Canada: Changes to “patent box” tax regime expected (Quebec)

Canada: Changes to “patent box” tax regime expected

Quebec is set to unveil details of changes to the incentive deduction for the commercialization of innovations (IDCI).

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


Background

Quebec announced the IDCI in its 2020 budget to replace the deduction for innovative manufacturing corporations. The IDCI regime, which complies with Action 5 of the Organisation for Economic Cooperation 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 tax years beginning after 31 December 2020.


Eligibility criteria

While Quebec has yet to release draft legislation regarding the new exemption for businesses with intellectual property assets that are not related to research and development (R&D) activities, taxpayers need to be familiar with the IDCI's eligibility criteria. Specifically, to be eligible for the IDCI, a corporation must:

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

Revenue Quebec is soon expected to clarify the implementation of this measure and provide instructions for applicants.

Read a March 2021 report prepared by the KPMG member firm in Canada

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