2007-2008 Quebec budget highlights

• The 2007-2008 budget forecasts that a balanced budget will be achieved in each year of the financial forecast.
• The Quebec economy will continue to expand over the next two years.
• The Minister anticipates stable short-term interest rates and that the upward trend of long-term interest rates will continue for the next two years.
• The budget gives priority to health, where spending growth will reach 6%, an increase of $1.4 billion. The budget of the Ministère de l’Education, du Loisir et du Sport will also increase by 5% or $644 million.
• The total debt continues to increase, but it decreases as a percentage of the gross domestic product.

• The budget proposes to eliminate the tax on capital as of January 1, 2011. Until then, the rate of the tax on capital applicable to corporations that are not financial institutions will be reduced from 0.49% to 0.36% as of January 1, 2008. It will then be reduced to 0.24% as of January 1, 2009, and to 0.12% as of January 1, 2010.
• The tax on capital applicable to financial institutions will be reduced from 0.98% to 0.72% as of January 1, 2008, and then fall to 0.48% as of January 1, 2009, and to 0.24% as of January 1, 2010.
• Since the tax on capital will be eliminated on January 1, 2011, a corporation will no longer be able to claim the capital tax credit for a taxation year beginning after December 31, 2010. Also, any unused balance of the capital tax credit at the end of a taxation year including December 31, 2010, will expire.
• Some technical changes will be made in order to, among other things, clarify the notion of bond for the purposes of the tax on capital, and to clarify the calculation details of the paid-up capital of a corporation holding an interest in a partnership. These changes will apply to a taxation year of a corporation ending after May 24, 2007.
• Withdrawal of the indexing in the determination of the refundable tax credit for processing activities in the resource regions. In order to link the purpose of the tax credit, job creation, with obtaining tax assistance, an annual tax indexing factor of 2% will be considered in establishing the tax credit beginning in calendar year 2008. This factor will be increased to 4% in calendar year 2009. This correction aims to eliminate tax assistance to an eligible corporation received with regard to wage indexing rather than the creation of additional jobs. No such adjustment will be made to the refundable tax credit for Gaspésie and certain maritime regions of Quebec and the refundable tax credit for the Vallée de l’aluminium.

• Personal income taxes will be reduced starting January 1, 2008. The reduction will be in the form of an increase in the ceilings and thresholds establishing the taxable income brackets. The first bracket (16%) will cover the first $37,500 of taxable income. The second bracket (20%) will cover taxable income exceeding $37,500 but not exceeding $75,000, and the third bracket (24%) will cover taxable income exceeding $75,000. Thresholds and ceilings will be automatically indexed each year as of January 1, 2009.
• Increase in the basic tax credit as of the 2008 taxation year. The amount of recognized essential needs and the complementary amount forming the basic amount will be replaced by a single amount of $10,215. The new basic amount will be automatically indexed annually as of January 1, 2009. A related change to reflect the increase in the basic tax credit will be made to the amounts used to calculate tax withheld at source.
• As previously announced on February 20, 2007, the tax credit for adult children who are students will be replaced, as of the 2007 taxation year, by a transfer mechanism for the recognized parental contribution. The amount of recognized essential needs ($6,650 in 2007) and the amount for studies ($1,860 in 2007) used in the calculation of the amount that a student can transfer to his or her parent will be automatically indexed annually as of 2008.
• For purposes of the presumption of residence in Quebec applicable to a child of an individual who is deemed to reside in Quebec because of employment, the limit applicable to the child’s income for a taxation year after 2007 will be automatically indexed as of January 1, 2008.

Quebec’s tax legislation will be amended to incorporate some of the measures announced in the March 19, 2007, federal budget. References are given to the measures retained.

• For the purposes of Quebec’s tax system, various adjustments will be made to the measures retained in relation to the implementation of a registered disability savings plan.
• In the field of taxation applicable to the foreign subsidiaries of Canadian corporations, Quebec’s legislation will be harmonized with the federal legislation and will be applicable on the same date as for the purposes of the federal tax system.
• The measures relating to the change to the frequency of instalments of Canadian-controlled private corporations from monthly to quarterly will be incorporated into Quebec’s tax legislation and be adapted to take the specific features of Quebec’s tax legislation into account.
• Some measures have not been retained either because they do not correspond to features of Quebec’s tax system or because Quebec’s tax system is considered satisfactory in the relevant area. Among the measures not retained is the implementation of a working income tax benefit. However, the federal benefit will not be taxable.
• With regard to other measures announced by the federal Finance Department, the Minister of Finance of Quebec announced that the measures enabling corporations to report income in a functional currency will be incorporated, with adaptations, in Quebec’s legislation and will apply on the same date as it will for the federal tax system.
• Some application details are given on the implementation of the measures relating to the splitting of certain retirement income between spouses.
• Quebec’s tax legislation will be amended to incorporate measures announced on December 28, 2006, by the federal Minister of Finance to improve the taxation of financial institutions.

