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As part of its annual Budget tabled on April 21, 2005, the Quebec Government announced a number of measures designed to foster the development of intellectual property. The Government has also introduced changes to the existing tax credit programs for R&D and design activities.

FINANCIAL ASSISTANCE FOR SPECIALIZED CONSULTING SERVICES

Corporations with fewer than 200 employees will be eligible to receive financial assistance to seek specialized consulting services for the following projects:

• development of new products or innovative processes
• technology transfers
• improvement of management skills
• acquisition or protection of intellectual property
• development of financing strategies
• realization of investment projects - carrying out feasibility studies

This assistance is also being made available to specialized collaborative networks, which are networks created by businesses which enter into an agreement with each other to work towards the advancement of their sector. In addition, a non-refundable contribution of up to 40% will be made by the Quebec government to such businesses to assist them with expenditures they incur to implement these projects such as:

• professional fees including legal, accounting and engineering fees
• expenses incurred to acquire patents, such as searches in patent databases to find suitable patents to carry out the project, and
• expenses incurred for the protection of intellectual property

The assistance will be limited to a maximum of $50,000. The total of all contributions received by a business, under this program or under other programs and incentives, whether provided by the federal or provincial government, cannot exceed 50% of all the expenditures inherent in a project.

This program has been available since April 21, 2005. To receive assistance, an application containing a detailed description and a pro-forma budget for the project must be made in writing to the ministère du Développement économique, Innovation et Exportation (MDEIE).

The application must be made before a project is undertaken and must be sent to the regional office of the MDEIE for the region where the applicant conducts its business. The website of the MDEIE is www.mdeie.gouv.qc.ca/page/web/portail/en/.

MEASURES RELATED TO RESEARCH AND DEVELOPMENT (R&D)

Changes to the General R&D Tax Credit Regime

A person carrying on a business in Canada and performing research and development (R&D) work in Quebec may benefit from different types of refundable R&D tax credits in Quebec. The Budget provides for a number of important changes to the current rules respecting R&D.

Under existing legislation, a person was only required to carry on a business in Canada and perform R&D work in Quebec to be eligible for the different types of refundable R&D tax credits discussed below. Under the new rules, a taxpayer will now be obliged to carry on a business in Quebec, rather than Canada, and have a permanent establishment in Quebec to be eligible for the R&D tax credit. This change will apply to R&D expenditures incurred by a person whose fiscal year begins after the day of the Budget Speech (April 21, 2005). This change will not apply to R&D expenditures incurred after April 21, 2005 under a research contract concluded prior to such date.

Increase in the Rate of the R&D Tax Credit for Salaries

The Budget provides for certain changes to the rate of the refundable R&D tax credit for salaries paid to employees who perform R&D work in Quebec. Currently, the rate is 17.5% but can rise to 35% in the case of a Canadian-controlled private corporation whose assets, including the assets of associated corporations calculated on a worldwide basis, are less than $50 million. For R&D expenses incurred after April 21, 2005, the rate will vary between 17.5% and 37.5% on the first $2,000,000 of R&D expenditures. For each bracket of a corporation's total assets, the rate of the refundable R&D tax credit has been increased (except for the $50 million bracket). The table below illustrates the progressive rise in the rate of the credit granted to businesses based on their total assets:

Assets of the corporation (Millions of dollars)	Current rate (Per cent)	New rate (Per cent)
25 or less	35	37.5
30	31.5	33.5
35	28	29.5
37.5	26.25	27.5
40	24.5	25.5
45	21	21.5
50	17.5	17.5

Expenditures incurred for R&D work performed after April 21, 2005 will benefit from the new rates even if they were incurred under a research contract concluded before such date.

Pre-competitive R&D Tax Credit

Certain changes to the pre-competitive R&D refundable tax credit have also been announced. This credit is currently available to a person who carries on a business in Canada and concludes an agreement with another person under which they agree to group together and perform R&D work in Quebec. The rate of this tax credit is 35%.

The legislation will be amended to oblige all parties that enter into such agreements to carry on a business in Quebec, rather than Canada, and to have an establishment in Quebec to be eligible for this credit.

Moreover, it will now be necessary to obtain from the MDEIE a certificate recognizing that the parties agree to group together and perform R&D work. Agreements where parties do not group together but where one party subcontracts the work to another will not be recognized by the MDEIE.

These changes will apply to R&D expenditures incurred after April 21, 2005 under an agreement for which the MDEIE has issued a certificate after such date.

University R&D Tax Credit

Changes to the refundable tax credit generally referred to as the "university R&D tax credit" have also been announced in the Budget. This tax credit is available where R&D work is subcontracted to eligible public research centres such as universities. The rate of this tax credit is 35% and the credit applies to 80% of the amount of the research contract granted to eligible public research centres. It is the responsibility of the ministère des Finances du Québec (MFQ) to recognize research centres as eligible public research centres. Until the Budget, the eligibility criteria that the MFQ used had not been made public. To remedy this situation, the Government has provided an overview of these criteria in the Budget. In essence, the research centre must demonstrate its capacity, in terms of its available resources, to carry out R&D work on behalf of businesses. Its employees must have the qualifications needed to carry out the R&D work and the centre must have the appropriate premises and equipment related to their field of expertise. The research centre must also obtain most of its financing from public funds. More detailed criteria will be available shortly on the MFQ's website.

MEASURES RELATED TO DESIGN

A refundable tax credit for design is available for manufacturers involved in design activities in the industrial and fashion sectors. There are two components to the design tax credit. The first component relates to expenses incurred for design activities performed in-house (internal component) and the second component relates to expenses incurred for design activities carried out externally (external component).

The rate for this refundable tax credit is 15% but can increase to as much as 30% in the case of a small business enterprise (SME).

The Budget provides for certain changes to the current rules:

• The internal component of the design tax credit will no longer be limited to the fashion sector and will be extended to the entire industrial sector. This change will apply after April 21, 2005.
• The restriction preventing specified shareholders from working for external consultants will be lifted. These restrictions are no longer needed given that the in-house component of the design tax credit will be broadened to the entire industrial sector. This change will apply to expenditures incurred after April 21, 2005 under an external contract concluded after such date.
• A corporation that is a member of a partnership will now be eligible for the internal component of the design tax credit as well. This amendment will apply to expenditures incurred by a partnership whose fiscal year ends after April 21, 2005.
• A $150,000 gross income minimum will apply to the external component of the design tax credit. This amendment will apply to businesses whose fiscal year begins after April 21, 2005.
• The internal component of the design tax credit is currently capped at $60,000 annually, which covers the salary for a single designer ($40,000 for patternmakers) in the fashion sector. The legislation will be amended so that the number of designers will no longer be limited to one. This change will apply regarding a salary incurred by a corporation after April 21, 2005 for work done after such date.
• Currently, the eligibility criteria that the MDEIE considers before issuing an eligibility certificate for both components of the design tax credit are based on value-added factors with respect to the corporation's net sales and on an undertaking to produce goods in Quebec stemming from the design activity. An additional eligibility criterion based on production in Quebec will now apply. According to this new criterion, a corporation will have to show that 20% of its total production in the fashion sector or 50% in the industrial sector, for the preceding fiscal year or, if the corporation is in its first fiscal year, at the end of such year, is attributable to goods that the corporation made in Quebec itself. However, the MDEIE may certify an industrial corporation for purposes of the design tax credit in cases where a corporation is below the 50% production requirement but the design activities relating to the business carried on by such a corporation are, according to the MDEIE, of particular interest for Quebec. No such exceptions will be made for the fashion sector.

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the firm on the points of law discussed.

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