Canada: Budget Quebec Highlights – Certain Measures Concerning Businesses

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Tax, March 2008

Quebec Finance Minister Monique Jérôme-Forget tabled the 2008-2009 budget of the Government of Quebec on Thursday, March 13, 2008. This budget contains a number of measures having a direct effect on the taxation of businesses carried on in Quebec. Below is a summary of certain principal tax measures applicable to businesses and cross-border workers.

The Quebec government is currently a minority government. We understand that this budget is not expected to trigger a vote of confidence against the provincial government. Full adoption of this budget should therefore not be jeopardized.

CROSS-BORDER WORKERS

Since 2004, contributions paid by a resident of Quebec for tax purposes to the U.S. social security system under the Federal Insurance Contributions Act were generally no longer considered tax on foreign income giving entitlement to the Quebec foreign tax credit. This treatment created problems for taxpayers subject to Quebec tax as no such restriction existed in other Canadian provinces. Quebec’s tax legislation will be amended to provide that such contributions will be eligible for the Quebec foreign tax credit. This measure will apply retroactively as of the 2004 taxation year.

NEW MEASURES APPLICABLE TO CERTAIN INDUSTRIAL BUSINESSES

Introduction Of Investment Tax Credit For Manufacturing And Processing Equipment

An investment tax credit (ITC) is introduced for eligible corporations (which excludes, among others, aluminum producing corporations and oil refining corporations) that acquire assets that qualify as manufacturing and processing equipment between March 14, 2008 and December 31, 2016. The ITC will vary, depending on where in the resource regions the eligible investment is made and on the corporation’s paid-up capital.

The ITC will initially be 5%. The ITC may rise to (a) 20% if the eligible investment is made in an intermediate zone (Saguenay-Lac-Saint-Jean, Mauricie, La Vallée-de-la Gatineau and Pontiac RCM’s, Laurentides and the Antoine-Labelle RCM), (b) 30% if the eligible investment is made in the Bas-Saint-Laurent regions and (c) 40% if the eligible investment is made in a remote zone (the Abitibi-Témiscamingue, Côte-Nord, Nord-du-Québec and Gaspésie-Îles-de-la-Madeleine regions).

The tax credit will be completely refundable for eligible corporations whose paid-up capital, calculated on a consolidated basis, does not exceed C$250 million. Where the paid-up capital of an eligible corporation, calculated on a consolidate basis, exceeds C$250 million but is less than C$500 million, the 20%, 30% and 40% ITC rates must be reduced linearly until the 5% ITC rate is reached. Any non-refundable portion of the tax credit may be carried back 3 years (to the extent the taxation year ended after March 13, 2008) or forward 20 years.

Changes To The Three Existing Resource Regions Refundable Tax Credits

The period of eligibility for the three refundable tax credits granted in the resource regions, namely, the (a) refundable tax credit for processing activities in the resource regions, (b) refundable tax credit for the Vallée de l’aluminium and (c) refundable tax credit for the Gaspésie regions and certain maritime regions of Quebec is extended to December 31, 2010. However, it will not be possible to cumulate such refundable tax credits with the ITC.

Moreover, the period of eligibility is extended to December 31, 2015 for the refundable tax credit for the Vallée de l’aluminium and the refundable tax credit for the Gaspésie regions and certain maritime regions of Quebec. Subject to satisfying certain conditions, it will be possible to cumulate such refundable tax credits with the ITC.

Introduction Of Temporary Refundable Tax Credit For Development Of E-Business

A temporary refundable tax credit for the development of information technology will be available to an eligible corporation carrying on a business whose activities are part of the information technology sector. The tax credit is equal to 30% of the eligible salaries the eligible corporation incurs after March 13, 2008 and before January 1, 2016. The maximum amount of the tax credit that an eligible corporation may claim for a taxation year will be limited to C$20,000 per employee.

CAPITAL TAX AND MANUFACTURING CORPORATIONS

A corporation with an establishment in Quebec in a taxation year is subject to the Quebec tax on capital attributable to such establishment, calculated on the basis of the paid-up capital shown in its financial statements for the year. The current rate applied to the paid-up capital of corporations that are not financial institutions is 0.36%. Corporations that are not financial institutions that make certain eligible investments in manufacturing and processing equipment are entitled to a non-refundable capital tax credit to reduce their capital tax burden.

In order to further reduce the tax burden on corporations in the manufacturing sector, a manufacturing corporation will be entitled, for a given taxation year ending after March 13, 2008, to claim a deduction in calculating its paid-up capital for such taxation year. A manufacturing corporation whose proportion of activities attributable to manufacturing and processing activities for a particular taxation year is 50% or more will be entitled to claim a deduction in calculating its paid-up capital for such taxation year such that it will be able to completely eliminate the capital tax for such taxation year. The deduction a manufacturing corporation may claim in calculating its paid-up capital for a particular taxation year is reduced linearly if such proportion is between 50% and 20% for such taxation year.

As a corollary, effective March 13, 2008, eligible investments in manufacturing and processing equipment will no longer give rise to a non-refundable capital tax credit.

IMPROVEMENTS TO THE MEASURES RELATING TO RESEARCH AND DEVELOPMENT

Quebec’s tax legislation provides four types of refundable tax credits for scientific research and experimental development (R&D):

  • R&D salary
  • private partnership pre-competitive research
  • university R&D
  • fees or contributions paid to an eligible research consortium.

