On March 13, 2008 the Minister of Finance, Monique Jérôme-Forget, tabled the 2008-2009 Budget of the Québec Government.

This Budget, Monique Jérôme-Forget's second and the Liberal Government's seventh, is the second minority Budget since 1878, the last time Québec voters elected a minority Government. Given that the minority Liberal Government did not fall over its previous Budget, it will be interesting to see if it can convince, yet again, at least one other political party in the National Assembly to support the Budget. Thus far, l'Action Démocratique du Québec has indicated that it will support this Budget.

Enhancement of the Stock Option Deduction: Generally, an employee who disposes or transfers a right under a stock option plan provided by his employer is deemed to have received an employment benefit equal to the proceeds of disposition of the such rights less the amount paid to acquire those rights. In certain circumstances however, such as where the employer corporation is a Canadian-controlled private corporation and the employee has held the rights under the stock option plan for more than two years, the employee is allowed a deduction of 25% of the value of the employment benefit described above.

In order "to help small and medium-sized enterprises (SMEs) carrying out innovative activities attract and retain specialized staff, while encouraging their employees to increase the enterprise's performance and profitability", the stock option deduction will be raised from 25% to 50% for stock options granted by an SME carrying out "innovative activities" and having less than $50 million of assets (taking into account the assets of the corporations with which it is associated in a taxation year). Generally, activities are considered to be "innovative" where they have enabled the SME to obtain refundable research and development (R&D) tax credits for its taxation year ended in the given year, or for one of the three previous taxation years.

Elimination of the Tax on Capital for Manufacturing Corporations: In a effort to support the manufacturing sector, the April 21, 2005 Budget introduced a capital tax credit to enable certain corporations that invest in manufacturing and processing equipment to reduce significantly their capital tax burden. The Québec Government recognizes that the manufacturing sector faces many challenges namely because of the strength of the Canadian dollar. Consequently, this Budget announces a deduction for manufacturing corporations in the computation of their paid-up capital, which in turn will result in the elimination of the tax on capital for most of them.

Generally, a "manufacturing corporation" is a corporation whose proportion of activities attributable to manufacturing and processing is 20%. Where a manufacturing corporation has 50% or more of such activities, it may claim a 100% deduction in computing its paid-up capital.

Where such proportion is between 50% and 20%, the deduction is reduced linearly. For example, a manufacturing corporation whose proportion of activities attributable to manufacturing and processing is 35% may claim a deduction equal to 50% of its paid-up capital.

As a corollary to this measure, the capital tax credit will be eliminated.

Generally, this deduction will apply regarding a taxation year ending after the day of the Budget Speech.

Introduction of a Tax Credit for the Development of E-Business : In order to "consolidate the development of information technology throughout Québec", a temporary refundable tax credit is introduced in this Budget. Briefly, an eligible corporation may claim a refundable tax credit equal to 30% of the eligible salaries it incurs as of the day following the Budget Speech.

Generally, an eligible corporation is one that carries on a business whose activities are part of the information technology sector and has an establishment in Québec. Such corporation will have to obtain, each year, an eligibility certificate from Investissement Québec confirming that 75% of its activities for the taxation year constituted eligible activities and required a minimum of six full-time employees having certain involvement in such eligible activities.

Eligible activities consist of namely (i) information technologies consulting services relating to technology, systems development, e-business processes and solutions; (ii) development, integration, maintenance and evolution of information systems and technology infrastructure; (iii) design and development of e-commerce solutions; and (iv) development of security and identification services relating to e-commerce activities.

This refundable tax credit applies for salaries incurred until December 31, 2015 and is limited to $20,000, calculated on an annual basis, for each employee.

New Improvements to Tax Assistance for R&D Salary: Currently, a refundable tax credit for R&D exists for salaries paid to employees of the entrepreneur who carries out R&D in Québec and on salaries paid to employees of most R&D sub-contractors. The rate of this tax credit is 17.5% but can reach as high as 37.5% for certain small and medium-sized corporations. This rate increase applies only to the first $2 million of R&D spending eligible for this tax credit.

For R&D spending eligible for the increased tax credit of 37.5% for a fiscal period ending after the day of the Budget Speech, the $2 million spending limit will be raised to $3 million.

Introduction of a Tax Credit for Francization in the Workplace: To encourage the francization of immigrants who have insufficient French communication skills, this Budget introduces a refundable tax credit equal to 30% of eligible training expenditures, incurred in a taxation year, offered to each immigrant employee that is either a "protected person", a "permanent resident" or a "temporary resident who resides in Canada during the 18-month period preceding that time", as those terms are defined in the Canadian Immigration and Refugee Protection Act. Briefly, an eligible training expenditure is a course designed to foster the francization of such an immigrant employee.

This credit will be available for eligible training expenditures incurred after the day of the Budget Speech but before January 1, 2012.

Inter-provincial Tax Avoidance: In an objective to counteract certain tax planning "schemes" perceived to be put in place by certain corporations to avoid Québec income tax, the Québec Finance Minister announced, on December 20, 2006, that many separate Québec tax elections had been eliminated. As a consequence of this objective, the tax legislation will be amended to provide that the fiscal period end date of a corporation must be synchronized with the one chosen for the purposes of the federal Income Tax Act.

Measures Relating to the February 26, 2008 Federal Budget: Québec's tax legislation will be amended to incorporate certain measures announced by the federal Government in its last budget. These measures include the following:

  • the implementation of the tax-free savings account;
  • the time limits applicable to the registered education savings plan as well as the educational assistance payments made thereunder;
  • the adjustments to the gross-up applicable to the eligible dividends. However, the adjustments to the rate of the tax credit applicable to eligible dividends will not be adopted;
  • gifts of publicly-traded securities to registered charities; and
  • the disposition of taxable Canadian property.

The Québec Minister of Finance announced that "the Québec tax legislation will be harmonized with the federal tax legislation concerning the introduction of a tax regime relating to SIFTs, while specifying that it will be a separate tax regime." Québec's portion of the amount of taxable distributions of a SIFT with an establishment both in Québec and outside Québec would be determined in accordance with the general formula for allocating corporate taxable income. Consequently, the concept of “provincial component” introduced in the federal budget will not be adopted, as this concept is not necessary under Québec's new tax regime for SIFTs.

Given the forecast of a possible economic downturn, the Québec Government utilises the words "Prudence and Discipline" to describe the measures contained in this Budget. By absorbing "the shock of the economic slowdown without raising taxes and without scaling back public services", t he Minister of Finance, Monique Jérôme-Forget, considers that she is acting "en bonne mère de famille".

Author

Joseph (Hovsep) Takhmizdjian 
JTakhmizdjian@blg.com
514.954.2538

Other Author

Virginia Chan

Expertise

Tax