taking this step with far-reaching consequences. There were several options available for reducing the SR&ED budget while distributing losses more equitably between large and small companies, but he probably chose the worst one. This measure will apply to the fiscal years beginning after December 2, 2014.

Couillard government cuts tax credits

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.

ECC Solutions wins the 2014 Octas for best web solution

ConstructBuy.com developped by our client ECC Solutions was selected as best web solution at the 28th edition of the Octas which was held on May 24th. ConstructBuy.com is a social network for companies in the construction industry. This communication platform allows for the exchange and filling of information in real time between organizations involved in various renovation or construction projects.

Congratulations to Steve Piché and his entire team for this success!

2014 Ontario budget: no changes to innovation tax credits

The Ontario budget tabled on May 1st didn’t bring any changes to R&D tax credits and the Interactive Digital Media Tax Credit. It does, however, mention that business spending on R&D  in the province is lagging behind the U.S. As such, the government is studying ways to restructure tax support for R&D, including the possibility for an incremental incentive. Under such a system, companies that increase their R&D expenditures would benefit from enhanced credits while those that decrease them would see their benefits reduced. Ontario would join other jurisdictions such as the U.S. and Japan in offering incremental tax credits. This system could provide long-term benefits to the economy by encouraging R&D and innovation, and by boosting productivity. The government will consult with businesses and research organizations on this approach.

Emergex is taking over BDC’s SR&ED

The Business Development Bank of Canada (BDC) has recently announced that it has terminated its SR&ED consulting service. The BDC has directed its ex-customers to rely either on their external accounting firm or independent SR&ED consultants who perform these duties. In fact, many of these clients were unaware that it is not employees of BDC who are preparing tax credits for SR&ED, but external freelance consultants in their database who were contracted on behalf of the BDC. If you have used the BDC’s SR&ED consulting services, you now have the opportunity to re-evaluate which SR&ED firm you would like to work with in the future. There is no obligation to continue working with the consultant initially referred to you by the BDC. Do what many BDC “orphans” have done already and contact Emergex today!

New version of T661 form used for claiming SR&ED

On October 31, 2013, the Canada Revenue Agency (CRA) published a new version of the T661 form used to describe projects and claim expenses for scientific research and experimental development (SR&ED). These changes follow the announcements made in the March 2013 federal budget.

Simplification of project data

Some changes were made to Part 2 (Project Data). Certain ancillary matters have been eliminated such as the place where the work took place and the purpose of the work (e.g. creation of new processes and materials, or their improvement, etc.) The most important change, however, in this part is the amalgamation of Sections B and C (description of experimental development projects and those of scientific research, respectively). Henceforth, the descriptions of both types of projects must respond to the same three questions. The difference between “SR” and “ED” is slowly disappearing, with the question being asked only for statistical purposes.

Reorganisation of the questions in Section B

The new T661 form presents the three sections for describing each project in a different order, though each section is subject to the same limitations as before in terms of the number of words. One more now begin by describing the “Scientific or technological uncertainties” in 350 words, then the experimental “Work” in 700 words (which reflects the relative importance of this section), and finish with the “Scientific or technological advancements” in 350 words. The first and third sections have been inverted. Without being a drastic change, this new organisation of project descriptions is more logical and natural in a usual development cycle, because the project starts with meeting a technological barrier that leads to work in order to overcome it. Ultimately, this work results in technological advancements corresponding to an increase in the knowledge base that existed at the beginning of the project. Note that the contemporaneous evidence to support any project for which a claim is made must permit corroboration of the work performed with 1) the resources involved, 2) the hours worked, 3) the salaries paid and ultimately, 4) the tax credits claimed. The trend that we are observing is that the CRA’s tolerance for a lack of documentation has dropped significantly.

