Quebec businesses should determine whether they qualify for the province's newly enhanced Credit for Investments and Innovation (C3i). This temporary tax credit, which was introduced in the 2020 Quebec budget, generally provides enhanced benefits over the current Quebec Investment Tax Credit (ITC). The C3i provides a credit of up to 20% to qualified corporations that invest in certain property after March 10, 2020 and before 2025. The province's 2021 budget further enhanced this credit by temporarily doubling its rate to up to 40% for certain acquisitions after March 25, 2021.

This primer article provides an in-depth review of Quebec's C3i, including eligibility for the credit, how to calculate the credit rate and additional considerations, as well as details on claiming the C3i. Corporations should also consider these new rules, which overlap with the existing Quebec ITC rules, to determine whether it may be more beneficial to claim the Quebec ITC rather than the C3i, depending on their specific circumstances.

Background

C3i

Quebec announced the C3i in its 2020 budget to provide additional incentives for investments in manufacturing or processing (M&P) equipment and computer equipment (i.e., class 43, 50 and 53 assets). The C3i is also available for certain management software packages (class 12) acquisitions, as well as other certain types of assets.

Quebec included legislation to enact the C3i in Bill 74, which has not yet received Assent (i.e., is not enacted for U.S. GAAP purposes). The C3i 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.

For details, see TaxNewsFlash-Canada 2020-08, "Highlights of the 2020-2021 Quebec Budget".

ITC

The Quebec ITC allows a corporation that makes an eligible investment in qualified M&P equipment to claim a credit at a rate ranging up to 24%. The ITC is available for qualified property acquired in the period starting January 1, 2017 and ending December 31, 2022.

Quebec later enhanced the ITC for acquisitions before January 1, 2021 (under obligations contracted or construction started after August 15, 2018 and before January 1, 2020). For these investments, the ITC was available at increased rates that vary from 5% to 45%.

The rate of both the regular ITC and the enhanced ITC depend on where the qualified property is used, as well as on the corporation's paid-up capital (PUC) calculated on an associated-group basis and the cumulative amount of eligible expenses the corporation has claimed.

What businesses are eligible for the C3i

To be eligible for the new C3i, taxpayers must carry on a business in Quebec and have an establishment in Quebec, under the definition of "qualified corporation". Additionally, corporations that are members of a qualified partnership may receive the C3i for specified expenses that the partnership incurs for acquiring specified property. However, certain aluminium producing and oil refining corporations, as well as corporations that are members of a partnership that operates an aluminum production or oil refining business, are not eligible for the credit.

What can be claimed

Eligible taxpayers can claim the C3i on the following "specified property":

  • Computer hardware (class 50)
  • Manufacturing and processing equipment (classes 43, 53)
  • Management software packages (part of class 12 property) used to manage one or more of the following:
    • All of a business' operational processes by integrating its functions
    • An entity's business interactions with its customers using multiple and interconnected communication channels
    • A network of businesses involved in the production of a product or service required by the end customer to cover all movement of material and information from point of origin to point of consumption
  • Other property used primarily in smelting, refining or hydrometallurgical activities of ores extracted from a mineral resource located in Canada (other than ores from a gold or silver mine).

To qualify, the expense for the specified property must exceed $5,000 for eligible computer hardware and qualified management software packages, or $12,500 for other property.

In addition, the specified property:

  • Must be acquired after March 10, 2020 and before January 1, 2025
  • Must not have been used before
  • Must be used in Quebec mainly in the course of operating a business for a specific period of time subject to certain exceptions (such as loss, major breakage or unintentional destruction caused by fire, theft or water, or for class 12 property which can be used mainly in Quebec, instead of only in Quebec)
  • Must not be acquired in accordance with an obligation contracted before March 11, 2020 or a property whose construction started before March 11, 2020
  • Must not be used in the course of carrying on a recognized business in which a large investment project is carried out or used in the course of operating an ethanol, biodiesel fuel or pyrolysis oil plant.

Calculating the C3i

To calculate the C3i on a specified property for a taxation year, an eligible taxpayer must determine the amount that its specified expenses for the property (i.e., generally the amount of expenses incurred for the specified property that are included in its capital cost, subject to a cumulative limit and certain exceptions) exceed its excluded expenses (i.e., $5,000 or $12,500, depending on the asset). Then, the taxpayer must multiply this amount by the relevant C3i rate. Taxpayers may also qualify for temporary enhancements to Quebec's C3i rates proposed in its 2021 provincial budget.