The first three types will be affected by measures seeking to increase the tax incentive characteristic to them. The refundable tax credit for salaries is the most often claimed by taxpayers with R&D expenses.

R&D Salary

This credit is usually based on the salaries paid to employees, provided a research contract was granted to a sub-contractor not at arm’s length with the taxpayer. The rate of this tax credit is 17.5%. However, for a Canadian-controlled corporation with assets of less than C$50 million (including the assets of corporations associated with it), the rate can rise to 37.5% and apply to the first C$2 million of eligible R&D expenses. However, this increased rate declines linearly where the assets of the corporation (including the assets of corporations associated with it) vary between C$50 million and C$75 million. Where the assets of the corporation exceed C$75 million, the rate is 17.5%.

The budget proposes to increase the spending limit eligible for the credit to C$3 million for fiscal periods ending after the day of the budget. There will be a specific measure applicable to fiscal periods including that day.

Private Partnership Research

The budget proposes to change certain aspects of the credit for private partnership research. Some changes deal with the eligibility criteria so as to allow the participation of "excluded partners" (such as public research centres and universities). Other measures will however limit certain expenses related to excluded partners. The contribution rules limiting the amount of eligible expenses would on the other hand be amended so that an expense incurred by an excluded partner would no longer be considered a contribution for the other partners of this agreement.

Finally, changes to administrative formalities are also proposed in relation to (i) the abolition of the obligation to obtain a favourable advance ruling; (ii) the introduction of new information to provide with the tax return of the taxpayer; and (iii) the introduction of new measures related to the certificate issued to the research project by the ministère du Développement économique, de l’Innovation et de l’Exportation du Québec.

Generally, certain measures will apply as of the day following the day of the Budget Speech and others with respect to expenses incurred after the day of the Budget Speech and that are related to a contract entered into or an eligibility certificate issued after that day.

University R&D

As a corollary to the proposed change to the contribution rules for the purposes of the refundable tax credit for private partnership pre-competitive research, the budget proposes a new exception to the contribution rules applicable to university R&D. It is proposed that R&D expenditures assumed by certain university entities, public research centres or research consortiums do not reduce the amount of R&D expenditures pertaining to the research contract awarded to such entity by the taxpayer who awarded such contract. The measure is thus favourable.

This change will apply with respect to an R&D expenditure incurred or supported by the university entities, public research centres or research consortiums after the day of the Budget Speech, regarding R&D work that the entity, centre or consortium carries out after that day.

NEW MEASURES AGAINST INTER-PROVINCIAL TAX AVOIDANCE

Resynchronization Of Fiscal Periods

Certain interprovincial tax planning schemes particular to Quebec were based, among other things, on the ability of a corporation to make a separate election of fiscal period end for tax purposes for the purposes of the Quebec tax legislation and the Canadian federal tax legislation. Different fiscal periods allowed, among other things, for the presentation of favourable results between Canadian provincial jurisdictions where the corporation could be subject to a tax. The Minister of Finance gives this conclusion regarding this scheme: "Since the fiscal periods do not cover the same period, an appropriate combination of the nature, source and amount of income earned completes the abusive scheme".

On December 20, 2006, the then Quebec Minister of Finance announced measures seeking the abolition of the ability to make numerous tax elections separate from those made for Canadian federal tax purposes. In this context, the Minister of Finance feels justified to add to that list the ability to elect a separate financial period end in Quebec. Quebec’s tax legislation will thus be changed in order to synchronize the fiscal period end date of a corporation with the one chosen for the purposes of the Canadian federal tax legislation.

Generally, this measure will apply as of December 20, 2006. The budget proposes a few measures to reduce the impact of potential penalties and interest for affected corporations.

Aggressive Tax Planning Schemes

The budget documents state that aggressive tax planning schemes erode Quebec’s tax base and discourage the fiscal civil-mindedness of other taxpayers. The Minister of Finance announces that measures will be taken to fight these abusive practices. In particular, it intends to develop, over the coming months, a strategy involving tax administration and the tax policy.

The strategy involves the setting-up of a team specializing in managing, detecting and shutting-down aggressive tax planning schemes. It will also involve the review of the legislative framework currently available to Quebec’s tax authorities to combat those schemes. To complete this process, a public analysis will be launched and a green paper will be presented in the fall of 2008. New tax measures could then be announced in the wake of the green paper being presented.

MEASURES RELATING TO THE FEBRUARY 26, 2008 FEDERAL BUDGET

The budget announces that Quebec’s tax legislation will be amended to incorporate, with adaptations on the basis of applicable general principles, the following measures announced in the last Federal budget:

  • the exemption from notice and withholding procedures for cross-border transactions
  • the implementation of tax-free savings accounts
  • the adjustments to the gross-up rates applicable to eligible dividends
  • the amendments pertaining to capital cost allowance applicable to certain types of assets
  • gifts of publicly traded securities to registered charities
  • the excess corporate holdings by private foundations.

The following measures have not been retained because they do not correspond to features of Quebec’s tax system or because the latter has no corresponding provisions or is satisfactory in that regard:

  • the deferral of the mineral exploration tax credit
  • the requirement to make large payments directly to a financial institution
  • the business number initiative
  • the measures relating to the scientific research and experimental development
  • the adjustments to the rate of the tax credit applicable to eligible dividends
  • late remittances of source deductions
  • that provincial component of the tax on specified investment flow-through trusts (these measures will be adopted in Quebec as a separate tax regime).

For more information on these various measures, please see our February 2008 Blakes Bulletin on Tax concerning the last Federal budget.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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