On March 23, 2006, the Minister of Finance, Michel Audet tabled the 2006-2007 Budget of the Québec 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 the 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 Québec's infrastructure.

The Minister boasted that over the past three years Québec "has been disciplined and rigorous" and has "aligned the resources of the State with the priorities of Québecers", has redressed Québec's health care system, has reinvested in education, has considerably increased assistance for families and has reduced taxes. As a result Québec 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, which is taxed at the general corporate income tax rate as opposed to ordinary dividends paid out of income, which are taxed at the reduced corporate income tax rate or out of the corporation's investment income, which is taxed at the top corporate income tax rate. Québec initially announced on December 19, 2005 that it would not amend its legislation since (i) Québec'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. Québec now announces that it will amend its legislation to incorporate the rules relating to the concept of eligible dividends "since the Québec government endorses the principle of integration of the corporate and personal income tax systems, and in order to avoid making the taxation of Québec taxpayers unnecessarily complex". As a result, the gross-up of eligible dividend income 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 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 years to twenty years. The budget also introduces various measures to assist educational institutions in developing musical talent and to grant additional support to Québec 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 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 conductive 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 Québec and that has an establishment in Québec to eligible specialized employees. This measure is designed to encourage the development, in Québec, of state-of-the-art expertise in the financial derivatives field and to support the Montréal Exchange in its efforts to ensure that the Canadian financial derivatives market remains in Montréal even after the expiry in 2009 of the agreement reached in 1999 by the various Canadian stock exchanges granting the Montréal Exchange the exclusive rights to the Canadian market for financial derivatives. The new measure is set to expire on January 1, 2010.

Introduction of 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 Québec tax purposes.

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; supporting certain R&D organizations and improving R&D incentives for businesses. First, changes will be brought to the refundable tax credit for university R&D in order to authorize the participation of institutional players in R&D projects without reducing the eligible expenditure for purposes of the university R&D credit by eliminating the streamlining measures that are applicable to spin-offs of R&D projects by a prescribed research entity to a corporation that awards it the execution of the work, and increasing the tax credit for R&D salary, relating to the development of practical applications for research findings. Second, R&D projects carried out as part of a public-private partnership will no longer be eligible for the pre-competitive R&D tax credit but will be eligible for the enhanced R&D salary tax credit and the new "private partnership" R&D tax credit since the pre-competitive R&D tax credit, designed to encourage entrepreneurs to group together to carry out R&D projects, gets reduced where such partnerships involve institutional players. And third, a new private partnership R&D tax credit will be available for pre-competitive research done in a partnership (after April 21, 2005) 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: Certain changes were announced to the refundable tax credit for design in the fashion sector and the industrial sector, to the tax credit for the production of sound in order to cover digital audio-visual recordings and clips and to 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 Québec 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.


Joseph (Hovsep) Takhmizdjian