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2008-2009 Quebec budget highlights

March 13, 2008

Economic context
Measures concerning businesses
Measures concerning individuals
Others measures
Harmonization with announced federal measures

The Minister of Finance, Monique Jérôme-Forget, presented the 2008-2009 budget in the National Assembly this afternoon at 4:00 p.m. The following is a summary of the highlights contained in the budget.

Economic context

  • The 2008-2009 budget forecasts that a balanced budget will be achieved in each year of the financial framework.
  • The slowdown in the U.S. economy could last longer than predicted, which could further impact the economic outlook in Canada and Quebec.
  • After growing 2.4% in 2007, the growth in Quebec’s real gross domestic product (GDP) will slow to 1.5% in 2008 and 2% in 2009.
  • In 2007, the unemployment rate hit its lowest level in over 30 years, at 7.2%. The unemployment rate is expected to drop to 7% in 2008 and 6.9% in 2009.
  • Unlike the United States, Quebec and Canada are not affected by the decline in real estate investment, and housing starts will remain at a high level.

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Measures concerning businesses

  • Tax assistance to the manufacturing sector – an investment tax credit is introduced for eligible investments with regard to manufacturing and processing equipment (class 43), by a corporation that carries on a business in Quebec and has an establishment there.
    • The tax credit rate will be 5%, but may rise to 20% if the eligible investment is made in an intermediate zone (Saguenay-Lac-Saint-Jean, Mauricie, La Vallée-de-la Gatineau and Pontiac RCM’s, Laurentides and the Antoine-Labelle RCM), to 30% when the investment is made in the Bas-Saint-Laurent regions and up to 40% in a remote zone (the Abitibi-Témiscamingue, Côte-Nord, Nord-du-Québec and Gaspésie-Îles-de-la-Madeleine regions).
    • The tax credit will be fully refundable for corporations whose paid-up capital, calculated on a consolidated basis, does not exceed $250 million. Refundability will be reduced for corporations with paid-up capital, so calculated, between $250 million and $500 million. Any non-refundable portion of the tax credit may be carried forward 20 years, and back three years.
    • Aluminum producing corporations and oil refining corporations will be excluded.
    • This credit will be available for eligible investments made from March 14, 2008 to January 1, 2016.
  • The expiry of the three refundable tax credits granted in the resource regions – namely the refundable tax credit for processing activities in the resource regions, the tax credit for the Vallée de l’aluminium and the refundable tax credit for the Gaspésie regions and certain maritime regions of Québec – will be delayed one year. Corporations eligible for the refundable tax credit for the Vallée de l’aluminium and the refundable tax credit for the Gaspésie and certain maritime regions will be able to claim, until 2015, both the tax credit on the payroll increase and the new investment tax credit.
  • Elimination of the tax on capital for manufacturing corporations – A deduction will be allowed to manufacturing corporations, in calculating their paid-up capital, to enable them to completely eliminate their tax on capital. This deduction will apply regarding a taxation year ending after March 13, 2008. As a corollary, the capital tax credit will be eliminated for eligible investments made as of March 13, 2008.
    • The expression “manufacturing corporation” will designate a corporation at least 20% of whose activities consist of manufacturing and processing.
    • The elimination of the capital tax will be complete for a manufacturing corporation whose proportion of activities attributable to manufacturing and processing, for a given taxation year, is 50% or more; if such proportion is between 50% and 20%, the deduction a manufacturing corporation may claim in calculating its paid-up capital is reduced.
  • To consolidate the development of companies in the information technology sector, a temporary refundable tax credit for the development of information technology will be introduced. An eligible corporation may claim this tax credit until December 31, 2015, equal to 30% of the eligible salaries it incurs as of March 14, 2008. The maximum amount of the tax credit that an eligible corporation may claim regarding an eligible employee, for a taxation year, will be $20,000.
  • To encourage the francization of immigrants, the government will grant a 30% refundable tax credit that any eligible employer operating in Quebec may claim regarding training expenditures relating to francization for its employees.
  • Improvement to the tax credit for on-the-job training periods - The current rates of 30% if the employer is an eligible corporation, and of 15% in other cases, will be raised to 40% and 20% respectively where the tax credit is claimed regarding an eligible trainee who is a handicapped person or an immigrant.
  • Improvement to tax refundable tax credit for R&D salaries: The tax legislation will be amended so that the spending limit for small- and medium-sized enterprises (SMEs) eligible for the increased rate of 37.5% will be raised to $3 million from $2 million. This change will apply for fiscal periods ending after March 13, 2008.
  • Partnerships with public partners will be eligible for the refundable tax credit for private partnership pre-competitive research. The eligibility criteria for the refundable tax credit for private partnership pre-competitive research will be changed and other technical amendments will be made. Changes will generally apply regarding eligible R&D expenditures incurred or R&D work carried out after March 13, 2008.
  • The tax credit currently provided to encourage business-university synergy will be improved to allow the amount of this tax assistance to be maintained, despite the involvement of players from the institutional research community in carrying out R&D projects in the course of a university contract or an eligible research contract. The active participation in the form of R&D expenditures by players in the institutional research community will be allowed for the purposes of the refundable tax for university R&D and the refundable tax credit for private partnership pre-competitive research. Other technical changes will be made. These changes will generally apply to R&D expenditures incurred after March 13, 2008.
  • Changes will be made to tax credits to support cultural industries:
    • Circus shows, aquatic shows and ice shows will be eligible for the refundable tax credit for the production of shows. This change will apply regarding a show for which an application for an advance ruling or a final certification application has been filed after March 13, 2008, in relation to an eligibility period of the show beginning after that day.
    • For the tax assistance to be granted to shows that need support, the rate and the cap of the refundable tax credit for the production of shows will decline linearly with the total assets, calculated on a consolidated basis, of the corporation producing the show. The rate of the refundable tax credit for the production of shows will be 29.1667% and the cap will be $750,000 for a taxation year, when such total assets are equal to or less than $50 million for the preceding taxation year. The rates and cap will decline linearly to zero when total assets reach $75 million. This change will apply to a show regarding which an application for an advance ruling or a final certification is filed after May 31, 2008.
    • The tax legislation will be amended so that the 50% limit relating to the deduction of entertainment expenses will not apply in the context of tax credits in the cultural field. This 50% limit will not apply in calculating the eligible labour expenditure and production expenses for the purposes of the various tax credits in the cultural field.
  • The tax legislation will be amended to provide that the fiscal period end date of a corporation must be the same as the one chosen for the purposes of the federal Income Tax Act. Since this amendment follows the elimination of separate Quebec elections already announced on December 20, 2006, it will apply as of that date. The synchronization of the fiscal period end date with that elected under the federal legislation will be forward-looking regarding any fiscal period in progress on December 20, 2006 or after that date.
  • The Minister of Finance announced that, over the coming months, the tax authorities will intensify their fight against tax planning qualified as “aggressive” with a strategy for combating aggressive tax planning (ATP) schemes.
    • Financial resources will be allocated to Revenu Québec to set up a team specializing in managing, detecting and shutting down ATP schemes.
    • The legislative tools currently available to Quebec’s tax authorities to combat ATP – anti-avoidance provisions, penalty regime and disclosure mechanisms – will be reviewed.

