The following article appears in the April 11 – May 1, 2006 edition of The Canadian Taxpayer, a semimonthly publication with national circulation. Cet article paraît dans l’édition du 11 avril – 1er mai 2006 de The Canadian Taxpayer, une publication à tirage bimensuel distribuée dans l'ensemble du pays.
On March 23, 2006, the Minister of Finance, Michel Audet tabled the 2006-2007 Budget of the Quebec Government. This budget, Mr. Audet’s second and the Liberal Government’s fourth, is geared towards restoring public finances and improving equity toward future generation by namely creating the Generations Fund, the objective of which is to reduce Quebec’s debt to less than 25% of the Gross National Product by 2025. In addition, the budget targets three other objectives: (i) improving the health and education system, (ii) creating wealth in a context of sustainable development and (iii) developing and modernizing Quebec’s infrastructure.
In his speech, the Minister boasts that over the past three years Quebec "has been disciplined and rigorous" and has "aligned the resources of the State with the priorities of Quebecers", has redressed Quebec’s health care system, has reinvested in education, has considerably increased assistance for families and has reduced taxes. As a result Quebec can now make a commitment to future generations.
Taxable dividends – harmonization with the federal regime: On November 23, 2005, the federal Minister of Finance announced certain changes to the tax treatment of dividends paid by large corporations after December 31, 2005. These changes introduced the concept of "eligible Dividends" in order to achieve a more balanced tax treatment between corporations and publicly listed flow-through entities by eliminating the double taxation of dividends under the federal tax system. Eligible dividends are those paid out of income taxed at the general corporate income tax rate as opposed to ordinary dividends paid out of income taxed at the reduced corporate income tax rate or out of the corporation’s investment income taxed at the top corporate income tax rate.
Quebec initially announced on December 19, 2005 that it would not amend its legislation since (i) Quebec’s tax system relating to dividends did not lead to double taxation at the provincial level and (ii) the technical details giving effect to the federal changes were still unknown. Quebec now announces that it will amend its legislation to incorporate the rules relating to the concept of eligible dividends "since the Quebec government endorses the principle of integration of the corporate and personal income tax systems, and in order to avoid making the taxation of Quebec taxpayers unnecessarily complex". As a result, the gross-up of eligible dividends will be increased from 25% to 45% and the dividend tax credit rate with respect to eligible dividends will be increased from 10.83% to 11.9%. The dividend tax credit with respect to ordinary dividends will be reduced to 8% "to ensure the same integration of the corporate and personal income tax systems".
Improvement of the tax credit for donations and gifts: The budget introduces the following measures to encourage donations and gifts: (i) the reduction of the threshold above which individuals are entitled to a 24% rather than a 20% donation tax credit from $2,000 to $200 and (ii) the extension of the carry-forward period for donations made by corporations from five to twenty years. The budget also introduces various measures to assist educational institutions in developing musical talent and to grant additional support to Quebec museums.
Reduction in income tax rates for small corporations: As a result of last year’s budget, Canadian-controlled private corporations with paid-up capital of less than $10 million have enjoyed a Quebec rate of 8.5% (reduced from 8.9%) on the first $400,000 of annual income. This year’s budget further reduces the rate to 8% since such corporate taxation reform .creates a fiscal environment more conducive to investment..
New tax credit for hiring of employees specialized in financial derivatives: The budget introduces a temporary non-refundable tax credit equal to 20% of eligible salaries paid by a corporation that carries on business in Quebec and that has an establishment in Quebec to eligible specialized employees. This measure is designed to encourage the development, in Quebec, of state-of-the-art expertise in the financial derivatives field and to support the Montreal Exchange in its efforts to ensure that the Canadian financial derivatives market remains in Montreal even after the expiry in 2009 of the agreement reached in 1999 by the various Canadian stock exchanges granting the Montreal Exchange the exclusive rights to the Canadian market for financial derivatives. The new measure is valid only for eligible specialized employees before January 1, 2010. To qualify for the tax credit, the employee must hold an eligibility certificate issued by the ministère des Finances du Québec and devote at least 75% of his work to eligible activities on financial derivatives - the certificate will be issued to employees who have obtained a university degree in a relevant discipline or passed the first examination leading to the title of Chartered Financial Analyst no more than 48 months earlier. The eligible salary cannot exceed $75,000 per specialized employee.
