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 :

Mr. Larouche is your expert in taxation for the Québec office. Contact him today!

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Below is an update for certain items discussed during the Raymond Chabot Grant Thornton international tax seminar held on April 18 and 19, and resulting from the April 26, 2017 Canada Revenue Agency (CRA) and Finance Canada (Finance) round tables of the Canadian chapter of the International Fiscal Association (2017 IFA round table). We also outline other items of interest from the 2017 IFA round table.

Unless otherwise noted, legislative references in this document are to the Income Tax Act, RSC, c.1 (5th Supp.) and its regulation.

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Nancy Jalbert
Partner | CPA, CA | Business Transformation

What luck! A new client from Asia has just placed a $250,000 order. It’s your first international order. But are you well prepared for this?

What happens if, for example, during shipping, the merchandise gets stopped at customs? It goes without saying that the client won’t pay until he’s received the goods…Result: your dream turns into a nightmare.

We’re not trying to discourage you; we’re just trying to show you the importance of properly planning an export project. Here are five steps to follow.

1. Give it some proper strategic thought

First, ask yourself if exporting is truly one of the best growth strategies for your business. If so, are you ready to devote the necessary time and resources? At what cost?

As applicable, this project must have the full support of management and be integrated into the company’s overall strategy.

2. Analyze all export aspects

Then, analyze whether the company’s main functions are able to realize this project, in particular:

  • Human resources: Do you have enough employees and are they well trained? For example, you would like to export to Mexico, but do your representatives speak Spanish?
  • Production: Are you able to respond to an increase in demand? Should you obtain larger facilities or purchase additional equipment? If applicable, how much will you have to invest?
  • Marketing and distribution: Should you review your marketing tools? What distribution method will you use?
  • Financial and legal resources: What is your short- and long-term financial capacity? How much will international development cost and what means of financing have you planned? Would you be able to protect your intellectual property abroad?

Completed with the help of external experts, this analysis will help identify the company’s weaknesses with regard to the general export risks and challenges, and develop an action plan in response. Above all, don’t dream of rapid returns: it could take years for an export project to become profitable.

3. Target and analyze your market

Don’t target all the markets. Choose the most attractive market for your business by conducting a study to understand the business dynamics of this market, your future clients’ profile, barriers for entry, etc. You will learn the rules of export at a lower risk.

Then, make sure you analyze the potential and characteristics of this market by going to visit as often as possible.

Are you considering the United States? Don’t forget that each state has its own requirements.

4. Develop a strategy for this market

You may then develop an operating and marketing strategy tailored specifically to this market. How will you penetrate this market (through a partner, an established distribution network, by delegating representatives, etc.)? How will you organize the logistics (transportation, customs, etc.)? What will your marketing strategy be for this market?

N.B.: What works well at home may not necessarily apply abroad. It may be necessary to innovate and adapt your products and services to meet the expectations of the targeted market.

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5. Analyze your financial needs

Lastly, thoroughly analyze the project costs related and examine financing possibilities. Pay particular attention to expenses that seem minor, such as travel. The bill will quickly add up if you travel several times to China!

There is a wide range of financing options through export loans and subsidies. We will be pleased to guide you and help you plan your international growth.

15 May 2017  |  Written by :

Nancy Jalbert is a partner at Raymond Chabot Grant Thornton.

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Companies established in many countries cannot escape transfer pricing.

Transfer prices are the prices at which related entities located in different countries trade, including the sale of goods, services or intellectual property.

In Canada and most countries, these prices must be established by respecting the arm’s length principle, which stipulates that the conditions for related entities’ transactions must be the same as those that would have been agreed upon by non-related entities.

While companies established abroad must comply with transfer pricing rules, they can also use them to optimize their tax situation. Therefore, it is in their best interest to know these rules as soon as they plan on expanding abroad.

A planning tool

The proper use of transfer pricing can help a group minimize its tax burden. In fact, economic theory states that the greater the work performed, risks assumed and assets held, the higher the expected returns. Therefore, it would be to a group’s benefit if value-added functions, valuable assets and high risk activities were within a jurisdiction with a lower tax rate since a greater portion of the group’s profits will be taxed at a favourable rate.

Documenting transfer pricing

The Canada Revenue Agency (CRA) is one of the most aggressive tax bodies in the world when it comes to auditing transfer pricing. When it deems that the arm’s length principle is not being observed, the CRA can adjust the transfer pricing and impose a penalty. This penalty will apply if the adjustment increase exceeds the lesser of $5,000,000 and 10% of gross income.

However, the penalty will not apply if the taxpayer can prove that, through transfer pricing documentation, serious efforts were made to comply with the arm’s length principle. This documentation is therefore essential for companies established abroad as it must provide a complete description of transactions between the group’s entities and demonstrate the method used to determine the transfer pricing.

Your Raymond Chabot Grant Thornton consultant can help you better understand these issues.