Publication

Highlights of the Quebec Budget 2007-2008

February 21, 2007

February 2007

Tax

On February 20, 2007, the Quebec Minister of Finance, Michel Audet, tabled the Quebec Government's 2007-2008 Budget.

The following is a summary of the principal tax measures announced.

MEASURES CONCERNING BUSINESSES

In the April 21, 2005 Budget Speech, a capital tax credit was introduced to encourage corporations to make investments in certain sectors. Briefly, this capital tax credit enables a corporation that makes an eligible investment to claim a non-refundable capital tax credit corresponding to 5% of the amount of such eligible investment.

Investments in manufacturing and processing equipment constitute eligible investments for purposes of this credit. In addition, these assets must, subject to certain transition rules, be acquired before January 1, 2008.

To further stimulate investments in manufacturing and processing equipment, the period during which such investments can be made will be extended by five (5) years and the rate of the capital tax credit will be raised to 10%.

In addition, as part of the March 23, 2006 Budget Speech, the rate of the capital tax credit was raised to 15% for certain investments made in the forest sector, i.e., briefly, investments in assets that are used mainly in sawmill and wood preservation activities and activities involved in the making of veneers, plywood and reconstituted wood products. These assets must, subject to certain transition rules, be acquired before January 1, 2010.

To foster investments to modernize forest sector companies, the period during which such investments can be made will be extended by three (3) years, i.e., until January 1, 2013.

Until now a corporation with an establishment in Quebec was required to pay tax on its passive income at a rate of 16.25%. This rate will be reduced to 9.9% as of February 21, 2007 and will increase to 11.4% on January 1, 2008 and to 11.9% on January 1, 2009.

One of the objectives of this rate reduction is to make Quebec's tax system more competitive with the rates that apply in other Canadian jurisdictions. If a corporation's taxation year includes periods that straddle the change of rate dates, the tax rate effectively applicable for such taxation year will be a weighted tax rate reflecting the number of days of the taxation year included in each of these periods.

It should be noted that Quebec's tax treatment of dividends paid from investment income remains unchanged.

The tax legislation will be amended so that a person or a partnership who carries on a business in Canada and does R&D work in Quebec, or has such work done in Quebec on his behalf, will once again be eligible for the refundable tax credit for R&D salary, university R&D, pre-competitive R&D and R&D concerning private partnerships.

This change will apply to R&D expenditures incurred during a fiscal year that began after April 21, 2005.

Moreover, a further amendment will be made so that R&D expenditures incurred in a fiscal year that began after April 21, 2005 by a person or a partnership whose eligibility for the tax credits was affected by the amendment announced in the April 21, 2005 Budget Speech can be included in a claim for a tax credit, by the later of August 31, 2008 or the last day of a period of twelve months following the filing deadline for the taxation year in which such expenditures were incurred.

In order to further encourage healthy competition among the various regions of Quebec, the tax legislation will be amended to reduce the rate of the tax deduction granted to manufacturing SMEs in remote resource regions of Quebec. Accordingly, the rate will be reduced from 75% to 50% for the 2008 calendar year and to 25% for the 2009 and 2010 calendar years. Where the taxation year of the eligible corporation does not coincide with a calendar year covered by the change in rate, the change will apply in proportion to the number of days of such taxation year included in the calendar year covered by the change in the rate.

For many years, the government has made use of tax credits to support Quebec's various cultural industries. These tax credits are the tax credit for Quebec film and television production, the tax credit for film production services, the tax credit for film dubbing, the tax credit for the production of shows, the tax credit for sound recording production and the tax credit for book publishing.

Various technical amendments will be made to these tax credits.

Generally, these amendments will apply to claims for refundable tax credits made after February 20, 2007.

The tax legislation will be amended so that the 21-day period during which an investor may be in a coverage deficiency position in his SME Growth Stock Plan (Accro PME) (which replaced the former Quebec Stock Savings Plan) will be replaced by a period beginning the day after the day of a real withdrawal during a given month and ending on the last day of the second month following such given month. This amendment will allow the investor to remain in a coverage deficiency position for not more than three months. The amendment will apply as of January 1, 2007. It should be noted that no other change will be made to the Accro PME plan. Accordingly, the obligation to hold investments under the plan as at December 31 of the year of acquisition and as at December 31 of the following three taxation years will be maintained.

Generally, a change will be made to the terms and conditions of the annual certificate that Investissement Québec issues in relation to strategic buildings, so that the space of a strategic building can be occupied by businesses that hold an eligibility certificate issued by Investissement Québec or that would hold such an eligibility certificate if the tax benefits relating to the Mirabel Zone had not been eliminated.

This change will apply to eligibility certificates concerning a strategic building issued by Investissement Québec after February 20, 2007.

MEASURES CONCERNING INDIVIDUALS

Currently, the table used to determine the income tax payable by individuals on their taxable income provides for three rates that increase gradually with the table's taxable income brackets. The table provides for a tax rate of 16% for individuals whose taxable income is equal to or less than $29,290. The rate is 20% for the taxable income bracket over $29,290 without exceeding $58,595, and 24% for the bracket over $58,595.

As of January 1, 2008, the first bracket of the tax table will cover the first $32,000 of taxable income, with the second bracket consisting of the portion of taxable income over $32,000 without exceeding $64,000, and the third bracket corresponding to taxable income over $64,000.

To further encourage Quebec families to save for their children's education, financial assistance will be paid through a refundable tax credit for the benefit of children who will be beneficiaries of an RESP. Meanwhile, the federal government provides for a separate system of grants applicable to an RESP.

This refundable tax credit, which will be granted to a trust governed by an education savings plan, will enable families that contribute to an RESP after the day of the Budget Speech to obtain financial assistance of up to $3,600 per child, on a cumulative basis.

In general, the financial assistance for education savings provided by the tax credit will be equivalent to 10% of the first $2,000 of annual contributions to an RESP for children under age 18.

The Budget also contains other measures that affect individuals.

MEASURES CONCERNING CONSUMPTION TAXES

On January 26, 2007, the Minister of Finance of Canada issued, in a news release, draft amendments to the Excise Tax Act, explanatory notes and a background paper concerning a number of measures to improve and simplify the application of the GST and the HST in the financial services sector.

The proposed changes to implement in the federal tax system a new legislative framework for the allocation of input tax credits of financial institutions will not be incorporated in the QST system since these measures do not correspond to the characteristics of Quebec's tax system.

Currently, interest on amounts of GST owed by a person is based on the rate of Government of Canada Treasury Bills, to which a penalty of 6% is added.

In the May 2, 2006 federal Budget Speech, the Minister of Finance of Canada proposed, as part of the measures, changing the interest calculation rule stipulated by the Excise Tax Act with respect to the GST to harmonize it with the rule stipulated in other federal tax laws, with effect as of April 1, 2007.

Since the QST system is harmonized with the GST system regarding these specific measures, the same consequential changes will be made to Quebec's tax system and they will apply on the same date as the corresponding consequential changes to the federal tax system.

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 LLP or any member of the firm on the points of law discussed.

For further information, please contact one of the following lawyers:

Jules Charette
(514) 847-4450
jcharette@ogilvyrenault.com
 
Bernard Gaudreau
(418) 640-5172
bgaudreau@ogilvyrenault.com
 
Éric Gélinas
(514) 847-4938
egelinas@ogilvyrenault.com
 

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