On May 24, 2007 the Minister of Finance, Monique Jérôme-Forget, tabled the 2007-2008 Budget of the Québec Government.

This Budget comes only three (3) months after the previous Budget tabled on February 20, 2007, which was not adopted by the National Assembly prior to its dissolution because of the general elections held in Québec on March 26, 2007. It should be noted however that many of the measures announced in the February 20, 2007 Budget were given practical application the following day.

Minority Government Budget: The 2007-2008 Budget, Monique Jérôme-Forget’s first and the Liberal Government’s sixth, is the first Québec minority Government Budget since 1878, the last time Québec voters elected a minority Government. It will therefore be interesting to see if the minority Liberal Government will fall on its very first test in the National Assembly. This Budget confirms all the measures previously announced in the February 20, 2007 Budget subject to certain modifications to the personal income tax rate and tax on capital, the highlights of which are summarized below. This Budget also announces the Québec Government's intention to harmonize with the measures announced in the March 19, 2007 federal Budget announcement.

Personal Income Tax Reduction: In the February 20, 2007 Budget, it was announced that income thresholds used to determine the tax rate brackets will be increased so that Québec taxpayers will benefit as of 2008 of total tax savings of $250 million. This Budget now announces that the total tax savings will be $950 million.

Consequently, as of 2008 the following rates will apply: (i) 16% on taxable income equal to or less than $37,500; (ii) 20% on taxable income over $37,500 but not exceeding $75,000; and (iii) 24% on taxable income over $75,000. Furthermore, the amount used to calculate the basic tax credit will be $10,215 (increased to $9,940 from $9,745 in the previous Budget).

For an individual with $100,000 of taxable income, this will represent a saving of approximately $970 a year (in other words, less than 1% of the individual’s taxable income).

Reduction in the Tax on Capital: The Québec Government acknowledges that the tax on capital “hampers economic growth” since the tax on capital applies to a company’s investments rather than to its profits. Accordingly, the Budget announces that the rate of the tax on capital will be reduced gradually starting January 1, 2008 until it is completely eliminated on January 1, 2011.

Currently, the rate for corporations is 0.49% (0.98% for financial institutions). This rate will be reduced to: (i) 0.36% starting January 1, 2008 (0.72% for financial institutions); (ii) 0.24% starting January 1, 2009 (0.48% for financial institutions); and (iii) 0.12% starting January 1, 2010 (0.24% for financial institutions).

Harmonization with certain measures announced in the March 19, 2007 federal Budget: Amendments will also be made to Québec tax legislation to incorporate a number of measures announced in the federal Budget, subject to certain adaptations and clarifications. For example, the following federal measures have been retained: donations of publicity-listed securities to private foundations; the limitation on the deductibility of interest relating to active income of foreign affiliates (under the new rules applicable as of 2012, multinational corporation will be prevented from using tax havens and other tax avoidance mechanisms to obtain a double deduction for the same investment expense); the cumulative exemption of capital gains; the implementation of a registered disability savings plan; the regime applicable to excess business holdings of private foundations; the updating of the concept of "prescribed stock exchange"; the change in the frequency of instalments of Canadian-controlled private corporations from monthly to quarterly; the elimination of the annual limit applicable to contributions paid under a registered education savings plan; and the determination of the minimum withdrawal amount under a registered retirement income fund.

In this Budget, the Québec Government reiterates its commitment "to raise the standard of living of Québecers" and to recognize "the day-to-day effort of the middle class" since it is "these women and men who shoulder Québec" and are thus "entitled to a reprieve".

This Bulletin is not intended to constitute legal advice, but to keep our clients informed of changes in the law.

© All Rights Reserved 2007 Borden Ladner Gervais LLP

Author

Joseph (Hovsep) Takhmizdjian 
JTakhmizdjian@blg.com
514.954.2538

Other Author

Virgina Chan

Expertise

Tax