Canada: Québec 2012-2013 Budget

On March 20, 2012, the Minister of Finance, Raymond Bachand, tabled the 2012-2013 Budget of the Québec government. This Budget, Raymond Bachand's third, and the Liberal government's eleventh, has "two pieces of excellent news for Québecers". First, according to the Minister, the real GDP per capita has risen more in Québec than in Ontario and the United States, and as much as in Canada. Second, Québec either ranks first or second amongst OECD countries with respect to the "better life index". The Minister contends that Québecers owe that quality of life in large measure to public policies and social programs that reflect their values.

Buoyed by these sentiments, the Minister tabled certain fiscal measures to return to a balanced budget as of 2013-2014 and maintain the continued growth of the Québec economy. We have outlined below the most notable measures so tabled.

ENCOURAGING ACCESS TO FINANCING, PROMOTING GROWTH AND PUTTING MONEY IN THE COFFERS OF CERTAIN QUÉBEC CORPORATIONS: THE QSSP II REVISITED

The Québec Stock Savings Plan II was introduced in the Budget tabled in April 2005 and has been continually improved over the years. The plan is designed to promote growth and help qualifying small Québec corporations raise required capital. In addition to the existing tax incentives afforded by the QSSP II, the current Budget introduces a new refundable tax credit of 30% of the qualifying issue expenses that an eligible corporation incurs during the process.

These eligible expenses cannot, however, exceed the lesser of:

  • 15% of the gross proceeds received from the issue of shares;
  • $3,000,000.

Eligible corporations should act quickly considering the QSSP II is scheduled to end by December 31st, 2014.

INTER VIVOS TRUSTS – BEFORE BEGINNING, PLAN CAREFULLY – MARCUS TULLIUS CICERO

Trusts are often used as a mechanism to reduce the income tax payable by its beneficiaries. This current Budget announced certain changes to the taxation of inter vivos trusts and certain other measures aimed at curtailing some strategies utilized by non-residents that the Minister considers inappropriate.

An extra 4% for the Minister

In order to prevent an individual who pays tax at the highest Québec tax bracket of 24%, from settling an inter vivos trust and benefiting from its lower rate of tax, which in some cases can be 4% lower, the 2012-2013 Budget provides that the income tax rate payable by an inter vivos trust will be a flat rate corresponding to the highest Québec tax bracket of 24%.

Taking back a piece of the pie

Furthermore, an inter vivos trust not resident in Canada, that earns passive income from property that is real estate located in Québec (i.e. rent), will now be subject to a 5.3% income tax on said income. Briefly, when taking into account the applicable federal income tax rate of 29%, and the 48% federal gross-up for "passive income" earned in a province, this additional 5.3% ensures that the inter vivos trust is paying the highest combined federal (42.92%) and Québec (5.3%) rate of taxation of 48.22%. The inter vivos

Now you see me, Now you don't

In order to curtail some strategies that the Minister considers inappropriate, which involve the utilization of Canadian non-resident inter vivos trusts holding real estate in Québec, the 2012-2013 Budget announced the following:

  • a Canadian non-resident inter vivos
  • the tax on the accrued gain will be due on any eventual disposition;
  • in order to ensure compliance and payment of the income tax generated upon said deemed disposition, the trust must obtain a certificate of compliance in respect of each Québec located property owned at the time the trust changed its residence before disposing of said properties; and
  • the acquirer must have received a copy of the certificate of compliance to exonerate himself from the liability to pay said taxes; The maximum liability is 12% of the purchase price of the property in question.

QUÉBEC COOPERATING TO IMPROVE THE COOPERATIVE INVESTMENT PLAN ("CIP")

This Budget introduces changes to certain terms and conditions of CIPs, some of which are summarized below:

  • In order to foster the growth and development of cooperatives, the 2012-2013 Budget proposes to reduce the special tax applicable upon redemption or repayment of securities held in a cooperative before the required 5-year holding period. In short, the holder will receive a greater reduction of the special tax, the longer the securities are held during the 5 year holding period. The special tax is eliminated if the securities are held for at least 5 years;
  • It is now required that payment of interest on a preferred unit be made with money as opposed to the issuance of new preferred units;
  • Shareholding Workers Cooperatives ("SWCs") are also affected by changes to rules relating to excess capitalization. New restrictions will come into effect with respect to the types of investments that SWCs can make with sums received from members. Also, in order to reflect the growing needs of cooperatives and not to restrict capitalization by members, a modified adjustment formula will enable all SWCs, regardless of their constitution date, to apply a rate of 165% to the cost of their investments for the purposes of calculating the special tax;
  • In order to ensure the integrity of the Cooperative Investment Plan, a preferred unit can only be acquired for consideration consisting solely of money; and
  • The previously introduced patronage dividend tax deferral mechanism will be continued for an additional 10 year period.

