E-business or SR&ED : which tax credit is for you ?

Is your company in Information Technology (IT)? You are surely looking for sources of financing. Do you do research and development? You probably have already studied many government funding programs and tax credits. How to evaluate the program that suits you, the one that offers the best return for your investment in time and for your efforts? Is e-business or SR&ED made for you?

This article compares two of the most popular government programs: the e-business tax credit (Crédit pour Développement des Affaires Électroniques – CDAE) and the Scientific Research and Experimental Development (SR&ED) tax credit.

Important Notice: This information is presented briefly for presentation purposes only. Before evaluating or submitting a claim you should contact a tax specialist into such programs, such as R&D Action, to validate the calculations in your specific situation. We also suggest you consult the relevant policies available on the Canada Revenue Agency (CRA), the Quebec Revenue Agency (in French only) and Investissement Québec websites.

1- THE E-BUSINESS TAX CREDIT (CDAE)

The e-business tax credit is a provincial program administered jointly by Investissement Québec and the Quebec Revenue Agency (ARQ). It offers tax credits to companies qualified in information technology in the province of Quebec. The cost of the e-business credit for the government in 2019/20 is limited to over $ 450 million of refundable and non-refundable credits. This program receives hundreds of submissions each year. So this is another very popular financing option.

e-business credit may apply to you if your primary activity is Information Technology (IT), such as:

• Computer systems design,
• Software publishing,
• IT consulting service,
• Development, integration, maintenance or evolution of systems,
• Design or development of e-commerce solutions.

The e-business credit provides access to refundable tax credits (checks) and non-refundable tax credits (as a deduction from Québec taxes):

• A refundable tax credit of 24% is granted for eligible salaries, up to a maximum of $ 83,333 in salaries, for a maximum tax credit of $ 20,000 per employee;
• In addition, a non-refundable 6% tax credit is granted for eligible salaries, up to a maximum of $ 83,333 in salaries, for a maximum tax credit of $ 5,000 per employee.

Certification of company

The company must be qualified before qualifying employees for the program. To obtain a e-business credit company certificate, it must be shown that it:

• Maintained a minimum of six (6) eligible full-time employees (40 consecutive 26-hour weeks) at any time throughout the year.
• Met both of these revenue or activity requirements:
• 75% of gross revenue must come from the IT sector which is defined by twelve (12) specific NAICS codes;
• 50% of gross revenue must be tied to four (4) specific NAICS codes.

Certification of employees

An employee is eligible when both of the following conditions are met:

• He has a full-time job with a minimum of 26 hours of work per week, for a minimum of 40 consecutive weeks;
• He devotes at least 75% of its time to undertaking, supervising or directly supporting work related to the performance of an eligible activity, including:

Eligible activities

• Information Technology (IT) consulting services related to technology, systems development or e-business processes and solutions;
• Development, integration, maintenance or evolution of:
• Information systems, such as software packages, software and computer programs;
• Technology infrastructure, such as upgrading the technology architecture and integrating hardware components and software;
• The design or development of e-commerce solutions for a monetary transaction;
• The development of security and identification services.

2- THE SR&ED TAX CREDIT

2.1 Federal

First, the SR&ED program is administered by the Canada Revenue Agency (CRA) and provides a tax credit for eligible R & D expenditures. This tax credit is refundable (a check) for most SMEs. The rate of tax credits is 35% for eligible expenses for SMEs.

• Eligible salary expenses are increased by a 55% proxy for overhead, so that $ 100 of salary is calculated as $ 155 of expenses in the federal claim.
• For subcontractor expenses, the federal credit rate is 28% of eligible invoices. For the materials consumed, the rate is 35%

Since the SR&ED program does not have a fixed budget, each eligible application is approved. In 2016-17, the program processed approximately 21,000 credit applications representing approximately $ 2.7 billion in federal tax credits and over half a million in provincial credits. This is more than 6 times the budget of the CDAE program.

2.2 Quebec

Also, the federal SR&ED program is duplicated by a similar program in Quebec. Quebec’s supplementary SR&ED credit is always refundable. For SMEs, the higher provincial rate of tax credits is 30% for eligible expenses exceeding $ 50,000. This means that the federal + Quebec combined credit rate is 54% on the salary of the first $ 50,000 of eligible expenses and 73.75% on salaries exceeding the first $ 50,000 of expenses.

For subcontractor expenses, the combined rate above the initial $ 50,000 is 37.75%. Material expenses are not eligible in Quebec, so the combined rate is 35%.

3- Differences e-business credit vs SR&ED

In summary, e-business and SR&ED differ in many ways:

• e-business credit is limited to Information Technology companies. SR&ED has no limitations in the company’s technology domain;
• e-business credit can only be claimed for companies that have six (6) eligible and more full-time employees. SR&ED can be claimed as soon as the company has eligible hours and costs.
• SR&ED tax credit is the most rewarding but also the most intimidating. Do you really do experimental development? Once the company and its recognized employees are eligible for the e-business credit, the annual repayment may become recurring in subsequent years if the corporation continues to meet the eligibility criteria requested by Investissement Québec.
• The e-business credit may require the creation of a new company that qualifies for the company certificate criteria. SR&ED can be claimed by any company that pays salaries or pays bills deemed eligible;
• Any e-business credit funding reduces your eligible expenditures for the provincial SR&ED claims;
• Once granted, the e-business credit and SR&ED tax credits will never have to be repaid (except in the case of fraud, of course);
• The e-business credit only considers salaries. SR&ED can be claimed on wages, subcontractors and materials consumed for research;
• The e-business tax credit is limited to $ 25,000 per employee. SR&ED has no such limit.
• The e-business credit considers technological activities. SR&ED only deals with experimental development activities to resolve technological uncertainties in order to advance technology. The challenge of eligibility for SR&ED credit is therefore greater;
• Both tax credits are paid in lump sum and approved once your end-of-year tax return has been accepted by the CRA, IQ and the ARQ;

4- Final verdict:

In conclusion, R&D Action experts, recommend, as experienced experts,:

• SR&ED credit if your development advances your technology and knowledge of your technology field. It is also more generous for the efforts deemed eligible;
• e-business credit if your activities are less “R&D ” typical and more like consultation, design, standard development, integration, maintenance or evolution of information systems.

In general, eligibility for the e-business tax credit is less burdensome, more predictable and easier to maintain for many years.

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