Information about claim preparers

Information concerning the expert consulting firms that participated in the preparation of the SR&ED request will now be provided. The business name and number of the preparer will be required as well. The details about these firms’ fees will also be provided, including the type (fixed rate, hourly rate, contingency fee basis), the specific rate and the total amount paid or expected to be paid. The CRA may impose a $1000 penalty if the information is missing or incorrect. The collection of this information will permit the establishment of official statistics on the use of SR&ED consultant services. Recall that the Globe and Mail reported in 2011 and 2012 that a third of the $3.5 billion in SR&ED credits was “diverted” to consultant firms. Although there were some consultants who required fees between 30% and 50%, this assertion does not apply universally. The Jenkins report estimates the costs of compliance (including internal costs) at 14% for small and medium businesses and at 5% for large businesses. The data collected will confirm these facts as well as the findings of investigations conducted by the Quebec Technology Association (AQT) and the Canadian Institute of Chartered Accountants (CICA) indicating that the average rates charged are reasonable, according to the businesses which use their services. Additionally, the SR&ED expert consulting firms of good repute welcome these tighter controls which permit the detection and removal of those who abuse the system. The use of the new form will be mandatory for all SR&ED claims which are submitted starting January 1, 2014.

Not a boss, but a coach – Profile of Pierre Savignac

Pierre Savignac, président d'Emergex Subventions RS&DE

Pierre Savignac, Founder & CEO of Emergex SR&ED Consultants

This article by journalist Emmanuelle Gril was originally published in French on Jobboom.com.

Pierre Savignac, having graduated with a bachelor’s degree in computer science from the University of Montreal in 1986, is running his third company.  For as long as he can remember, he always wanted to go into business.  “In my first job, I was told: ‘You, you’ll start your own business for sure!’  It was a strong and fundamental desire, and even when I became an employee again, I knew it was only temporary,” he recalls.

At the age of 28, he started his first company, then another that he formed a few years later.  In 1994, he finally launched Emergex.  Between two start-ups, he worked for Alis Technologies, MédiaSoft Télécom, Virtual Prototypes and Vidéotron.

Today, Emergex has fifteen employees and consultants, most of whom are computer scientists, engineers, or software architects. Their mission?  To help companies, mostly in the IT sector, claim their tax credits for research and development.  “These programs can subsidize up to 80% of the wages paid by a company.  In Quebec, where there are many software development firms, they are often the most important source of revenue,” explains Pierre Savignac.

He believes that hierarchy, as traditionally conceived, is an outdated concept.

“Today, the role of management consists of helping employees to do their jobs.  I see my role more as that of a coach.  I assist and support individuals in achieving their tasks,” he explains.  And for this, he is particularly well-equipped, because he has assumed all of the roles while his company grew, from managing finances to writing technological reports and from negotiating with Revenue Canada to managing a team spread all over the country. “My door is always open and I can always be consulted.  My management style oscillates between trust and control, depending on the employees.  Some take on their responsibilities very well, while others need more guidance.  You should know how to adapt,” he says.

Obviously, this is a role that he understands and implements perfectly, since in 2012, Emergex reached the rank of 24th in Quebec in the annual PROFIT 200 list, which honours the 200 Canadian companies which have experienced the most growth in revenue during the previous five years.

The credit for the production of multimedia titles enters the 21st century

Nicolas Marceau, the Quebec Minister of Finances announced on Monday, September 30th, improvements to the program for the production of multimedia titles. This program, created at the end of the ’90s, at a time when multimedia titles consisted mostly of CD-ROM products (like virtual tours of museums) and offline video games, was starting to be out of touch with the needs of the industry, notably in the sector of online gaming.

One of the main problems was the fact that the eligibility period was limited to three years after publication of the product. Such a limit made no sense for online games which continue to be developed for several years. For example, the massively multiplayer online role-playing game Everquest celebrated its fourteenth anniversary this year. Expenses will now be eligible to the credit during the entire lifecycle of the product.

New categories of activities will also be added to the eligibility list in order to better support this sector. The conception and the development of game hosting infrastructures as well as deployment and maintenance tools for these infrastructures will now be eligible. User relations will also give access to the credit since the development of user communities, technical services, animation and user care will be considered eligible activities.

These changes will be in effect for all claims submitted after September 30th 2013.

In your opinion, will these changes help consolidate Montreal’s position as one of the capital of video games?

What do you think of the cost for our governments or for Quebec’s society in general compared to the economic windfall that such tax breaks bring?

Will small businesses have the same access to these tax credits as large multinationals?

Is the administrative red tape required to satisfy the requirements of Investissement Québec worth it for startup companies?

Testimonials

 

Louis Côté, Hint innovation

Louis Côté, Hint innovation

I am especially impressed that you could do so much, in terms of both quantity and accuracy, based solely on our few hours of discussion!