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canadian investment tax credits explained

Wednesday 24 June, 2009

The Canadian Consulate in Chicago sponsored this SR & ED Information Breakfast, which stands for Scientific Research & Experimental Development program, which provides foreign investors tax credits in Canada when doing R&D in the great white north.

Mel Machado, currently of Price Waterhouse Coopers, but formerly of Revenue Canada, wrote the original legislation which brought these into existence.  He provided the details of the program:  DFAIT#2_June_25_2009 v1.0

Claude Jodoin, a tax attorney @ Fasken Martineau, provided a very valuable presentation on how to structure & leverage these investment tax credits from a tax planning point of view.  Here’s his presentation SRED Presentation Fasken Martineau He brought out that foreign companies need to generate income, i.e. build a business in Canada, against which you can deduct these tax credits for tax purposes in Canada.  In other words, you can’t simply set up an R&D cost center & take advantage of the program.  However, his presentation also offers a number of ways to set up companies within & outside of Canada which allow companies to leverage these tax credits without having to do everything required to build a business there.

Canadian provinces offer even more tax credits in addition to what the Canadian government offers. Jerome Nadeau of Investissement Quebec in Chicago let us know how much you can save in French-speaking Canada.  Here’s his presentation SRED Presentation Quebec

Erich Hochstein countered with Ontario‘s offering.  Here’s his presentation SRED Presentation Ontario

Q&A revealed:

  • Investment tax credits are not saleable & have nothing to do with carbon credits.
  • The Quebec office helps Chicago companies finance these tax credits.
  • Ontario is adding programs to take advantage of this.
  • Pharmceutical & aeronautics firms have taken most advantage in Quebec.  Of 90,000 claims in Ontario, 25-30% have gone to information technology companies.
  • The provincial offices & consulate form SWAT teams to help US investors find the right people in Canada.
  • Although historically LLC’s have not been favoured, now they are the favoured vehicle.
  • Investment tax credits must be declared & used within 18 months of filing.
  • The Quick Look for Eligibility takes a few hours & you have a pretty good idea whether or not you can take advantage of the investment tax credits.  The process does not require non-disclosure agreements.
  • The 1st steps are to decide what you want to do, identify research partners, & then contact the economic development agencies

When I worked @ the Canadian consulate, this is something we “sold” whenever we were encouraging foreign direct investment into Canada.  By combining federal with provincial tax incentives, foreign companies can get tax reductions of 50+% of what they spend on R&D there.  In some cases, you can even get cash back.  They are real & firms are taking advantage of them.  You have to abide by their rules, but they can be beneficial.  Consult Claude’s presentation to consider all the different options available.

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