Tax Insights: Quebec’s incentive deduction for the commercialization of innovations

Issue 2022-11

In brief

On December 17, 2021, Quebec’s Ministry of Finance published additional specifications and adjustments to the province’s “incentive deduction for the commercialization of innovations in Quebec” (IDCI). The publication:

• clarifies the definition of a “qualified intellectual property asset” (IP asset)
• introduces a requirement, for taxation years beginning after December 31, 2023, to more precisely link the research and development (R&D) activities contributing to the development of an IP asset with the resulting income from that IP asset
  

The IDCI, which was introduced in Quebec’s 2020-2021 budget, is expected to provide one of the most competitive corporate tax rates in North America for businesses that commercialize locally developed intellectual property (IP) at a Quebec establishment. This Tax Insights provides an overview of the IDCI, including upcoming changes to the incentive.

In detail

Purpose

The IDCI is intended to encourage companies that develop IP in Quebec to execute the commercialization phase through an establishment in the province.

Tax incentive

For taxation years of companies beginning after December 31, 2020, eligible income (attributable to an IP asset) will benefit from a reduced provincial tax rate that could be as low as 2% (instead of the current Quebec general income tax rate of 11.5%), resulting in a combined federal/Quebec tax rate of 17% (15% federally plus 2% provincially). This 17% combined rate is one of the lowest rates in Canada and the United States, thereby making Quebec companies that develop qualified IP assets in the province more fiscally competitive.

The IDCI was designed based on the recommendations from the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 5, related to countering harmful tax practices, which takes into account transparency and substance. Accordingly, the IDCI was created to comply with the OECD minimum standard, and therefore avoid being considered a harmful tax measure.

Parameters of the incentive

To be eligible for the IDCI, a business must:

• have an establishment in Quebec
  
• own an IP asset resulting from R&D activities conducted in whole or in part in Quebec, such as
  • software copyrights (created after March 10, 2020)
  • patents and certificates of supplementary protection (applied for after March 17, 2016)
  • plant breeders’ rights (requested after March 10, 2020)
• commercialize the IP asset from an establishment in Quebec

The types of revenue eligible for the IDCI are from: 

• a payment for the use of or the right to use the IP asset
• the sale, rental or lease of a property incorporating the IP asset
• the provision of a service intrinsically linked to the IP asset
• an amount obtained as damages in the context of a remedy of a judicial nature relating to the IP asset

The deduction is calculated based on a complex formula, which includes the following elements:

• the qualifying profit from the commercialization of the IP asset, which represents an estimate of the added profit that is attributable to the IP asset
  
• the importance of R&D activities in Quebec (over the current and previous six years)
• a factor to achieve an effective tax rate as low as 2% on qualifying income 

Upcoming changes to the IDCI

Quebec’s Ministry of Finance announced that, for taxation years beginning after December 31, 2023, companies will be required to more precisely link the R&D activities that made it possible to develop the IP asset with the resulting income from that IP asset. The new rules to implement this new requirement are being developed and will be announced at a later date. This new requirement will require companies to track R&D expenditures, by IP asset, on a historical basis and retain these detailed records and other supporting documentation in case of an audit.

The takeaway

As more details on the IDCI are now available, companies in various industries (e.g. those in the information technology [including video game and digital media], manufacturing, high technology and life sciences sectors), should evaluate the parameters to determine:

• whether they are eligible for the IDCI, or
• what changes are required to obtain the potential benefits associated with the IDCI
  

PwC can help you further understand the IDCI and how it applies to your business.