Canadian startups are among the most innovative businesses in the world, thanks to both the incredible brain power of native Canadian talent, as well as innovation-friendly business tax policy at both the federal and provincial levels.
While the Canada Revenue Agency’s Scientific Research and Experimental Development (SR&ED) tax credit gets a lot of attention, provincial governments have a bevy of tax and grant programs that are designed to help spur local innovation. In many cases, this funding targets specific industries where commercialized innovation can be especially lucrative for both taxpayers and the provincial government.
Among the most popular of these provincial tax credits is Revenu Quebec’s Tax Credit for the Development of E-Business, which is most commonly referred to as CDAE (from its French-language abbreviation). This program is only available to activities in Quebec, and while the program isn’t mutually exclusive from the federal government’s SR&ED tax credit, there are qualifying criteria specific to CDAE that can make it a tricky application to navigate.
A mix of refundable and non-refundable credits for SaaS development in Quebec
For starters, while both SR&ED and CDAE are tax credits, SR&ED is typically dispersed as a refundable tax credit for Canadian-controlled Private Corporations (CCPCs), while CDAE offers a mix of refundable and non-refundable taxes credit for any Quebec-based companies (CCPC or otherwise).
Specifically, CDAE tax credits are geared toward businesses developing and selling software licenses or services (ie. Software-as-a-Service or SaaS). To pass this threshold, companies must have 75 percent of gross revenue derived from IT sector activities, with 50 percent of these activities related to a core subset of the IT sector.
Additionally, a qualifying company must have at least 6 full-time technical employees for the entire fiscal year of the CDAE claim, which differs from SR&ED in that it doesn’t have revenue or employee-number requirements (per se) as part of the qualifying criteria.
What are CDAE-qualified employee activities?
The software-specific caveat for CDAE is perhaps the most important distinction between Quebec’s innovation tax credit and the federal government’s SR&ED program. Although SR&ED has no revenue or minimum employee requirements, it’s also geared toward expensing R&D costs in almost any industry, making it a much broader mandate than CDAE (beyond just geography).
On the flip side, while the CDAE’s revenue requirements are more restrictive, its eligible activities are less rigid and can include routine development (as opposed to the highly-vetted “Why?” and “How” requirements put forth by SR&ED that prioritize net-new innovation).
CDAE does not, however, offer tax credits for any programs that involve hardware, including software that controls hardware or is built into hardware, ala Internet-of-Things (IoT) systems or robotics. Similarly, projects that rely on external data sets—namely, Artificial Intelligence (AI)—are ineligible for CDAE, as data used during R&D must be internally owned and generated by the company’s clients.
Additional disqualifying criteria includes:
- Operation of an e-business solution (ie. processing electronic transactions)
- Management or operation of information systems, applications or infrastructures arising from e-commerce activities
- Operation of a customer relations center
- Activities not related to e-business
- Administrative tasks
- Activities related to a marketing information system and designed to increase a corporation’s visibility and promote its goods and services to current or potential customers
A vehicle for expensing technical salaries
Both SR&ED and CDAE are tools that founders can use to cover salaries, but the requirements (and credit amounts) vary pretty significantly given each program’s focus.
For instance, CDAE covers only the salary of employees in technical roles (ie. developers and quality engineers) during the product development life cycle. This is delivered in the form of an up to 24 percent refundable tax credit and an up to 6 percent non-refundable tax credit of each eligible employee’s salary. The activity of the employees who are covered by the tax credits must meet the 75 percent criteria rule—that is, three quarters of their time must be spent on eligible IT activities—and have to be related to a driving revenue.
There’s an additional caveat, of course, as the CDAE only covers salaries up to $83,333, which means companies can only reap up to $20,000 in refundable credits and up to $5,000 in non-refundable credits per employee. However, there is no restriction on the number of employees that can be covered by CDAE, so long as previous revenue and activity requirements are met.
For SR&ED, on the other hand, businesses can claim tax credits on expenses such as salaries, wages, materials consumed or transformed, subcontractor expenses, and overhead—so long as they are directly related to eligible R&D activities in Canada. Put simply, the SR&ED refundable tax credit is based on the percentage of time an employee has spent on R&D activities relative to their salary.
How to apply to CDAE
The application process for the CDAE takes place in two parts. First, companies must apply to Invest Quebec within 15 months of the fiscal year-end where eligible expenses were accrued.
From there, Invest Quebec begins a systematic review process before granting qualified businesses an eligibility certificate. Once that certificate is delivered, qualifying organizations must submit an application to Revenue Quebec within 18 months of the same fiscal year to receive their credits.
SR&ED tax credits must also be claimed within 18 months of the relevant fiscal year, though it’s not guaranteed that these applications are always audited—though applicants should expect at least one visit by the CRA when applying for their first year.
When to use CDAE vs. SR&ED—or both?
CDAE is most beneficial to more mature companies that have made progress in their development but need additional, non-dilutive funding to scale—especially as it relates to bringing software-based innovations to market.
A classic scenario for many startups is that they’ll receive more SR&ED tax credits as their R&D projects first ramp up and then eventually increase their CDAE funding as fewer of their activities are covered by SR&ED. In that same vein, because CDAE covers more routine development activities versus SR&ED’s focus squarely on net-new innovation, businesses can reap CDAE tax credits when maintaining or improving existing technology.
Because CDAE tax credits are fixed regardless of size or ownership structure—unlike SR&ED which offers lower, non-refundable credits to non-CCPC and larger companies—it can be an attractive credit for large or foreign-owned businesses as well.
Stacking both CDAE and SR&ED
There are options for businesses that want to optimize both CDAE and SR&ED on the provincial level to maximize the tax credit amount.
Doing this is tricky, however, and requires not just deep knowledge of existing tax code, but the ability to communicate the nature of innovation both from the business-side and technical-side of R&D.
This is especially critical for businesses that may be applying for the first time—or who have maybe struggled with their application in the past despite delivering on all relevant criteria.
To learn more about how to optimize your tax credit claims to help extend your R&D runway and drive greater innovation, book a call with a member of the Boast AI team today.