Why the Refundable Tax Credit for the Development of E-Business Matters

The Québec government announced last week that it would extend and enhance the Refundable Tax Credit for the Development of E-Business (CDAE) for 10 years—from January 1, 2016 to December 31, 2025. For Montréal International (MI), this announcement is the culmination of many months of work and discussions with the Québec government. The extension and enhancement of the CDAE are in line with the recommendations outlined by MI and TechnoMontréal in a joint brief submitted to the Québec government in March 2013, which showed that the tax credit is a sound, cost-effective, competitive and relevant measure overall.

The Québec government introduced the Refundable Tax Credit for the Development of E-Business in 2008 to boost the information and communications technology (ICT) sector and, by extension, foster productivity, innovation and growth in all sectors of the Québec economy.

A Driver of Growth for the ICT Sector

According to our estimations, most of the businesses that are eligible for the Refundable Tax Credit for the Development of E-Business are grouped under the NAICS[1] 5415 code: Computer systems design and related services. Employment statistics for this industry group from 2008 to 2011 suggest that the Montréal metropolitan region was able to stand out thanks to the CDAE. Employment in the area increased by 10.8% over the period, placing Greater Montréal first among major cities in northeastern North America. That goes to show that the Refundable Tax Credit for the Development of E-Business has successfully helped bolster the region’s ICT sector.

Employment Growth – NAICS 5415, 2008-2011, Six Largest Cities in Northeastern North America

Blog_Graph_succes du CDAE

A Strong Magnet for Foreign Direct Investment

Our analyses at MI show that the range of available incentives has grown significantly in recent year, particularly in the U.S. and Ontario, and for industries with high added value in the past few years.

Incentives such as the CDAE seem to be a prerequisite for economic competitiveness. Even though incentives do not drive investment projects, they are the ace up any region’s sleeve, helping it stand out among others with a similar offering.

With costs in major urban centres north and south of the border having reached similar levels as the Canadian dollar hits parity with its U.S. counterpart, incentives in general, and the CDAE in particular, have come to play an even greater role in making the Montréal metropolitan area more attractive and enabling it to maintain its cost advantage in the ICT services sector over other major North American cities.

The CDAE also takes on an added importance in a knowledge-based economy, where ICT investment projects are highly mobile and have a wide range of sites to choose from.

Québec’s ability to count on measures such as the CDAE to develop an attractive cost structure is all the more important as the province’s ICT businesses are not immune to the growing trend of offshoring.

Between 2008 and 2012, 20 MI-supported FDI projects, which totalled $700 million and created 3,000 jobs, benefited from the Refundable Tax Credit for the Development of E-Business at least in part.

Francis Langlois

Analyst, Economic Research Division, Montréal International

[1] North American Industry Classification System

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