In March of 2008, the government of Quebec introduced a refundable tax credit to promote the e-commerce and information technology industries. The refundable tax credit will be in effect until December 31, 2015.
In order to be eligible for this refundable tax credit, a corporation must first obtain an eligibility certificate from Investissement Québec for each taxation year the credit is claimed. All corporations whose activities are part of the IT sector and have an establishment in Québec may be eligible for the refundable tax credit if the conditions of admissibility are met.
Conditions of Admissibility
To obtain an eligibility certificate from Investissement Québec, the corporation must show supporting evidence that the two following criteria are met:
1- At least 50% of the corporation’s total gross revenue is derived from the following activities
- Software publishers;
- Design of data processing systems and related services; or
- A combination of both; and
2- At least 75% of the corporation’s total gross revenue is derived from activities in the IT sector in one of the following eligible activities:
- Manufacturing of computer and peripheral equipment;
- Manufacturing of radio and television broadcasting and wireless communication equipment;
- Wholesalers / Distributors of computers, peripherals and packaged software;
- Computer and software stores;
- Software publishers;
- Data processing, data hosting and related services; or
- Design of data processing systems and related services.
The two criteria mentioned above must be met for each taxation year. It should be noted that the services provided must be rendered to persons who have an arm’s length relationship with the corporation or must be related to the development of applications used exclusively outside Québec, or a combination of both.
Calculating the Credit
The refundable tax credit is equal to 30% of eligible salaries paid to eligible employees. The eligible salary is capped at $66,667 per employee, representing a maximum refundable tax credit of $20,000 per employee per year.
It is important to note that shareholders and persons with whom they do not deal at arm’s length who hold 10% or more of the share capital do not qualify as eligible employees.
The corporation must have a minimum of 6 employees (excluding shareholders) who carry out eligible activities on the development of e-commerce on a full-time basis (i.e. a minimum of 26 hours per week for a minimum of 40 weeks). Investissement Québec may, however, issue eligibility certificates if the eligible corporation is able to show that its failure to fulfill this commitment was due to exceptional circumstances beyond its control, such as the departure of employees or the impossibility of filling vacant positions within a reasonable period of time.
The corporation can apply for a letter of interest with Investissement Québec which allows the corporation to get an advance ruling of its eligibility and that of its employees. In some cases, Investissement Québec offers a loan guarantee to ensure interim financing of the tax credit.