Quebec’s latest budget aims to boost competitiveness and innovation through enhanced tax incentives

As well as investing $6.7 billion in the green economy and $15.8 billion in public transit, Quebec’s latest budget includes $1 billion worth of new and updated incentives to boost business competitiveness and help innovative companies. These incentives are designed to support investments in startups, R&D and productivity in the province. Finance minister Eric Girard said that with Budget 2020/2021, Quebec businesses “will benefit from the most competitive tax rate in North America.”

Promoting and retaining IP developed in Quebec

The budget introduces the incentive deduction for the commercialization of innovations (IDCI). This incentive aims to accelerate innovation by reducing taxes on revenue attributable to IP commercialized in Quebec to just 2 percent, compared to the basic corporate income tax rate in Quebec of 11.5 percent. To qualify, companies must be based in the province and have conducted R&D locally. The incentive seeks to retain IP that has been developed in the province.

The IDCI replaces but essentially enhances the Innovative Companies Deduction (ICD) introduced in Budget 2016, which sought ”to ensure that patented innovations developed in Québec will also be marketed in Québec.” That incentive lowered the tax on income from IP to 4 percent. It specifically served companies that weren’t eligible for the small business deduction; that is, companies with more than $15 million in paid-up capital and primarily engaged in manufacturing and processing.

This type of tax relief is commonly called a “patent box” deduction, which was heralded as an important innovation in tax policy when Quebec adopted the measure in 2016. But Margaret Dalziel, an associate professor with the Conrad School of Entrepreneurship and Business at the University of Waterloo, sees potential problems with the measure. “How would you know if it works? It’s almost certainly going to increase patenting, but what we really want is the underlying innovation, and that’s almost unmeasurable,” she told RE$EARCH MONEY in a phone interview. Also, a patent box deduction strongly favours industries that generate a lot of patents, which narrows the impact of the measure, she says.

An alternative to traditional venture capital for innovative startups

Also included in the 2020/2021 budget is a tax credit designed to boost investments in high-growth SMBs. The synergy capital tax credit (SCTC) allows Quebec-based corporations to receive a non-refundable tax credit equal to 30% of the value of investments in Canadian-controlled startups with permanent establishments in Quebec and gross income of less than $10 million. Eligible startups must be operating in one of five sectors: green technology; information technology; life sciences; innovative manufacturing; or artificial intelligence.

Serge Bourassa, president and COO of the Centre d'entreprises et d'innovation de Montréal (CEIM), believes that early-stage startups are more likely to benefit from the SCTC, as the credit includes startups as young as one-year-old and sets no minimum revenue for participation. According to Bourassa, the SCTC addresses a gap for startups in the pre-commercialization stage who struggle to raise venture capital due to lack of track record.

Bourassa suggests that the SCTC addresses another problem with traditional VC investment: the short horizon for high expected returns. “An established company, presumably with relatively deep pockets and admissible under the SCTC, could provide a better financing alternative,” he said in an email to RE$EARCH MONEY, “Since it is not structured as a traditional VC, it would very likely invest for the long run, enabling the startup to execute a more effective valuation and development strategy.”

And since the investing company is likely to become a first-user of the startup’s product, he adds, it will evaluate the risk of its investment more effectively, leading to more reasonable investment conditions: “When everything works well, it becomes a win-win solution for both parties with common goals. Truly smart money.”

Bourassa anticipates that some of the startups who receive support from CEIM will benefit from SCTC, "But the key ingredients are a fit between the start-up innovations and the investing company, as described above, with aligned long-term objectives.”

But Dalziel points out that these relationships with corporate partners may not be in the startups' long-term interests. “It might limit the strategic freedom of the startup,” she says. Startups receiving SCTC investments risk that their corporate partner could restrict ther development, such as by limiting their ability to sell to competitors.

Supporting investment in manufacturing and productivity

A third incentive in the budget is the investment and innovation tax credit (C3i), meant to foster investment in modernizing technologies and equipment, especially for digitization. The non-refundable credit is offered to companies who make purchases of manufacturing and processing equipment, computer hardware, or management software packages. The value of the credit ranges from 10, 15 or 20 percent, depending on the economic vitality index of the area where the investments are made — for example, Montreal and Quebec City are high economic vitality zones. It will be applied as a reduction to a company’s total taxes in a taxation year.

C3i builds on Quebec’s current investment tax holiday, which has already played a role in supporting investments like Medicago’s decision to build a $300-million manufacturing facility in Quebec City. A biopharmaceutical company that uses plant-based technology to develop and mass-produce vaccines, Medicago made headlines recently by creating a “vaccine candidate” within twenty days of receiving the DNA sequence of the virus. “I can see that, if we have another project, it would be attractive to continue participating,” Medicago’s chief financial officer Mike Wanner told RE$EARCH MONEY.

The incentive does give Quebec a competitive edge, says Wanner. “We’re a global company and we’re registering and launching products globally. We would naturally look back to the US, so it could very well compete with potential investments in the US or in Europe,” he said. “The decision for the government to extend those tax incentives are wise and meaningful. They help to make Quebec more attractive for putting a long term project there.”

R$