Regular C3i rate

The regular C3i rate is 10% in Montreal and Quebec metropolitan communities, and 15% in other territories and regions. However, the rate rises to 20% in the following city, municipality, or regional county municipality:

  • Antoine-Labelle
  • Appalaches
  • Argenteuil
  • Avignon
  • Basques
  • Bonaventure
  • Charlevoix-Est
  • Communauté maritime-des-Îles-de-la-Madeleine
  • Côte-de-Gaspé
  • Etchemins
  • Golfe-du-Saint-Laurent
  • Haute-Côte-Nord
  • Haute-Gaspésie
  • La Tuque
  • Maria-Chapdelaine
  • Matanie
  • Matapédia
  • Matawinie
  • Mékinac
  • Mitis
  • Pontiac
  • Rocher-Percé
  • Shawinigan
  • Sources
  • Temiscouata
  • Vallée-de-la-Gatineau.


Enhanced C3i rate

Quebec's 2021 budget announced that, under certain conditions, taxpayers may claim a temporarily enhanced C3i at double the regular rate. Specifically, the enhanced tax credit rate is equal to:

  • 40% for a specified property acquired to be used mainly in the low economic vitality zone
  • 30% for a specified property acquired to be used mainly in the intermediate zone
  • 20% for a specified property acquired to be used mainly in the high economic vitality zone.

This temporary enhanced rate will generally apply to specified expenses incurred after March 25, 2021 but before January 1, 2023, to acquire a specified property after March 25, 2021 but before April 1, 2023, if:

  • The property is acquired in accordance with a written obligation contracted after March 25, 2021 and before January 1, 2023, or
  • The construction of the property by or on behalf of the corporation or partnership begins after March 25, 2021 and before January 1, 2023.

For details on other provincial budget tax measures, see TaxNewsFlash-Canada 2021-14, "Highlights of the 2021-2022 Quebec Budget".

Calculation of the credit

Note that, in calculating the credit, eligible taxpayers must reduce the eligible expense by the amount of benefit or advantage that it is entitled to obtain for a C3i specified expense (e.g., a reimbursement, compensation or guarantee). However, in calculating a C3i specified expense, taxpayers should not consider the federal investment tax credit to be government assistance.

Further, corporations cannot claim more than $100 million of eligible expenses over five years under the C3i. Where a corporation is part of an associated group, this eligible expense limit will be subject to a sharing agreement.

Management software packages

Certain special rules apply for management software packages where a corporation uses management software packages in several locations and is unable to determine the territory where the software is mainly used. In this situation, the management software is deemed to be used in the territory where more than 50% of the salaries or wages for acquiring the management software were incurred in the first year those expenses were incurred.

Other considerations

The refundability of the C3i depends on the size of the businesses, as follows:

  • Assets and gross income do not exceed $50 million — Fully refundable
  • Assets and gross income exceed $50 million but are less than $100 million — Partially refundable
  • Assets and gross income are $100 million or more — Non-refundable.

Eligible taxpayers may carry back the non-refundable portion of the C3i for a taxation year to the three previous taxation years, or carry forward to the 20 subsequent taxation years. However, no carry back is available to a taxation year that ends on or before March 10, 2020.

In addition, eligible taxpayers should also be aware that claiming the C3i affects the undepreciated capital cost of the asset class on which the C3i is claimed. Specifically, the C3i reduces the capital cost in the year after the credit is claimed (both in Quebec and for federal tax returns).

Claiming the C3i

Eligible taxpayers can claim the C3i by filing the following prescribed forms in French with their tax return:

  • Form CO-1029.8.36.II, "Crédit d'impôt à l'investissement et innovation"
  • Form CO-1029.8.36.IK, "Entente concernant le plafond cumulatif lié au credit d'impôt pour investissement et innovation".

English translations of these forms are available as Form CO-1029.8.36.II-T, "Tax credit for Investment and innovation" and Form CO-1029.8.36.IK-T, "Cumulative Limit Allocation Agreement for Associated Groups".

Claiming the ITC vs. C3i

Certain eligible taxpayers may determine that it is more beneficial to claim the current ITC rather than the regular C3i for a specified property. In this situation, a taxpayer may elect to claim the ITC in the first taxation year during which it incurred expenses to acquire an eligible property using Form CO-1029.8.36.IN, "Crédit d'impôt pour investissement" (Quebec's English translation is available under Form CO-1029.8.36.IN-T, "Tax Credit for Investment").

Example

For example, Opco is an eligible corporation, with a PUC of $250 million or less, that carries on business in the remote zone of Haute-Gaspésie. Opco acquires qualifying manufacturing machinery (i.e., a class 53 asset) on March 18, 2020 in accordance with a written contract signed on March 12, 2020. Opco determines that the machinery is eligible for the ITC at the regular 24% rate, as well as for the C3i at the regular 20% rate. As a result, since Opco can only claim one of those credits, it elects to claim the ITC on the machinery (instead of the C3i).

However, if Opco acquires qualifying manufacturing machinery on March 27, 2021 in accordance with a written contract signed on March 26, 2021, Opco would instead benefit from claiming the C3i at the enhanced 40% rate.

For more information, contact your KPMG advisor.

Information is current to March 29, 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