REDUCTION IN CONTRIBUTIONS TO THE HEALTH SERVICES FUND – AGE 65 OR OVER

To encourage employers in the private sector to hire or keep "experienced" workers in their work force, this Budget announces that, as of 2013, such employers may obtain a reduction in their contributions to the Health Services Fund ("HSF") payable on the "eligible wage" of each employee that is at least 65 years old.

The maximum amount of this reduction is:

  • $400 in 2013;
  • $500 in 2014;
  • $800 in 2015;
  • $1,000 as of 2016.

This is the corollary measure announced in the previous Budget whereby Québec tax payable by persons age 65 or over was eliminated on part of their earned income in excess of $5,000.

RENEWAL OF THE REFUNDABLE TAX CREDIT FOR LABOUR TRAINING IN THE MANUFACTURING, FORESTRY AND MINING SECTORS

This refundable tax credit is designed to support the efforts of companies that contribute to the development of the skills of their eligible employees. Briefly, an eligible employer can claim a refundable tax credit of 30% of its eligible training expenditures for such employees.

The benefits of this measure was to be eliminated by the end of 2011. However, considering the benefits arising from this incentive, the 30% tax credit will be renewed until December 31, 2015 under the same terms and conditions.

FISCAL MEASURES AIMED AT NEW FINANCIAL SERVICES CORPORATIONS

To encourage the creation of new financial services corporations, three measures have been announced in this Budget. They are summarized as follows:

Refundable tax credit for employees hired by a new FSC

An eligible financial services corporation ("FSC") may receive a refundable tax credit equal to 30% of the "eligible salaries" it incurs during the five-year validity period of its qualifying certificate. A new FSC must apply, before the end of its second taxation year, to the Minister of Finance to obtain said certificate. No application for a certificate may be submitted after December 31, 2017.

For the certificate to be issued, the FSC must:

  • have an establishment in Québec;
  • have less than $15 million in net shareholders' equity;
  • have activities typically carried on by securities dealers and providers of securities advisory or management services.

The salaries eligible for this credit are for full-time eligible employees who carry out 75% of their duties in an establishment in Québec directly attributable to the activities of the FSC outlined above.

The salary per eligible employee will be capped annually at $100,000. Accordingly, the refundable tax credit will be limited to $30,000 per eligible employee on an annual basis.

Refundable tax credit for eligible expenditures

In addition to the measure above, a FSC may receive, for a taxation year, a refundable tax credit equal to 40% of the eligible expenditures it incurs during the validity period of its qualifying certificate. Eligible expenditures can include such items as:

  • the fees relating to the constitution of the initial regulatory file submitted to a recognized regulatory body;
  • the fees relating to the constitution of the initial file for participation in a stock exchange;
  • the subscription fees for a financial analysis or research service.

The expenditure limit will be set at $375,000 calculated on an annual basis. Accordingly, for a taxation year, this refundable tax credit will be limited to $150,000 on an annual basis.

Five-year tax holiday for a foreign specialist employed by a FSC

This tax holiday is introduced to foster the hiring, by a FSC, of a foreign employee specialized in the field of finance. A foreign specialist must obtain a qualifying certificate from the Minister of Finance to the effect that such an individual is a professional with a "high level of expertise" in the field of finance. Where certain conditions are met, the tax holiday lasts 5 years and will allow the specialized foreign employee to deduct, in calculating taxable income for Québec purposes, an amount equal to 100% of salary in the first year and second year of the 5-year period, 75% for the third year, 50% for the fourth year and 25% in the fifth and last year.

CONCLUSION

At the beginning of his Budget Speech, the Minister of Finance announced he had "two pieces of excellent news for Québecers". According to the Opposition, what the Minister should have announced is :

  • "I have two pieces of excellent news for Québecers... and some really bad news. Which do you want to hear first?"

Pursuant to some figures divulged by the Opposition, Québec's public debt will surpass $183 billion in 2012 and $211 billion in 2017. Given that the fiscal measures announced in the Budget are not principally aimed at increasing tax revenues, it will be interesting to see how the Québec government addresses its growing debt while keeping Québec ranked first or second amongst OECD countries with respect to the "better life index".

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