Canadian Tax Credits as a Source of R&D Financing for Medical Device Startups. June 2017

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1 Canadian Tax Credits as a Source of R&D Financing for Medical Device Startups June 2017

2 Research and Development Tax Incentives in Canada Provincial and Federal governments in Canada provide tax credits to eligible companies for research and development activities. Foreign companies who incorporate in Canada can receive up to 40% returns on their R&D expenditures. Creating an affiliate company in Canada and accessing local tax credits offer foreign medical device startups the opportunity to: 1.Develop products more economically; 2.Build regional partnerships with leading North American Universities; and 3.Better position themselves to launch sales and raise capital. 2

3 Eligibility for Tax Benefits Company must conduct systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis. [In medical device terminology preclinical and clinical studies]. Canadian affiliate of Company resides in Canada and is Canadian-controlled. 50% of the shareholders of the Canadian affiliate company are Canadian residents. 3

4 Tax Advantages All expenditures incurred for R&D purposes carried out in Canada can be deducted (including amounts paid to subcontractors). Tax credits are based on corporation s size, status and taxable income and can consist of up to 40% returns on R&D expenditures. Tax credits can be received even if a corporation does not pay any income tax. 4

5 Rates for Tax Credits (Federal) Taxable income per year Rate on expenditures up to $3 million per year ceiling (in %) $500,000 or less Between $500,000 and $800,000 Gradual reduction from $800,000 or more Rate on expenditures exceeding the ceiling (in %) Taxable capital of corporate group Rate on expenditures up to $3 million per year ceiling (in %) $10 million or less Between $10 million and $50 million Gradual reduction from $50 million or more Rate on expenditures exceeding the ceiling (in %) 5

6 Rates for Tax Credits (Québec) Assets of Corporate Group (in millions of Canadian dollars) Rate on expenditures up to $3 million per year ceiling (in %) Rate on expenditures exceeding the ceiling (in %) 50.0 or less or more

7 Intellectual Property IP control can remain with foreign-based company and does not need to be transferred to Canada to qualify for tax credits. Licensing IP agreements are created between foreign companies and their Canadian-based affiliates performing R&D in Canada. This allows for limited use of intellectual property to conduct R&D and access the Canadian tax credits, while safeguarding the IP with the foreign parent company. 7

8 Organizational Structure for Accessing Canadian Tax Credits Foreign Medical Device Company Canadian Affiliate (licenses IP from foreign company) R&D Canadian University partnerships or private clinical trials Accessing tax credits 8

9 Real-Life Example Newtech is an Israeli startup developing a device for treating wounds. Its Canadian affiliated company resides in Quebec and contracts with McGill University Hospital to perform a clinical study on behalf of Newtech. The Canadian corporation has the following expenditures*: Qualifying salaries and wages: $180,000 Clinical study cost (payable to University): $620,000 Total qualifying expenditures: $800,000 Refundable credit for Québec (30% on salaries and wages): $54,000 Refundable federal credit (35% on qualifying expenditures): $261,100 Total cash refund: $315,100 * For illustrative purposes only 9

10 Next Steps to Incorporating in Canada ProMedoss team based in Canada can assist your company to: 1. Create a local company affiliate and incorporate in Canada 2. Establish partnerships with local universities and institutions 3. Engage premium local support services for research activities 4. Access federal and provincial tax credits 5. Showcase your products to local investors and industry representatives For more information on our services please contact: Adam Eidelman at adam.e@promedoss.com or Eddie Freedman at eddie.f@promedoss.com 10