IDCI — Quebec tweaks patent box tax regime

IDCI — Quebec tweaks patent box tax regime

Quebec is set to unveil details of new changes to the Incentive Deduction for the Commercialization of Innovations (IDCI)

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Taxpayers that carry on business in Quebec should determine whether they are eligible for the Incentive Deduction for the Commercialization of Innovations (IDCI). Although Quebec recently announced new eligibility and calculation changes to this "patent box" tax regime, it has yet to provide legislation or guidance on these changes. Until Quebec clarifies these new changes, taxpayers should act now to familiarize themselves with these rules, which effectively reduce Quebec's corporate income tax rate to 2% (from the 11.5% general rate or 4% small business rate) on certain income.

The new changes to the IDCI were announced in an information bulletin published in December 2020. Revenue Quebec is expected to soon clarify the implementation of this measure and provide instructions for applicants.

Background

Quebec announced the IDCI in its 2020 budget to replace the deduction for innovative manufacturing corporations (DIC). This regime, which complies with Action 5 of the Organization for Economic Co-operation and Development (OECD)'s Base Erosion and Profit Shifting (BEPS) framework, is intended to encourage taxpayers to retain intellectual property in Quebec. Generally, Canadian resident and non-resident corporations can claim the IDCI, provided they can attribute revenue derived from a "qualified intellectual property asset" to an establishment in Quebec. The IDCI is available for taxation years beginning after December 31, 2020.

Quebec subsequently announced its intention to relax the eligibility requirements and to amend the formula for calculating the IDCI in Information Bulletin 2020-15. Specifically, Quebec stated that businesses with intellectual property assets that are not related to R&D activities will also qualify for the IDCI, and that taxpayers would no longer have to multiply by the proportion of the qualified innovative corporation's business carried on in Quebec for the year.

Legislation to enact the IDCI was included in Quebec Bill 74, which has not yet received Assent (i.e., is not enacted for U.S. GAAP purposes). The IDCI was substantively enacted for IFRS and ASPE purposes on December 2, 2020, the date the bill received first reading, as Quebec has a majority government. However, the changes to the eligibility and formula announced in Information Bulletin 2020-15 have not yet been incorporated in a bill.

For more details on the IDCI, see TaxNewsFlash-Canada 2021-01, "Tax Accounting — 2020 Tax Rates and Other Changes" and TaxNewsFlash-Canada 2020-08, "Highlights of the 2020-2021 Quebec Budget".

Eligibility criteria

While Quebec has not yet released draft legislation to enact its new exemption for businesses with intellectual property assets that are not related to R&D activities, taxpayers should be familiar with the IDCI's eligibility criteria as previously announced. Specifically, to be eligible for the IDCI, a corporation must:

  • Be a "qualified innovative corporation"
  • Have an establishment in Quebec
  • Carry on a business in Quebec
  • Earn income from commercializing a "qualified intellectual property asset".

Under this criteria, a qualified intellectual property asset may include:

  • An invention protected by a patent or certificate
  • An invention protected by a plant breeder's rights
  • A copyright-protected software.

Further, gross revenue from the commercialization of an asset may include:

  • Royalties for the use or right to use the asset
  • Income from the sale, rental or lease of a property incorporating the asset
  • Income from the provision of a service intrinsically linked to the asset, and
  • An amount obtained as damages in the context of a judicial remedy relating to the asset.

IDCI calculation

Quebec has still to release draft legislation to change the calculation of the IDCI to no longer require taxpayers to multiply by the proportion of the qualified innovative corporation's business carried on in Quebec for the year. However, under the current legislation, a taxpayer must use the following formula to calculate the IDCI deduction amount:

{[A × (B/C)] – D} × (E/F) × G

Where:

  • A — Net income for tax purposes of the qualified innovative corporation
  • (B/C) — Gross income from the commercialization of a qualified intellectual property asset over its total gross income
  • D — Estimate of the routine return
  • E — Qualified amount of R&D expenditures related to Quebec
  • F — Overall amount of R&D expenditures
  • G — A factor making it possible to attain a taxation rate of 2%

This formula can be broken down into three elements:

  • The qualified profits from a qualified intellectual property asset (i.e. {[A × (B/C)] – D})
  • The Quebec nexus ratio (i.e. (E/F))
  • The rate of the tax benefit (G).

Based on our understanding of the changes announced in the 2020-15 Information Bulletin, the Quebec nexus ratio will be removed from the formula ((i.e. (E/F)). Therefore, if these changes are made a taxpayer can use the following formula to calculate the IDCI deduction:

{[A × (B/C)] – D} × G

KPMG observation

We understand that Revenue Quebec intends to soon issue a prescribed form, as Finance Quebec is currently drafting changes to the IDCI tax provisions.

For more information, contact your KPMG advisor.

Information is current to March 22, 2021. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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