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INTRODUCTION

In 1979, the Quebec Government introduced the Quebec Stock Savings Plan (QSSP) with the aim of helping Quebec companies to attract investor capital. Over the years, the Government restricted access to the plan and ultimately imposed a moratorium on its application in 2003.

In the Budget of April 21, 2005, the Government announced that the QSSP would be replaced by a new plan, modelled after the QSSP with some significant changes, called the SME Growth Stock Plan (Régime Actions-croissance PME). While the legislation governing the successor scheme has not yet been tabled, companies can take advantage of it as of now.

It remains to be seen exactly what acronyms will be used in financial circles as a shorthand way of referring to the new plan, but RAC seems a likely choice for the French acronym. In this bulletin, we will use the English acronym QGSP to refer to the new plan.

As with the QSSP, the QGSP allows individuals residing in the Province of Quebec to obtain a tax deduction for purposes of Quebec provincial income tax if they acquire shares of certain companies issued in the course of a public offering.

It should be noted that the QGSP is initially being introduced for a limited time, because in theory, it is to end on December 31, 2009. The Government's intention may well be to launch the new plan on a trial basis and see how popular it is before giving it permanent status.

The following pages contain a summary of the QGSP's main rules, as announced in the Budget. These rules will require detailed scrutiny before it will be possible to determine if a given company can qualify as an eligible issuing corporation for QGSP purposes. In addition, the particulars of the legislation that will ultimately formalize these rules will have to be considered.

RULES APPLICABLE TO ELIGIBLE SHARES AND ELIGIBLE CORPORATIONS

Generally, and subject to certain specific application rules, the following conditions will have to be met in order for a share to be eligible for the QGSP:

• The share must be issued as part of a public offering by way of prospectus. With the exception of shares acquired by an investment fund, no share of a corporation that is issued under a prospectus exemption will be eligible for purposes of the QGSP. Under the QSSP, shares issued pursuant to certain kinds of exemptions, including those obtained for stock option plans and employee stock ownership plans, could qualify as eligible shares.
• The issuing corporation must be a Canadian corporation whose assets, including those of any other corporations associated with it at any time during the previous twelve-month period, are less than $100,000,000. Under the QSSP, the equivalent limit was $350,000,000. As was the case under the QSSP, the assets of the corporation will be determined on the basis of its last financial statements prepared prior to the date of the receipt for the final prospectus. The requirement of having a minimum of $2,000,000 in assets that applied under the QSSP is eliminated.
• The issuing corporation's senior management must be in Quebec and more than half of the salaries paid to its employees during the last taxation year ended prior to the date of the public offering must have been paid to employees of an establishment located in Quebec. Under the QSSP, it was sufficient for just one of these two criteria to be met.
• Throughout the twelve months preceding the public offering, the issuing corporation must have carried on a business and had at least five full-time employees who were not insiders for purposes of the Securities Act or persons related to them.
• The issuing corporation must obtain an advance ruling from Revenue Quebec confirming that the offering meets the QGSP's objectives. The same requirement existed under the QSSP, with the following exception: it was not necessary to obtain an advance ruling for shares offered by way of simplified prospectus. That exception is eliminated under the QGSP.
• As under the QSSP, the share must be listed on a Canadian stock exchange no later than the sixtieth day following the date of the receipt for the final prospectus.
• As under the QSSP, the use of the proceeds of the offering must not be the acquisition of shares or securities of another corporation or the repayment of a debt or loan contracted for purposes of such acquisition, with the exception of certain acquisitions of shares of, or loans or advances made to, controlled subsidiaries. Under the QGSP, a new restriction will apply to the use of the proceeds: the share may not be recognized as eligible for the QGSP where the use of the proceeds of the offering relates to activities to be carried on outside Quebec and where, in Revenue Quebec's opinion, such activities could have a negative impact on the level of employment and/or the level of economic activity of the issuing corporation, or its subsidiaries, in Quebec.
• No more than 50% of the value of the property of the issuing corporation may consist of investments such as shares, stocks, promissory notes, debentures, bonds, any other debt securities, guaranteed investment certificates or units of a mutual fund trust. In this regard, the exception for scientific research and experimental development activities that applied under the QSSP rules will apply in connection with the QGSP. (This exception provides that where the stipulated use of the proceeds of the offering is the financing of R&D, the determination of the composition of the corporation's assets may be based on the last interim financial statements. The test with respect to the composition of the corporation's assets is also more permissive in such cases in that promissory notes, debentures, bonds and other debt securities of the corporation are not taken into account.)
• Under the QSSP, the corporation was not allowed, within the five years preceding the offering, to have made a purchase or redemption of shares of its share capital, unless the purchase or redemption was for less than 5% of its paid-up capital or unless the corporation, further to such purchase or redemption, had made an offering outside the QSSP for an amount not less than the amount of the prior purchase or redemption. Similar conditions will also apply under the QGSP.
• Along the lines of the QSSP, a holding company whose head office and principal place of business is located in Quebec may be recognized as an eligible corporation for QGSP purposes if almost all of its property consists of shares of or loans or advances made to one or more subsidiaries controlled by it, where at least one of such subsidiaries meets the QGSP eligibility criteria.
• The share will have to be a common share carrying voting privileges, in all cases. Under the QSSP, certain securities carrying conversion privileges could also be eligible for the plan. Under the QGSP, such securities will no longer be eligible.

