Provincial R&D Update (09-2)
R&D Tax Update, March 2009 (09-2)
Saskatchewan: cash is king
Previously, Saskatchewan offered a non-refundable scientific research and experimental development (R&D) tax credit equal to 15% of qualifying expenditures incurred in Saskatchewan.
Last year, the Saskatchewan government announced that it would examine ways to meet its commitment to enhance the Saskatchewan R&D tax credit. Over the ensuing year, it met with representatives from the R&D sector and a clear message was received that refundability of the R&D credit was necessary.
In order to facilitate access to this incentive and to improve the effectiveness of the R&D tax credit for small and medium-sized businesses, it was announced in the 2009-2010 budget tabled on March 18, 2009 that the existing non-refundable tax credit would be converted to a 15% refundable tax credit for all qualifying expenditures incurred after the date of the 2009-2010 budget. This will assist Saskatchewan R&D companies in accessing additional capital when it is often most needed.
Eligibility rules and definitions will remain unchanged and unclaimed non-refundable tax credit balances will remain available to be claimed against taxes payable for the existing 10-year carryforward period.
Quebec : support for IP commercialization and E-business ICT
No R&D measures were announced in the 2009-2010 Quebec budget tabled on March 19, 2009. However, the budget did introduce measures that may be of interest for intellectual property (IP) commercialization and for E-business activities.
A 10-year tax holiday was introduced for new corporations dedicated to the commercialization of IP developed in Quebec universities and Quebec public research centres.
This tax holiday applies to new corporations dedicated to producing and selling goods resulting from eligible IP created in the above institutions. A certificate must be obtained from the Ministère du Développement Économique, Innovation et Exportation (MDEIE).
Eligible IP includes patents issued under the Patent Act (Canada) and the copyright on a computer program regarding which the MDEIE ascribes a significant technological advancement.
This budget also introduced retroactive changes to the criteria used to determine eligibility for the existing E-business tax credit, making it more accessible. Accordingly, the definition of eligible information technology activities will be broadened to include additional relevant North American Industry Classification System (NAICS) codes. However, an additional condition must be satisfied: at least 50% of the corporation’s gross income must be earned from activities included under NAICS code 511210 (software publisher) or NAICS code 541510 (computer assisted design and related services) or a combination of these activities.
Manitoba: limited refundability announced in the 2009 budget
To promote cooperation between corporations and research institutes, it was announced in the budget tabled on March 25, 2009 that the 20% R&D tax credit will be made refundable for certain eligible expenditures incurred after 2009 by a corporation with a permanent establishment in Manitoba. Eligible R&D expenditures will be those incurred in Manitoba under an eligible contract with a qualifying research institute, which will include post-secondary institutions and research institutes in Manitoba.
In addition, the refundable tax credit will benefit only qualifying corporations that conduct R&D activities involving biotechnologies and new technologies in such fields as medical science, the environment, agriculture, information, communications and computers. Therefore, the refundability of the R&D tax credit is limited, since it is geared to specific areas of the industry and is refundable only for contracts with universities and prescribed research institutes.
The budget also provided that effective December 1, 2010, the small business income tax rate will be reduced to 0%. As a result, it is worth noting, the non-refundable R&D tax credit will have no value to corporations benefiting from the 0% corporation income tax.
Ontario: encouraging innovation
March 26, 2009, The Ontario Minister of Finance announced the following measures to further enhance the Ontario Innovation Tax Credit (OITC), the Ontario Interactive Digital Media Tax Credit (OIDMTC) and the Ontario Computer Animation and Special Effects Tax Credit (OCASE). The targeted measures are intended to support innovation and create jobs.
The OITC is a 10% refundable tax credit for small and medium-sized corporations performing eligible R&D activities in Ontario.
This budget proposes to extend the OITC to more small and medium-sized corporations by extending the taxable income phase-out range of between $400,000 and $700,000 to a new phase-out range of between $500,000 and $800,000.
This measure is parallel to the enhancement of the federal investment tax credit for R&D proposed in the 2009 federal budget.
Ontario amendments will be introduced after the federal measures are enacted. The effective date of the Ontario amendments and phase-in rules will parallel the federal measures.
OIDMTC is a refundable tax credit available to qualifying corporations for expenditures related to the creation, marketing and distribution of eligible interactive digital media products. Currently, a 30% refundable tax credit is available to small corporations that develop their own eligible products and a 25% refundable tax credit is available to large corporations that develop their own eligible products or to corporations that develop eligible products under a fee-for-service arrangement.
Ontario budget proposes permanent enhancements to the OIDMTC to:
- Enhance the tax credit rates for qualifying expenditures incurred after March 26, 2009 to:
- 40% for qualifying corporations, regardless of size, that develop and market their own eligible products and;
- 35% for qualifying corporations that develop eligible products under a fee-for-service arrangement.
- Expand eligible labour expenditures:
- Currently, qualifying corporations that develop and market their own products are able to claim 50% of such labour expenditures while corporations developing eligible products under a fee-for-service arrangement are unable to claim these expenditures. For qualifying expenditures incurred after March 26, 2009 the budget proposes to allow corporations to claim 100% of the amount paid to eligible arm’s-length contractors that is attributable to the salaries and wages of the contractor’s employees, and
- Extend the tax credit to more fee-for-service arrangements:
- Effective after March 26, 2009, this budget also proposes to extend the OIDMTC to digital media game developers that incur a minimum $1 million of eligible labour expenditures over a 36-month period for fee-for-service work done in Ontario in respect of an eligible product. Corporations that meet the minimum expenditure test will not be required to be at arm’s length with the purchaser corporation, or to develop all, or substantially all, of the eligible product.
Currently, OCASE tax credit is a 20% refundable tax credit available to qualifying corporations for eligible labour expenditures related to digital animation and special effects in qualifying film and television productions.
The following enhancements are made to OCASE after the budget date:
- Eligible labour expenditures are increased to 100% from 50% of amounts paid to arm’s-length unincorporated individuals and partnerships providing freelance services;
- Eligible labour expenditures are expanded to include 100% of amounts paid to arm’s-length incorporated individuals providing freelance services while ensuring that incorporated individuals cannot claim the credit directly; and
- Administration is streamlined by relaxing the requirement that an eligible animation or visual effect be created primarily with digital technologies.
Newfoundland and Labrador: no new tax measures but money on the table
Even though it is not a tax measure, it is worth noting that Newfoundland and Labrador announced, in the budget tabled on March 26, 2009, that $25 million will be allocated to the Newfoundland and Labrador Research and Development Council to promote R&D.
About R&D Tax
Opportunities, issues and developments affecting the federal and provincial scientific research and experimental development tax incentive programs.