Tax Credit for Investment and Innovation (code 109)

The investment and innovation tax credit ("C3I") is designed to encourage Quebec companies to improve their operations by investing in equipment and other modern technologies. When acquiring specified property, an eligible corporation can claim a refundable credit, the rate of which varies depending on where the property is located (currently 15% to 25%), on specified expenditures relating to the property acquired.

C3I Eligibility Requirements

C3I is a continuation of the Investment Tax Credit (ITC), which previously targeted the acquisition of manufacturing and processing equipment. Introduced in 2008, the ITC mainly targeted the manufacturing sector and equipment used to produce goods for sale or lease. However, this measure ended on 31 December 2022.

Nevertheless, the legislator has retained the spirit of this measure by introducing C3I, while considerably broadening its scope. The main change is the addition of innovation-related assets, which means that a greater number of companies and sectors can now benefit.

Which Companies are Eligible?

As a general rule, all companies are eligible (including partnerships that have companies as members), with the exception of certain categories that are expressly excluded. These include tax-exempt companies, Crown companies and companies whose main activities are aluminium production or oil refining.

To be eligible, the corporation must operate a business in Quebec and have an establishment there during the taxation year covered by the credit application.

What Goods are Eligible?

To be eligible for C3I, the property must never have been used by the company or another company before it was acquired. Refurbished property may be eligible under certain specific conditions). Eligible property must be used solely in Quebec (with the exception of Class 12 property, which must be used primarily in Quebec) and must be put into service within a reasonable period of time following its acquisition. It is important to note that these assets must not have been acquired from a related supplier.

The property must also fall into one of the following tax categories:

• Category 53 - 43 - 29: equipment used in the manufacture or processing of goods for sale or lease;

• Category 50: general-purpose electronic data-processing equipment and related systems software;

• Category 43: goods used principally in the smelting, refining or hydrometallurgy of ores, except ores from gold or silver mines;

• Category 12: qualifying enterprise resource planning software packages.

What Costs Can Be Included?

Eligible costs are the capital expenditure incurred to acquire the asset, less any applicable grants. To these costs may be added the amounts required to make the asset functional or usable.

For example, in the case of the acquisition of an eligible ERP package, the credit can be claimed not only on the cost of the licence, but also on the implementation costs. For manufacturing equipment, it is possible to include certain related work, such as plumbing, electricity, masonry or structural adjustments required for the installation and use of the equipment.

In other words, all related costs that can be capitalised in the cost of the asset may be eligible. This is particularly important, as these expenses may sometimes be incurred in a different financial year to the one in which the asset was acquired.

Applicable Exclusion Thresholds

Finally, certain minimum thresholds known as excluded expenses must be taken into account:

• $12,500, per property, for Category 53-43-29 properties;

• $5,000, per property, for Category 12 and 50 properties.

The credit rate applies to eligible expenses from the first dollar per item exceeding these exclusion thresholds. Note that the threshold applies only once per property.

Maximum Eligible Expenditure

The credit is subject to a cumulative cap of $100 million in eligible expenditures over a 4-year period for taxation years beginning after December 31, 2023, among all associated companies.

Lending Rates By Region

The rate applicable to C3I varies according to three factors: the date on which the eligible expenditure for the property was incurred, the date on which the property was acquired and the region in which the property is mainly used. It is 25% in areas of low economic vitality, 20% in areas of intermediate economic vitality and 15% in areas of high economic vitality. This structure encourages investment in more remote regions by offering higher credit outside the major centres. In this way, C3I encourages companies to invest outside the major urban centres.

Repayable Loan

Since 1 January 2024, C3I has been fully refundable. C3I can take the form of a refundable tax credit, which means that the amount granted can either reduce the company's tax liability or be paid directly to the company if no tax is due.

Administrative Procedures

The C3I claim must be filed within 18 months of the end of the tax year in which the expense was incurred or the specified expenses were actually paid, using Revenu Québec's form CO-1029.8.36.II. This credit may interact with other credits and subsidies, making their optimisation essential.

Do You Need Help With Company Taxation?

C3I can provide significant tax leverage, but its application depends on a number of technical criteria, precise thresholds and its interaction with other government credits or assistance. An inadequate analysis may result in a loss of tax advantage or adjustments during an audit.

The business tax experts at Mallette support organisations at every stage of their growth. Whether it's C3I or other tax measures related to investment and innovation, we're here to help you make informed and secure decisions.