RULES APPLICABLE TO INVESTORS

Insofar as the investor is concerned, the following are the main rules that will apply under the new QGSP:

• Whereas the QSSP allowed investors to benefit from a tax deduction at a rate that varied between 75% and 125%, the deduction rate under the QGSP is set at a uniform 100% in all cases.
• As under the QSSP, the deduction will be calculated based on the cost of the shares and will be limited to 10% of the investor's total income (for purposes of the Taxation Act (Quebec)) for the taxation year. Total income includes all employment, business and investment income (dividends, interest, etc.) and capital gains, subject to certain adjustments.
• Under the QSSP, an investor who acquired QSSP shares and resold them before the end of the second taxation year following the end of the year in which they were acquired could be required to bring an amount back into income unless, during the year in which the shares were resold, he or she acquired qualifying replacement shares for a total cost at least equivalent to that of the sold shares (taking into account the deduction percentage attaching to the sold shares and the replacement shares). This became known as the coverage requirement. This requirement is changed in two ways under the QGSP. First, the coverage requirement will have to be respected for a year longer, i.e. until the end of the third taxation year after the year of acquisition. Secondly, while before, investors only needed to hold the necessary amount in their plans on December 31 of each taxation year in order to meet the coverage requirement, they will have to be more vigilant under the new plan, because every time QGSP shares are sold, the investor will have to cover his or her position with new QGSP shares or replacement shares no later than 21 days after the sale.

REPLACEMENT SHARES

Under the QSSP, investors were able to cover their positions by acquiring replacement shares where the shares concerned were included in a list maintained by the former Commission des valeurs mobilières du Québec (CVMQ), which has since become the Autorité des marchés financiers (AMF). The shares of an issuing corporation usually qualified for inclusion in the list if the corporation had carried out a QSSP offering during the previous four-year period.

Under the QGSP, the AMF will again maintain a list of replacement shares that may be acquired for purposes of meeting the coverage requirement. However, an innovation under the QGSP will allow a corporation that has not made a QGSP offering to apply to have its shares included in the list of eligible replacement shares if the corporation meets the conditions required for making a QGSP offering and its shares are listed on a Canadian stock exchange. In such a case, the corporation will have to obtain an advance ruling from Revenue Quebec.

The old AMF list set up for the QSSP will remain in effect for the QSSP only. It will not be possible to have any shares added to the old list and the shares of corporations included in the old list will not qualify as valid replacement shares for purposes of the QGSP.

CAPITAL POOL COMPANIES (CPCs)

Briefly, a Capital Pool Company (CPC) is a shell corporation that is authorized to make a public offering of shares for a limited amount and list those shares on the TSX Venture Exchange. Once listed, for a period of up to 18 months, the objective of a CPC is to carry out an acquisition, by way of purchase, consolidation, merger or arrangement with another corporation. This type of operation constitutes a "qualifying transaction" under the CPC program.

As long as certain conditions are met, an investor who acquires shares of a CPC may benefit from a deduction in the same manner as if he or she had invested directly in eligible shares of an eligible issuing corporation under the QGSP.

Revenue Quebec may grant the designation of eligible issuing corporation for purposes of the QGSP to a CPC that carries out an offering of shares by way of prospectus but does not satisfy certain criteria that would otherwise apply under the QGSP rules. More specifically, a CPC may be designated as an eligible issuing corporation for QGSP purposes even if, at the time of the offering, the CPC does not pay more than half of its salaries to employees attached to an establishment located in Quebec and does not have its senior management in Quebec, or has not had at least five full-time employees during the preceding twelve months, provided the following conditions are met:

• the CPC has assets of less than $100 million;
• no more than 50% of the value of its property consists of investments such as shares, stocks, promissory notes, debentures, bonds, any other debt securities, guaranteed investment certificates or units of a mutual fund trust; it should be noted that the liquid assets of the CPC to be used in carrying out the qualifying transaction will not be included in this calculation;
• the use of most of the proceeds of the offering, as stipulated in the final prospectus, is the carrying out of a qualifying transaction that is to consist in the continuation of an existing business which, had it been carried on by the CPC throughout the period of twelve months prior thereto, would have allowed the CPC to satisfy the five employees/twelve previous months criterion and the senior management in Quebec/salaries criterion (more than 50% paid to employees attached to an establishment of the corporation in Quebec);
• Revenue Quebec is of the opinion that the CPC public share offering meets the QGSP's objectives.

INVESTMENT FUND

Along the lines of the QSSP, the securities issued by an investment fund whose assets are comprised of shares of corporations that meet QGSP eligibility criteria will be eligible for the QGSP. An investor who acquires a security issued by an investment fund will be able to enjoy the same tax benefit as on the acquisition of a QGSP eligible share issued by an eligible corporation.

