A New Era for Quebec’s SR&ED Program: Eligible Activities and Expenditures Expanded

In its 2025 budget, Quebec announced a wholesale restructuring of its tax incentives for research and development (R&D), including provincial tax credits for scientific research and experimental development (SR&ED). Designed to streamline and modernize the system, the announced measures focus on reducing the administrative burden on businesses, eliminating underused credits, and improving the effectiveness of the incentives by shifting funding to areas where it will deliver the most value—essentially, the province is hoping to do more with less. However, in doing so, the province has also expanded the scope of activities and expenditures that qualify for tax credits, substantially increasing the financial support available for eligible projects.  

Major Overhaul

Among key changes announced for taxation years beginning after March 25, 2025, Quebec has eliminated several previously existing tax credits and consolidated others into a new Research, Innovation and Commercialization Tax Credit (CRIC).

The province has also simplified the tax credit rate structure and made it more inclusive, offering a 30% refundable tax credit on the first $1 million of eligible expenses (above the exclusion threshold) to all corporations, with a 20% refundable credit for additional eligible expenses. In addition, the exclusion threshold is now the greater of $50,000 or the basic personal amount for each employee (e.g., $18,751 in 2025) working on qualifying R&D projects, prorated based on the employee’s time spent on eligible activities.

However, perhaps the most transformative change to Quebec’s SR&ED program is the expansion of eligibility for tax credits to include pre-commercialization activities and capital assets. For further discussion on other aspects of the announced changes and their potential impact on businesses, please see Ryan’s article, “Quebec’s SR&ED Tax Credit Overhaul: A Simpler, Stronger Incentive.”

Expansion of Eligible Activities

While the definition of R&D remains essentially the same under the CRIC, one important change is the inclusion of pre-commercialization in eligible activities. Previously, businesses could only claim expenses related to R&D activities up to the point of resolving a technological uncertainty. Now, expenditures can be claimed for certain activities conducted after that point, including tests, technological validations, and studies to ensure satisfaction of regulatory requirements, as well as certain prototype development and pilot plant activities.

Tests, Validations, and Studies: Corporations can now claim expenses for testing, validating, or studying a product or process for the purpose of commercialization and ensuring it obtains regulatory certification or approval. For example, a clean energy company developing a new solar panel technology can now include expenses for beta testing required to obtain regulatory approval for use in residential buildings in its CRIC claim.

Prototype Development: Expenses related to developing and testing prototypes for functionality and performance to ensure a final product will meet regulatory and market requirements and are now eligible for the tax credit. For instance, a medical equipment manufacturer can include expenditures in its CRIC claim for the stress testing of device prototypes to ensure the final product will obtain regulatory approval for use in patients.

Pilot Plants: Businesses can include expenditures related to testing or validating a pilot plant’s production processes to ensure the technology meets quality and regulatory standards. For example, under the CRIC, a biotech firm can now include expenses in its claim for the testing of pilot production runs in a newly developed pharmaceutical manufacturing process to ensure it produces consistent and expected results.

In all cases, pre-commercialization activities must constitute a continuation of eligible R&D activities undertaken in Quebec to be eligible for the CRIC. Furthermore, the extended eligibility only applies to activities undertaken during taxation years that begin after March 25, 2025.

In addition, activities related to product design, which were previously eligible for a separate industrial component of the Tax Credit for Design, now qualify for the CRIC. (The fashion design component of the previous credit remains unchanged.)  

Capital Expenditures Now Eligible

In a significant—and somewhat controversial—measure, Quebec now allows capital assets (i.e., depreciable assets) to be included as eligible expenditures under the CRIC. This change is expected to be far-reaching, with many previously ineligible expenditures now qualifying for the tax credit. However, there are some limitations: land, buildings, and used equipment are excluded from the CRIC. Nonetheless, this shift in policy should benefit companies investing heavily in R&D infrastructure. For example, software developers undertaking qualifying R&D activities can now include the cost of servers and other technology components in their CRIC claims.

Primary Advantage

Quebec’s new approach recognizes that businesses generally do not go straight to market once an R&D project has been completed. Numerous additional costs are incurred during the pre-commercialization phase of a project. While direct provincial funding may be available to subsidize such costs, as well as marketing and sales expenses, when bringing a new product or process to market or exploring an export market, access to these programs is limited—and funding is not guaranteed.

By expanding CRIC eligibility to include more of the full cost of innovation, Quebec has created a more complete, equitable incentive to promote R&D investment in the province. Indeed, is there another state, province, or territory in North America that offers a 20 to 30% refundable tax credit for R&D, including pre-commercialization expenditures?

Key Challenges

While the expansion of eligible activities and expenditures provides businesses with the potential for larger tax credits, offsetting costs associated with R&D investment and mitigating risk, the revamped program also poses several challenges.

Taxpayers and auditors alike may find it difficult to substantiate the eligible use of capital assets in R&D projects up to three years (the statutory audit period) after the fact. In addition, there is uncertainty whether the current level of technical expertise at the provincial government will be sufficient to resolve potential disputes regarding the extent to which long-term capital assets have been employed in eligible activities.

Similarly, disagreements might arise during audits over the extent to which salaries and wages of employees previously excluded from tax credit claims may now be included as eligible expenditures. In this regard, the addition of certain pre-commercialization activities to eligible expenditures is expected to significantly broaden the scope of employee wages to be considered in calculating the CRIC.

Naturally, any business relying on the old rules runs the risk of missing eligible expenditures and the opportunity for a larger tax credit, particularly where capital assets and pre-commercialization activities are involved. It is expected that the province will release further guidance on the latter, as the connection to eligible R&D typically becomes tenuous as a new product or process approaches commercial viability.

Businesses will need to be diligent in reviewing their R&D activities to ensure all eligible expenses are captured. Furthermore, the potential impact of new CRIC expenditure inclusions on other incentive programs, such as government grants and clean technology tax credits, must also be considered to optimize an organization’s financial support.

Documentation and Compliance

Expanded eligibility for pre-commercialization activities and capital assets might require businesses to augment documentation of their R&D processes and expenses, such as tracking the use of capital assets over time and capturing activities related to compliance with regulatory requirements. The exclusion threshold for eligible expenditures will also vary between the Quebec and federal programs, making documentation of calculations a critical step in supporting CRIC and SR&ED tax credit claims. Investing in robust documentation processes will pay dividends: smoother audits and maximized tax credit claims.

Quebec’s R&D incentive changes represent a bold step towards a more comprehensive and effective approach to supporting innovation in the province. Despite anticipated challenges as businesses adapt to the new rules, the overall impact is expected to be positive, fostering improved productivity and economic growth. Ultimately, taxpayers in Quebec will decide if the rate of return on this substantial public investment in R&D is acceptable.