Pierre Larouche
Lead Senior Director | Eng. | Tax

In 2008, the Ministère des Finances du Québec (MFQ) created the tax credit for the development of e-business (CDAE) program.

The CDAE is to support information technology (IT) providers offering services to improve the productivity of management and manufacturing operations (based on an excerpt from the 2008-4 bulletin *Page 2, paragraph 5, FRENCH ONLY ).

Consistently vague and restrictive definition

Since the program was introduced, several amendments have been made to better adapt it to the reality of IT businesses which, in the eyes of the MFQ, met this goal. In 2015, the MFQ added new, more restrictive rules for IT businesses developing software integrated into equipment in connection with their solution delivered to clients. These new rules are raising questions in the industry and several cases are being very actively discussed with various Investissement Québec (IQ) representatives with regard to the interpretation of software concepts such as “ results of such activities are incorporated into a product intended for sale” (based on the 2015 budget document).

The definition is becoming more specific and the trend leads us to believe that these changes will most likely result in excluding IT businesses from the program that mainly target the manufacturing market – a sector that requires an array of IT solutions to automate procedures.

Two markets, two realities

The rules of the CDAE program are based on a detailed analysis of a corporation’s revenues. In fact, businesses must prove that the different activities included in revenue relate mainly to IT services (system design, software edit, etc.). The MFQ relaxed the rules on several occasions, at the start of the program, to take into account the reality of businesses and their service delivery to clients.

Businesses proposing a computer application to improve operations management are often equipped with different computer equipment and related services, which the MFQ has taken into account when reforming the program. Currently, for a business targeting the services sector (insurance, financial institutions and others), the rules are quite appropriate. But what about those relating to manufacturing businesses where procedures need to be automated? This is the issue. Let’s take a closer look.

It goes without saying that the same IT service delivery provided to a manufacturing business that wants to improve its productivity requires more than just computer equipment. An IT solution is implemented in a hostile environment that requires industrial facilities, better adapted electric systems for improved insulation, etc.

Furthermore, special accessories are also required for reading data in the manufacturing process, which is not the case for implementing IT in a service organization since data to feed an information system is added by users (i.e., a keyboard) and not by data acquisition! Before the introduction of the new rules for software integrated into equipment, this type of automation was already penalized. Diversifying products and services to provide the solution is often no longer considered in the program as an IT activity and excludes the service provider from the program.

With the implementation of the new rules in 2015, a restriction applies to embedded software which undermines the expansion of certain businesses. It should not be forgotten that software incorporated into equipment is becoming increasingly more necessary in the automation of processes and is now specifically excluded from revenues to determine whether a business is eligible for the program. As such, if the MFQ wanted to improve productivity in management and manufacturing operations, as stipulated in the 2008 bulletin when the CDAE was created, it is not doing so but rather, with this course of action, it is cutting out the manufacturing aspect that was part of the program’s initial objective.

The solution

At a time when the Quebec government is currently focussing on innovative manufacturers, it would be very wise, in our opinion, to make the CDAE as accessible as possible to IT providers targetting manufacturers specifically, such that Quebec businesses can benefit more from innovative, high-performance products in keeping with their ambitions.

To do this, we believe that the approach should be reviewed so it is more global and based on the CDAE’s fundamental objective, instead of simply removing the rule for integrated software, which hinders innovation. Does the IT solution contribute to improving a manufacturing business’s productivity? Yes, it fully contributes and we believe that this is what should be guiding the eligibility analysis for Quebec IT providers.

30 May 2017  |  Written by :

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