Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Tax, March 2009
Quebec Finance Minister Monique Jérôme-Forget tabled the 2009-2010 budget of the Government of the Province of Quebec on Thursday, March 19, 2009 (Budget) not only against the backdrop of a provincial economic recession but also that of a global financial economic crisis. As a result of several previously announced and new spending initiatives, Quebec will post a C$3.9-billion deficit in 2009-10, its first in a decade, and there will be a C$3.8-billion shortfall in 2010-11. To get back to a balanced budget by 2013- 14, the Budget proposes raising the Quebec sales tax by one per cent beginning in January 1, 2011, maintaining Quebec's annual spending increases at no higher than 3.2% starting in 2010-11, indexing government fees as of January 1, 2011, and cracking down on tax avoidance and evasion schemes (see our February 2009 Blakes Bulletin on Tax: Quebec Release Consultation paper on "Aggressive Tax Planning"). No increases in personal or corporate income taxes are proposed.
We have summarized hereinafter some of the most noteworthy tax measures included in the Budget applicable primarily to businesses. Given the Liberal government majority, one can expect that the measures of the Budget will be enacted in the near future.
BUSINESSES INCOME TAX MEASURES
Ten-Year Income Tax Holiday for New Corporations Commercializing Intellectual Property
To further spur innovation and boost university research in the Quebec public domain, the Budget introduces a ten-year tax holiday, applicable to new eligible corporations dedicated to the commercialization of intellectual property developed in Québec universities and Québec public research centres that have received a certificate from the ministère du Développement économique, de l'innovation et de l'Exportation (MDEIE). The certificate will be valid for a maximum of three years, and would need to be renewed with the MDEIE when it expires, in order for the income tax holiday to continue to apply. The eligible corporation wishing to claim this income tax holiday for a given taxation year must enclose with its tax return for such year, a form prescribed by the Minister of Revenue of Québec and the certificate issued by the MDEIE.
A new corporation will, for a given taxation year, be an "eligible corporation" if for the taxation year and each prior applicable taxation year, it satisfies the following conditions:
- it was incorporated in Canada after March 19, 2009 and before April 1, 2014;
- it began to carry on an eligible commercialization business within 12 months of its incorporation;
- it earns all or almost all of its income, for the year, from one or more active businesses that are eligible commercialization businesses, and all or almost all of the amounts resulting from the disposition of its capital properties, for the year, stem from dispositions of capital properties that occur in the normal course of the activities of such businesses;
- it did not carry on all or part of a business previously carried on by another entity (unless such other entity carried on such business for a period of 90 days or less);
- it is not the result of a merger or amalgamation or several corporations;
- it did not sell all or almost all of the properties it used in the course of carrying an eligible commercialization businesses;
- it claimed all the deductions, including discretionary deductions such as depreciation for capital cost, which it was entitled in calculating its income and its taxable income for the year, at least up to what is required for its taxable income to be equal to zero, if applicable;
- it was not a beneficiary of a trust (other than a mutual fund trust such as for temporary investment of its cash); and
- it was not a party to a joint venture nor was it a member of a partnership unless each member of such joint venture or partnership was, as the case may be, an eligible institute; an "eligible institute" is a eligible university or an eligible public research centre for the purposes of the Québec tax credit for university research and for research done by a public research centre.
"Eligible commercialization business" of a corporation is defined as a business regarding which the MDEIE issues a certificate stipulating that the only purposes of the business are:
- making and selling goods more than 50% of whose value stems from eligible intellectual property;
- making and selling goods of which an essential component is an eligible intellectual property; or
- the licensing of computer programs that are eligible intellectual properties.
The expression "eligible intellectual properties" of a corporation denotes property that, in the view of the MDEIE, satisfies the following conditions:
- the property was developed in the course of employment or academic study at an eligible institute by one or more individuals, each of whom is an inventor for the purposes of the Canadian Patent Act, or an author for the purposes of the Canadian Copyright Right Act, and its development does not result from a research contract carried out on behalf of another person or other entity;
- nobody had ownership of the property in any way whatsoever, other than (i) the eligible institute where the research work on its development took place, (ii) the individual(s) who created it and each of whom was, at the time of its creation, an employee or a student of the eligible institute where the research work was carried out, (iii) the corporation, (iv) a subsidiary entity of an eligible institute recognized by MDEIE; or (v) a combination of the persons or entities mentioned in (i) through (iv);
- timely disclosure of the property was made to the eligible institute where the research work was carried out in accordance with the institute's policy on disclosure of intellectual property;
- the property consists of (i) a patent under the Canadian Patent Act, (ii) intellectual property regarding which an application for a patent was filed under the Canadian Patent Act by a person or entity referred to above in respect of who it is reasonable to expect that the patent be issued in accordance with the application no later than the last of day of the 10th taxation year of the eligible corporation ending after its incorporation, or (iii) the copyright on a computer program (within the meaning of the Canadian Copyright Act) regarding which the MDEIE believes constitutes a significant technological advance at the time it is achieved.
