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

Quebec plans for further changes to the eligibility requirements for the “incentive deduction for the commercialization of innovations”

Further changes to “patent box” tax regime expected in Quebec

The government of Quebec plans for further changes to the eligibility requirements for the “incentive deduction for the commercialization of innovations” (IDCI).

This provincial "patent box" tax regime generally allows a qualified corporation to benefit from a reduced 2% Quebec corporate income tax rate on certain income from qualified intellectual property assets.

Quebec's announcement states that it will maintain the IDCI eligibility requirement that a business must incur research and development (R&D) activities carried out in whole or part in Quebec (abandoning its previous plan to remove this requirement) and will add new qualifications for R&D activities.

Quebec also says it is working to modify the Quebec nexus ratio to require a direct link between the R&D activities and the intellectual property asset. 

Eligibility requirements

The announcement from Quebec states that the intention is to maintain the requirement that the intellectual property asset must result from R&D activities carried out in whole or part in Quebec under the definition of "qualified intellectual property asset." As a result, Quebec indicates it will not proceed with its previous announcement to relax these eligibility requirements. Read TaxNewsFlash

The release also states that Quebec will require R&D activities carried out in Quebec to contribute significantly to the creation, development or improvement of the intellectual property asset under this definition. Quebec reported that it will consider all facts to make this determination. In addition, the R&D activities must reflect an active participation in the creation, development or improvement of the intellectual property asset and involve the deployment of financial and human resources in Quebec.

These changes to the definition of "qualified intellectual property asset" will apply for tax years beginning after 31 December 2020.

Quebec nexus ratio

Quebec announced that it will modify the Quebec nexus ratio—which is part of the formula to calculate the IDCI deduction—to require a direct link between the R&D activities and the qualified intellectual property asset, which Quebec considers is consistent with OECD standards.

Quebec also stated that corporations will have to monitor their R&D expenditures per intellectual property asset, on a historical basis for purposes of applying the Quebec nexus ratio, and retain supporting documents for subsequent audits by Revenu Quebec.

Generally, the Quebec nexus ratio determines the portion of qualifying income entitled to the IDCI based on the ratio of qualifying R&D expenditures related to Quebec and overall amount of R&D expenditures. Currently, the nexus ratio is calculated on a cumulative basis according to a moving average of R&D expenditures including the particular year and the preceding six years.

Quebec stated that it will clarify the new requirement in the future, which will apply for tax years that begin after 31 December 2023.

Read a January 2022 report prepared by the KPMG member firm in Canada

 

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