Measures concerning businesses

• The corporate tax rate applicable to passive income will be reduced to the tax rate applicable to active income that is ineligible for the small business deduction. The rate will be reduced from 16.25% to 9.9% as of February 21, 2007, to 11.4% as of January 1, 2008, and to 11.9% as of January 1, 2009.
• Extension and improvement of the capital tax credit – The capital tax credit rate applicable to the acquisition of class 43 assets will be raised from 5% to 10% for eligible investment made after February 20, 2007, and during a taxation year beginning before January 1, 2011.
• Extension of the higher 15% capital tax credit for certain investments in the forest sector – Assets covered by the higher rate of 15% must be acquired during a taxation year beginning before January 1, 2011.
• The tax legislation will be amended to reduce the tax holiday granted to small and medium-sized manufacturing enterprises in remote resource regions from 75% to 50% as of January 1, 2008, and to 25% as of January 1, 2009.
• SR&ED – Changes to the requirement to carry on a business in an establishment located in Quebec – The tax legislation will be amended so that a person or a partnership that carries on a business in Canada and performs R&D work in Quebec, or has such work done in Quebec on his or her behalf, may be eligible for the refundable tax credits for R&D salary, university R&D, pre-competitive R&D, and R&D concerning private partnerships. This change will apply to R&D expenditures incurred by a person or a partnership in relation to a business it carries on in Canada and whose fiscal year began after April 21, 2005. A further amendment will be made to the tax legislation so that R&D expenditures, incurred in a fiscal year that began after April 21, 2005, by a person or a partnership whose eligibility for the refundable tax credit was affected by the amendment announced in the April 21, 2005 budget speech, can be included in a claim for a refundable tax credit, by the later of August 31, 2008, and the last day of the twelve-month period following the filing deadline for the taxation year in which such expenditures were incurred.
• Increase in the capital tax exemption threshold of a farming corporation or a corporation that carries on a fishing business. The amount of the deduction in the calculation of the paid-up capital of such a corporation will be raised from $400,000 to $5 million. This change will apply to taxation years ending after February 20, 2007.
• Technical amendments will be made to the tax credits for Quebec film and television production, film production services, film dubbing, the production of shows, sound recording production and book publishing to ensure that these tax credits achieve their objectives. These changes will generally apply with regard to applications for refundable tax credits filed after February 20, 2007.
• With regard to the SME Growth Stock Plan (Accro PME), the existing 21-day period during which an investor may be in a coverage deficiency position in an Accro PME account will be replaced by a period beginning on the day after the day of a real withdrawal during a given month and ending on the last day of the second month following such given month. This amendment will apply as of January 1, 2007.
• Adjustments will be made to transitional rules regarding the refundable tax credit for the construction, renovation or conversion of strategic buildings in the Mirabel Zone. Changes will be made to the terms and conditions of annual certificate issued after February 20, 2007, by Investissement Québec in relation to the occupation of strategic buildings.

Measures concerning individuals

• Introduction of a refundable tax credit to support education savings for families contributing to a RESP after February 20, 2007.
• As of taxation year 2007, changes will be made to the tax credit for minor children engaged in vocational training or post-secondary studies rules.
• Transfer of the unused portion of the tax credit for tuition fees and examination fees that a student does not use to parents or grandparents as of the 2007 taxation year.
• The maximum eligible retirement income used to determine the tax credit for retirement income will be raised from $1,000 to $1,500 as of the 2007 taxation year.
• A new refundable tax credit will be introduced for Quebec residents who provide respite services to informal caregivers as of the 2007 taxation year.
• The refundable tax credit for child care expenses is simplified and enhanced as of the 2007 tax year.
• The refundable tax credit for the treatment of infertility is being raised from 30% to 50% as of the day following the date on which the Quebec policy on in vitro fertilization comes into effect.

Other measures

• The $1,000 refund of Quebec sales tax (QST) paid on the purchase or long-term lease of a new hybrid vehicle, first announced in the March 23, 2006, budget speech, will be raised to a maximum amount of $2,000. This measure will apply to a new hybrid vehicle that has been purchased or for which a long-term lease has been entered into after February 20, 2007, and before January 1, 2009.
• The proposed changes to implement a new legislative framework in the federal tax system for the allocation of input tax credits for financial institutions (announced on January 26, 2007) will not be incorporated in the QST system.
• The QST system will be harmonized with the GST system regarding the introduction of the new interest calculation rule stipulated by the Excise Tax Act that was part of the measures relating to standardized accounting.