Functional Currency Reporting – Application to the Quebec Mining Duties Act
A corporation subject to the Quebec Mining Duties Act must, among others, file financial statements and a profit and loss return with the Quebec government. The Canadian Income Tax Act was recently amended to allow, if certain conditions are met, corporations to report income for tax purposes in a currency other than the Canadian dollar. The Minister of Finance of Quebec announced in May 24, 2007 budget that Quebec's income tax legislation would be harmonized with the Canadian Income Tax in this regard. In order to prevent a corporation that already uses a functional currency to have to keep a parallel set of books in Canadian dollars solely to satisfy the requirement of the Quebec Mining Duties Act, the Quebec Mining Duties Act will be amended, effective for fiscal years for which the filing deadline is after March 19, 2009, to introduce functional currency reporting rules similar to those contemplated to be introduced in the Quebec Taxation Act.
Five-year Royalty Holiday for New Natural Gas Wells
The holder of a natural gas development lease is subject to royalties payable to the Quebec government under the Quebec Mining Act. This royalty varies currently from 10% to 12.5% of the value of production at the well (measured in cubic metres).
Considering the global financial crisis, the dramatic fall in the price of energy commodities and investment projects being postponed, the Quebec Mining Act will be amended to provide that a royalty rate of 0% will apply for a period of five years beginning on the date the natural gas well enters into production, where such well is brought into production after March 19, 2009 and before January 1, 2011. The royalty savings resulting from this holiday will, however, be limited to a maximum of C$800,000 per well.
It is expected that this measure will accelerate investment in natural gas development and reduce the risk associated with natural gas exploration in Quebec, where the potential for profit often remains uncertain.
Refundable Tax Credit in Manufacturing Sector Extended to Forest and Mining Sectors
In 2007, the Quebec government introduced a refundable tax credit for manpower training to support Quebec's manufacturing sector Briefly stated, this credit allows an eligible employer to claim a refundable tax credit for each eligible employee, of 30% of eligible training expenditures incurred in respect of the eligible employee during the year.
The application of the tax credit for manpower training in the manufacturing sector (including post-amendments) will be extended to eligible companies (and presumably partnerships) in the forest and mining sectors.
This measure will apply regarding an eligible training expenditure incurred after March 19, 2009 and before January 1, 2012 in respect of an eligible training beginning during such period. Training expenditure incurred in relation to training offered in accordance with an obligation contracted no later than March 19, 2009 will not qualify as eligible training expenditure.
SME GROWTH STOCK PLAN BECOMES THE STOCK SAVINGS PLAN II
In 2005, the generous Quebec Stock Savings Plan was replaced by the SME Growth Stock Plan to support the capitalization of small public corporations only. In general terms, the SME Growth Stock Plan works as follows:
- an individual acquires for cash a qualifying share issued by a qualified issuing corporation, or a qualifying security in an investment fund holding qualifying shares in a qualified issuing corporation;
- the individual who resides in Quebec on December 31 of a year can deduct, in calculating his taxable income for the year, his adjusted cost of the qualifying share or the qualifying security he acquired in the year (generally 100% of the purchase price) and included such qualifying share/security in his SME Growth Stock Plan no later than January 31 of the following year; however, the deduction on this account may not exceed 10% of the individual's total income for the year; and
- the individual must maintain in his SME Growth Stock Plan, for a minimum of 3 years, qualifying or valid shares or qualifying securities whose adjusted cost is equivalent to the amounts of the deductions claimed in relation to the program over the preceding 3 years.
Originally planned to terminate in 2009, the SME Growth Stock Plan, now renamed under the Budget as the "Stock Saving Plan II", will be extended until December 31, 2014. The Budget stipulates that the Quebec Taxation Act will be amended to provide that:
- the adjusted cost of a qualifying share or a valid share is raised from 100% to 150% of the cost of such share;
- this increase will apply regarding qualifying shares and valid shares acquired after March 19, 2009 and before January 1, 2011 and included in the Stock Saving Plan II no later than the January 31 following the year of their acquisition;
Furthermore, to encourage more corporations and investors to make use of the Stock Saving Plan II, the condition related to the asset limit that qualified issuing corporations must satisfy will be raised from C$100-million to C$200-million (determined on an associated basis). The new asset limit will apply in respect of a public offering of shares for which the receipt for the final prospectus, or the filing exemption, as the case may be, is granted after March 19, 2009.
