SR&ED Tax Clips: Québec eliminates permanent establishment requirement for claiming refundable R&D tax credits

Québec's 2007 budget eliminates the requirement that corporations, individuals and partnerships must carry on business through a Québec permanent establishment to qualify for the province's refundable research and development (R&D) tax credits, outlined in Table 1 below. This change is retroactive to R&D expenditures incurred in fiscal years starting after April 21, 2005, which is when the 2005 Québec budget mandated the Québec permanent establishment requirement.

Table 1
Rate
Tax credit R&D wage (1)
17.5% to 37.5%
University R&D (2)
35%
Private partnerships (before March 24, 2006, pre-competitive R&D)

(1) Québec Canadian-controlled corporations with less than $50 million in assets may claim the 37.5% rate on up to $2 million of R&D wages. For those with assets between $50 million and $75 million, the rate is gradually reduced to 17.5%. (Lower thresholds apply to R&D wages incurred before December 5, 2006). The rate is 17.5% for all other taxpayers. 50% of payments to unrelated subcontractors are eligible for the credit.
(2) In some cases, Québec's 35% credit is available on 80% of payments to certain eligible entities (e.g., universities and public research centres).

R&D expenditures affected by this change must be claimed by the later of:

  • August 31, 2008; or
  • 18 months after the end of the taxation year in which the R&D expenditures were incurred.

PricewaterhouseCoopers Comments
The change will be welcomed by corporations, individuals and partnerships that carry on a business in Canada, but do not have a permanent establishment in Québec. It allows them to claim Québec R&D tax credits for R&D performed in Québec. Businesses without Québec permanent establishments should determine whether any R&D expenditures incurred in Québec will now qualify for Québec's R&D tax credits.