Under Quebec tax rules, only one tax credit may be claimed for an activity.
Taxpayers must therefore make informed decisions to optimize their credit entitlement. In the following paragraphs we discuss integrating the research and development tax credit for salaries and wages (tax credit for salaries) and the tax credit for the development of e-business (CDAE). We have also included a few scenarios that could guide readers in their possible choices.
The choice is impacted by several factors: the employee’s salary, the use of the employee’s time, the corporation’s tax status, whether or not the investment tax credit (ITC) is refunded, etc. An additional consideration is that, unlike the tax credit for salaries, the CDAE is not considered government assistance that reduces expenses qualifying for the SR&ED tax credit for federal purposes. Additionally, Investissement Québec charges annual fees for processing the CDAE file.
To qualify for the CDAE, a corporation must satisfy criteria relating to its income, activities and employees (have at least six eligible employees). The CDAE provides for assistance of 30% of qualifying salaries, up to $25,000 (amount reached when the qualifying salary is $83,333), and 24% is refundable. An eligible employee must spend at least 75% of his/her time carrying out qualifying activities.
Tax credit for salaries overview
The tax credit for salaries depends on the corporation’s shareholders and assets.* To simplify the explanation, let’s look at two scenarios: a Canadian controlled corporation with assets of less than $50M and a corporation with assets over $75M.** The first corporation benefits from a tax credit of 30% while the second one has a 14% tax credit.
For comparison purposes, we assume that the employee’s salary fully qualifies for the tax credit for salaries and the CDAE. Also, in looking at the scenarios, we will not be taking into consideration the impact of the limit of expenses in Quebec.
Most advantageous choice
It is in the first corporation’s interest to claim the CDAE for an employee with a salary under $128,205 in order to maximize total credits and under $105,564 to maximize refundable tax credits.
The second corporation should claim the CDAE for an employee with a salary under $210,084 to maximize total credits and under $168,067 to maximize refundable tax credits. In light of the high amounts in question, these corporations will almost always claim the CDAE.
Undesirable effect in some cases
Under Quebec legislation, when an activity qualifies for more than one credit, the employee’s time relating to the activities must be attributed to one or the other of the credits. In the first corporation’s case, it may be beneficial to combine the two credits, as shown below:
Employee’s salary is $130,000 with 75% being eligible for the tax credit for salaries and 100% being eligible for the CDAE.
If the corporation were to claim only the tax credit for salaries, its credit would be $29,250, whereas if it were to claim the CDAE, it would receive $25,000. If it combines the credits, it could claim $35,500 (increase of $6,250, compared with only claiming the tax credit for salaries).
In the second corporation’s case, combining the credits would have an undesirable effect. By opting for the tax credit for salaries, it would claim $13,650 and under the CDAE, it could claim $25,000. However, by combining the credits, it cannot increase the $25,000 CDAE credit amount. This is because only activities can be used to combine the credits, not expenses. There is a portion of expenses for which it cannot claim a credit because of the CDAE qualifying salary ceiling.
As you can see from these examples, each situation is different, with its own variables. There is however, one constant you can count on, Raymond Chabot Grant Thornton’s tax specialists are there to assist you.
* To be entitled to some or all the increased credit, the corporation must be Canadian controlled and the consolidated world assets of the associated group must be under $75M.
** The rate to calculate the tax credit for salaries decreases on a straight-line basis from 30% when assets are $50M to 14% when assets are $75M.