Tax relief for employee transit passes: "With a view to promoting sustainable development and fighting climate change", the budget introduces a measure which will allow employers to deduct, from business income, 200% of the cost of its employees’ transit passes. The employees will not be taxed on this benefit for Quebec tax purposes - presumably the benefit will remain taxable for federal tax purposes. It will be interesting to see how many employers will start reimbursing their employees in light of the administrative burden.
Research and Development ("R&D"): The budget announces $75 million in assistance over three years for innovation and R&D activities by capitalizing on university research in order to maximize its economic benefits and improving R&D incentives for businesses. First, to allow hospital research centres and universities to spin off research into separate corporations, these corporations will now be entitled to claim the R&D salary tax credit rather than the university and pre-competitive R&D tax credits. Second, a new private partnership R&D tax credit will be available for pre-competitive research done in a private-private partnership at the rate of 35% and will apply to all eligible R&D expenditures or to 80% of the amount of a research contract granted to an arm’s length subcontractor.
Measure to curb tobacco smuggling: The budget introduces a number of changes to the tobacco tax system in order to provide government authorities with additional means of intervention and enforcement - tobacco products not properly identified will be deemed to be counterfeit products and all fines provided for under the tobacco tax legislation will be increased by 50%.
Other measures concerning individuals: The budget announces an increase from $500 to $1,000 in the general employment deduction for workers, an increase in the refundable tax credit for home support for elderly persons and a new reduced contribution of $14 per day for the care of school-age children who use school child-care services during spring break, which $14 gives entitlement to the refundable tax credit for childcare expenses.
Other measures: Certain changes were announced to the refundable tax credit for design in the fashion sector and the industrial sector, the tax credit for the production of sound in order to cover digital audio-visual recordings and clips and the eligibility criteria for the enhanced tax credit for French language feature films and unique documentaries, in case of a co-production, and television series production. Clarifications were also made to SME Growth Stock Plan so that a holding corporation can qualify as an eligible corporation if its subsidiary so qualifies.
Consumption taxes: Taxpayers will be entitled to a refund of the first $1,000 of Quebec sales taxes paid on a hybrid vehicle. This measure will apply to a new hybrid vehicle purchased or leased after the day of the Budget Speech and before January 1, 2009.
Members of our National Tax Professional Group / Calgary
Ross Freeman (*), Beverly Gilbert, Nancy Golding, Lindsay Holmes, Patrick Lindsay, Michael Munoz, Gregory Smart. Ruth Spetz. Jim Williams. Nicole Woodward
André Barette, Virginia Chan, Rosie Dikeakos, Paul Marchand, Charles Marquette, François Morin, Marilyn Piccini Roy, Charlotte Pinsonnault, Brian Schneiderman(*), Joseph Takhmizdjian, Geneviève Tétreault
Pamela Cross. Janet Kasun. Bernard Roach (*). Krishna Vern
Bethany Anderson, Craig Burley, Brian Cohen, Arthur Fish, Stephen Fyfe (*). Francesco Gucciardo, Stephen Heller, Eva Krasa, Natasha Miklaucic, Salvatore Mirandola, Elinore Richardson, Terrance Sweeney, Larissa Tkachenko (*), Clare Sullivan, Craig Webster, Stephanie Wong
Robert Kopstein, Randy Morphy, Josephine Nadel, Otto-Hans Nowak, Janette Pantry, Jasmine Sidhu, Bruce Sinclair, Max Weder (*), Gary Wilson,
(*) Regional coordinators
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