The minimum holding period of qualifying shares and qualifying securities by investors will be shortened by 1 year. Therefore, an investor will satisfy the minimum holding period requirement where he holds in his plan, on December 31 of the year of acquisition as well as on December 31 of the 2 subsequent years, qualifying shares, valid shares or qualifying securities for which the total adjusted cost is at least equivalent to the amount of deductions claimed under the program over the preceding 2 taxation years. This change will apply as of calendar year 2009.
COMMODITY TAX MEASURES
Increase in the Rate of the Quebec Sales Tax (QST) As of January 1, 2011, the rate of the QST will rise from 7.5% to 8.5%. This measure is intended as part of the measures to eliminate the budget deficit and to restore the structural balance of public finances by fiscal year 2013-2014.
The 8.5% rate will be applicable to taxable supplies to which this tax will become payable as of January 1 2011.
An increase in the refundable tax credit for the QST will come with the increase in the QST rate, particularly applicable to low-income households. The upward adjustment may be up to $150 for a couple, $125 for a person living alone and $75 in other cases.
CERTAIN OTHER TAX MEASURES
In order to enable the recovery by Revenu Quebec of additional administrative cost incurred in connection with the process of "tax collection" files, the Quebec Government announces that a fee of $93 will apply with regard to tax debts and also to tax or source deduction returns not filed that have been initially acted on by tax collection officials. Moreover, a fee of $75 will be charged to recover part of the costs in connection to the registration and cancellation of a legal hypothec. These measures will apply after the draft legislation giving effect to such measures is assented to or at any later date set by the Quebec government.
The Budget also includes the introduction of a refundable tax credit for the acquisition or lease of a new recognized green vehicle.
HARMONIZATION WITH FEDERAL TAX LEGISLATION
Measures Relating to the March 12, 2009 Budget Implementation Bill (Bill C-10) implementing the January 27, 2009 budget measures
The Budget announces that Quebec's income tax legislation will be amended to incorporate, with adaptation on the basis of applicable general principles, the following measures announced in the recent 2009 Federal budget:
- the deduction for loss of value of investments in a registered retirement savings plan or a registered retirement income fund after death;
- the increase of the base amount of active business income of a Canadian controlled private corporation eligible for the small business deduction from C$400,000 to C$500,000 (This increase will apply as of March 19, 2009. For a taxation year of a corporation including March 19, 2009, the business limit will be calculated on a prorated basis);
- the time at which the acquisition of control of a corporation takes place to determine whether it is a small business corporation or a Canadian-controlled private corporation;
- the amendments pertaining to capital cost allowance applicable to certain assets; and
- the withdrawal of the restrictions applicable to the deductibility of certain interest.
The Budget also announces that Quebec's commodity tax legislation will be amended to incorporate, with adaptation on the basis of applicable general principles and subject to the specific Quebec features, the federal measures pertaining to the simplification of the Goods and Services Tax / Harmonized Sales Tax for the direct selling industry.
The following measures have not been retained because they do not correspond to features of Quebec's tax system or because Quebec's tax system has no corresponding provisions or is already satisfactory in their regard:
- increase in the reduction thresholds of the Child Tax Benefit and the National Child Benefit Supplement;
- improvement to the Working Income Tax Benefit;
- First-Time Home Buyer's Tax Credit (The Government of Quebec has already announced that Quebec tax legislation will be amended to incorporate this measure);
- extension of the mineral exploration tax credit;
- correlative adjustments to the change to the amount of the expenditure limit concerning the investment tax credit;
- adjustments concerning the installment payments of small corporations;
- the increase to the basic personal amount, the amount for a spouse or de facto partner and the amount for an eligible dependant;
- the increase in the upper limit of the first two brackets of the personal income tax table;
- the increase in the age tax credit; and
- the introduction of the Home Renovation Tax Credit;
Updates to the decision to retain the federal measure relating to mandatory filing of tax returns by electronic transmission and the penalty for not filing a corporate tax return in the correct format and for late filing of information returns or not filing such returns in the correct format will be announced at a later date.
For more information on these various federal measures, please see our January 2009 Blakes Bulletin on Tax: 2009 Federal Budget.
Certain Measures Relating to the March 12, 2009 Budget Implementation Bill (Bill C-10) implementing the February 26, 2008 Budget Measures
The Budget announces that Quebec's tax legislation and regulations will be amended to incorporate, with adaptations on the basis of their general principles, the federal rules relating to the conversion of existing specified investment flow-through trusts into taxable Canadian corporations.
Department of Finance Canada news release of November 10, 2008
Quebec's tax legislation and regulation will be amended to incorporate the changes to the federal rules concerning reporting of income in a functional currency.
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.