doing business in canada - Davies Ward Phillips & Vineberg LLP

SR&ED expenses generally include all expenses directly related to research and development, such as salaries,cost of materials consumed in SR&ED and the lease costs of equipment used in SR&ED. Payments to Canadianresident corporations or other entities, such as universities, for SR&ED conducted in Canada on behalf of thepayer can also be included in SR&ED expenditures. Certain SR&ED expenditures made outside Canada, namely,salaries and wages of Canadian-resident employees carrying on SR&ED outside Canada, in support of SR&EDcarried on in Canada by the taxpayer, may also qualify.Broadly speaking, SR&ED incentives take the form of immediate deductions for qualifying current and capitalexpenditures and a 20% investment tax credit that may be applied to reduce income tax owing. Investment taxcredits may be carried over and applied in other taxation years subject to limits in the Tax Act. More generousSR&ED incentives are available to qualifying CCPCs, namely a 35% fully refundable tax credit for the first $3million of current SR&ED expenditures.Provinces may also provide incentives for SR&ED carried on within their jurisdiction.Québec provides for fully refundable income tax credits of up to 37.5% with respect to SR&ED undertaken inQuébec. Other Québec incentives include a 35% tax credit for eligible expenditures for research carried out bya university or public research centre and a tax holiday (i.e., full or partial exemption from Québec income tax onemployment income) for foreign researchers for up to five years.In Ontario, an additional deduction is permitted for a portion of certain eligible SR&ED expenditures incurred bya corporation in Ontario, whether directly or through a partnership.Ontario also provides incentives to corporate taxpayers with a permanent establishment (e.g., a branch or office)in Ontario in the form of two refundable tax credits: the innovation tax credit (the "ITC") and the Ontariobusiness-research institute tax credit (the "OBRITC"). The ITC is designed to encourage small corporations toundertake SR&ED and is clawed back as the corporation's paid-up capital or taxable income increases beyondcertain thresholds. Corporations with paid-up capital equal to or greater than $50 million or taxable incomeequal to or greater than $800,000 are not eligible for any amount of the ITC.Subject to the ruling requirement noted below, the OBRITC is generally available for expenditures of acorporation, incurred directly or through a partnership, pursuant to a research contract entered into betweenthe corporation and an eligible research institute (e.g., a university, college or non-profit research organization)in respect of eligible SR&ED carried on directly by the research institute in Ontario. To be eligible for the credit,a corporation must receive a ruling from the Ontario government before the expenditures are incurred.Film Tax CreditsThe federal government and many provincial governments, including Ontario and Québec, offer an array ofincentives for film and video production in Canada. Incentives may also be available for films and videosproduced outside Canada where the production corporation incurs eligible labour expenditures in Canada or therelevant province.SALES AND OTHER TAXESGOODS AND SERVICES TAXGeneral RulesCanada imposes a 5% goods and services tax (“GST”) on the consumption or use in Canada of most tangible orintangible property. A parallel system of input tax credits ("ITCs") is designed to ensure that intermediate usersof goods and services receive a credit for the GST they pay, so that only the final consumer or end-user in thechain of supply effectively bears the GST. GST is imposed under Part IX of the Excise Tax Act (the "ETA") and isadministered by CRA (except in Québec).Tax Considerations 89