Tech Capital Partners Blog

It has come up in conversations recently that the Quebec government has significantly  enhanced their provincial portion of the SR&ED credits. In fact, it has come up so often I thought I would investigate. I tracked down a gentleman at Invest Quebec who is responsible for marketing in North America. He quickly pointed out that they were not pro active in other Canadian Provinces. But since I called him, he could not have been more helpful. Here is what I discovered.

For Canadian-Controlled Private Corporations (CCPC) the refundable portion of the Quebec SR&ED credit is for 37.5% of the eligible expenses up to $3,000,000 and 17.5% thereafter. This compares to the Ontario rate of 10% of eligible expenses up to the same limit. The Quebec system, like in Ontario, piggy backs on the feds for eligibility and audits etc so that transition is pretty simple. There are, however, some subtleties that are worth noting. First, in Ontario once you have crossed the limit, there are no refundable tax credits where as in Quebec the credits are refundable at all levels. Second, in Ontario you can claim some materials and equipment as well as overhead expenses (65%) but on the Quebec side the rate is applied just to salaries. Third, in Ontario the tax credit is earned on 100% of the qualifying expenditures for payments made to contractors whereas in Quebec the tax credit is earned on only 50%.

It can be difficult to do an apples to apples comparison without a live example. So imagine a company with $3,500,000 in eligible salaries and $200,000 in materials and expenses. The side by side comparison looks as follows:

If that eye popping number for the Quebec claim isn’t enough to pique your interest, here is another little surprise for you. There is a credit system for employees who are not engaged in SR&ED eligible activities called the e-business credit which is 1/3 of a salary up to $20,000 per person for businesses larger than 6 employees. Wow.

Mind you, Ontario has a 30% refundable tax credit for companies that develop products that educate, entertain or inform. Also, for taxation years ending after December 31, 2008 Ontario will provide an additional 4.5% non-refundable tax credit on qualifying expenditures in respect of SR&ED.

I can understand why a company located in Toronto or Waterloo might find relocation difficult even with these incentives, but in Ottawa… the distance from Kanata to Gatineau is about the same as the distance between San Jose and Palo Alto. In today’s liquidity constrained environment, I would be surprised if every start-up in Ottawa wasn’t giving this serious consideration.

In an effort to be balanced, I spoke to a CFO in the Ottawa area who has had experience in these matters. Indeed one of the companies he works with did the Quebec shuffle only to return to Kanata. He pointed to three reasons which caused this particular company to move back. First when they started looking for significant amounts of space (20,000+ sq ft) they found a lack of suitable space in Gatineau. Admittedly this was a couple of years ago so that data point may be out of date. Second, in this firm many of the employees live in Kanata or Stitsville which caused the commute to mushroom from 15 to 45 minutes – not much by Toronto standards but the kind of thing that folks in Ottawa are not enamored with. Finally there is a capital tax issue which this fellow said amounted to four or five thousand dollars which he admitted was pretty minor in the context of the discussion.

I understand from folks in Ottawa these programs have caused increasing pressure on the community. Additionally, I have heard of a company that has a Waterloo and a Montreal presence which I think may be a matter of coincidence rather than a result of the tax programs. Nonetheless, in time this matter will be an increasing issue and I certainly hope the Ontario government is considering harmonizing its SR&ED plan with Quebec.

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