Certain technical rules will apply to the offering of securities by an investment fund. In general, the rules applicable to investment funds under the QGSP will be similar to those that applied to such funds under the QSSP.

TRANSITIONAL MEASURES

Some investors hold securities or participate in plans that would have allowed them to benefit from the deduction available under the QSSP at a later date. These include certain convertible securities, subscription rights, stock options and rights under employee stock ownership plans. All such rights will have to be exercised by December 31, 2005 in order to give rise to a deduction under the QSSP. Moreover, the requirements that applied to them under the QSSP, including the mandatory period for holding the securities, will still apply to investors who exercise these rights in connection with the QSSP prior to January 1, 2006.

It should be noted that the securities covered by the transitional measures will not give rise to a deduction under the QGSP.

CONCLUSION

The aim of the SME Growth Stock Plan is to facilitate access to capital markets by small and medium-sized enterprises. The new scheme is to include complex rules that must be observed by issuing corporations both at the time of the offering and on an ongoing basis.

Over the years, the lawyers of our tax team have acquired in-depth knowledge of the QSSP and are well placed to advise you in connection with the QGSP, which is modelled along similar lines, and with CPCs.

COMPARATIVE TABLE

	QSSP	QGSP
Public offering by prospectus	Prospectus required except in certain cases where a prospectus exemption was obtained (stock option plan, etc.).	Prospectus required in all cases, except in certain cases where shares are issued to an investment fund.
Requirement to list shares on a Canadian stock exchange	Yes.	Yes.
Eligible securities	Common shares, subscription rights (warrants) and certain securities convertible into common shares.	Common shares only.
Maximum assets	$350 million.	$100 million.
Minimum assets	$2 million.	No minimum.
Management/employees in Quebec	Senior management had to be in Quebec or more than 50% of salaries had to be paid to employees of an establishment located in Quebec.	Senior management has to be in Quebec and more than 50% of salaries must be paid to employees of an establishment located in Quebec, i.e., both conditions have to be met.
Number of employees	At least 5 full-time employees who were not insiders for purposes of the Quebec Securities Act throughout the 12-month period preceding the date of the final prospectus receipt. This condition did not have to be met if the corporation's shares were listed on a Canadian stock exchange throughout the same 12-month period.	At least 5 full-time employees who were not insiders for purposes of the Quebec Securities Act throughout the 12-month period prior to the date of the final prospectus receipt.
Use of proceeds of the offering	The proceeds of the offering could not be used to acquire shares or negotiable securities of another corporation other than a controlled subsidiary.	Condition maintained. New restriction added: The proceeds of the offering cannot be used for activities carried on outside Quebec where, in Revenue Quebec's opinion, such activities could have a negative impact on the level of employment or economic activity of the corporation or its subsidiaries in Quebec.
Requirement to obtain an advance ruling from Revenue Quebec	Advance ruling from Revenue Quebec required except for an offering made by way of simplified prospectus or a distribution of shares to an investment fund by private placement (blocks of $150,000 or more).	Advance ruling from Revenue Quebec required in all cases. An issuing corporation that distributes shares to an investment fund for the first time under the QGSP will have to obtain an advance ruling.
Eligibility of holding company	Yes, on certain conditions.	Yes, on certain conditions.
Prohibition on purchase or redemption of shares by the corporation	The corporation was not allowed, within the five years preceding the offering, to have made a purchase or redemption of its shares. The conditions were relaxed in certain cases, in particular where the corporation had made a subsequent offering outside the QSSP sufficient to "cover" such prior purchase or redemption or where the purchase or redemption was for less than a certain amount (5% of paid-up capital).	Conditions maintained.
Deduction rate	75% to 125% of share cost.	Single rate of 100%.
Additional deduction for employee stock ownership plan	25% if certain conditions were met.	No.
Additional deduction for shares of certain R&D corporations	25% if certain conditions were met.	No.
Minimum holding period	Two taxation years after the taxation year in which the shares were acquired (possibility of covering with replacement shares).	Three taxation years after the taxation year in which the shares are acquired (possibility of covering with replacement shares).
Investor's coverage obligation	Obligation to cover position on December 31 of the acquisition year and December 31 of each of the two subsequent taxation years.	Obligation to cover continuously for three taxation years after December 31 of the acquisition year. In case of intervening sales, positions must be covered within 21 days.
Replacement shares	Had to be on the list maintained by the Autorité des marchés financiers. This list continues to be valid for the replacement of QSSP shares. No new securities will be added to this list and it is not valid for the replacement of QGSP shares.	Have to be on a new list to be drawn up by the Autorité des marchés financiers. A corporation can apply to be on this list even if it has never made a QGSP offering as long as it meets the conditions and obtains an advance ruling from Revenue Quebec.
Acquisition through an investment group	Possible	Not possible.
Acquisition through certain investment funds	Possible.	Possible.
Eligibility of Capital Pool Companies (CPCs)	No.	Yes, on certain conditions.
Duration of plan	Abolished as of April 21, 2005 (except for the exercise of certain rights until December 31, 2005).	Until December 31, 2009.

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 or any member of the Firm on the points of law discussed.

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