Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Tax, March 2011
The Quebec government's (Government) objective last year was to emerge from the economic crisis and to consolidate the province's economic recovery. The price of this recovery over the last year has been an increase in the deficit, although lower than anticipated. The deficit for the 2010–2011 fiscal year will be C$4.2-billion, C$300-million less than forecasted. The anticipated deficits for the 2011–2012 fiscal year and the following year are C$3.8-billion and C$1.5-billion. The Government has repeated that the budget will be balanced by the 2013–2014 fiscal year.
Quebec Finance Minister Raymond Bachand (Minister) has indicated in the 2011–2012 budget (Budget) tabled on March 17, 2011 in the National Assembly that the Government's objective is to reign in growth in Government spending. This will now be the Government's first priority.
The Government has always tabled its budget after the federal government, an approach which allowed it to announce in its budget which tax changes could be made to reflect certain of the tax measures in the federal budget. In a surprising move this year, the Government announced that it would table its budget before the federal budget, which in the end was of little consequence, given the minor tax changes announced in the Budget.
The fiscal measures contained in the Budget, whether with respect to income taxes or consumer taxes, will be of little interest to most Quebec taxpayers, including individuals, corporations and trusts. No increases or decreases of corporate or individual taxes are on the table. The Government did, however, announce that it plans on optimizing the return on natural resources in Quebec and on encouraging entrepreneurship in Quebec but did not include any specific measures in this respect.
The following is an overview of certain tax measures which may be of interest to corporate taxpayers and employers.
New temporary refundable tax credit for cellulosic ethanol production
To promote an increase in ethanol production in Quebec, the Government will be offering a new refundable tax credit to eligible corporations for eligible cellulosic ethanol produced after March 17, 2011 and before April 1, 2018. Any cellulosic ethanol produced and sold in Quebec will be eligible for the credit. The tax credit (maximum of C$0.15 per litre of eligible ethanol produced) will be determined based on a mathematical formula using the average monthly market price of ethanol. The investment tax credit on manufacturing and processing equipment will no longer be available to corporations producing cellulosic ethanol.
To implement the new temporary refundable tax credit, certain changes will be made to the current temporary refundable tax credit for ethanol production in Quebec.
Investments in tax-advantaged funds
To promote entrepreneurship and entrepreneurial succession, the Government plans on improving access to capital for entrepreneurs by creating the Relève Québec Fund LLP, a limited partnership managed by Investissement Québec. In addition to the Government, the Fonds de développement économique, the Fonds de solidarité FTQ, Fondaction and Capital régional et coopératif Desjardins will contribute to the Fund's capital of C$50-million.
The Government has announced measures in its Budget to ensure that any investment in Fonds Relève Québec by one of the tax-advantaged funds will be considered an increased eligible investment for the purposes of the strict requirement that at least 60% of the average net assets of a tax-advantaged fund be comprised of eligible investments. In general, the Budget also contains several tax breaks either to extend the eligibility of certain existing tax breaks or to allow a greater number of investments to be considered eligible investments for the purposes of meeting such investment requirement. These and other measures relating to tax-advantaged funds are all proposed with a view to promote the future of Quebec businesses.
Quebec Pension Plan (QPP) contribution/benefit rate adjustments
To counteract the effects of the increasing cost of pension plans resulting from Quebec's unique demographic pressures and from the continued improvement in life expectancy, the Budget includes a gradual adjustment of employer/employee QPP contribution rates. The current employer/employee contribution rate of 9.9% will be raised gradually over the next six years in increments of 0.15 percentage point per year to reach 10.80% by January 1, 2017.
Concurrently, certain QPP benefit adjustments are planned to encourage workers to stay in the labour market. Such adjustments will ultimately harmonize the Quebec plan with the Canada Pension Plan.
There will be no changes to the sales tax increase already announced by Quebec. The Quebec sales tax will increase to 9.5% on January 1, 2012, but no other increase is planned.
The Government continues to demand that the federal government pay compensation to Quebec for the harmonization of the sales tax and proposes to further harmonize both sales taxes. The only differences it would maintain with respect to the harmonized sales tax of participating provinces are: (i) the two sales taxes would be applied under statutes adopted by the National Assembly and the House of Commons, (ii) Quebec would continue to administer the two taxes, and (iii) the tax integrity measures implemented by Quebec would be maintained. The Government seems optimistic regarding the resolution of this issue.
Tax evasion and aggressive tax planning
In connection with the Government's fight against tax evasion and unreported work, the Agence du revenu du Québec, the creation of which was announced last year, will be coming to existence on April 1, 2011. The Government has indicated that it is taking a cost-benefit approach to funding the Agence to ensure that the Agence has all the resources needed to achieve its tax recovery objectives.
In this respect, the Government has announced additional tax recovery objectives of C$150-million for 2011–2012 and C$200-million per year subsequently, bringing the objectives for 2013–2014 to C$1.4-billion. Additional funding of C$60-million has been allocated to attain the 2011–2012 objectives. L'Agence du revenu du Québec will hire 1,085 additional employees over the next three years.
In addition, the Government has announced that the team specialized in detecting aggressive tax planning (ATP) schemes has helped recover C$99.1-million as at January 31, 2011. The two main ATP schemes involved the desynchronization of fiscal periods and the manipulation of the rule of the proportion of business done in Quebec.
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