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Measures concerning individuals

  • The parameters of the refundable tax credit for home support for elderly persons will be improved as of taxation year 2008:
    • Increase the rate of the tax credit from 25% to 30%.
    • Increase in the eligible expenses limit from $15,000 to $15,600 for individuals not recognized as dependent seniors
    • Increase in the eligible expenses limit from $15,000 to $21,600 for dependent seniors
  • On the other hand, the refundable tax credit for home support for elderly persons will be reduced where family income exceeds $50,000. Restrictions on the eligibility of certain expenses for the tax credit will also be introduced.
  • The amount with respect to age, $2,200, which is granted to all persons who are at least 65 years of age at the end of a given year will be indexed automatically each year as of January 1, 2009.
  • The maximum eligible retirement income used to calculate the tax credit will be raised from $1,500 to $1,750 for the 2009 taxation year, and from $1,750 to $2,000 as of the 2010 taxation year.
  • Effective in 2008, a refundable tax credit for informal caregivers is introduced equal to 30% of the total expenses they paid in the year, to a maximum of $5,200, for specialized respite services respecting the care and supervision of a person who had a significant disability. The credit is reduced based on family income that exceeds an annual threshold of $50,000.
  • A new adapted work premium will be introduced for individuals with a severely limited capacity for employment as of the 2008 taxation year.
  • A supplement to the work premium will be introduced for long-term recipients giving up last-resort financial assistance after March 31, 2008.
  • Certain measures for workers will be annually indexed as of January 1, 2009: the $1,000 deduction for workers, the $1,000 exemption for emergency services volunteers and the $500 refundable tax credit for holders of a taxi driver’s or owner’s permit.
  • The stock option deduction granted to employees of innovative SMEs carrying out innovative activities will be enhanced from 25% to 50% provided certain conditions are met. The corporation must carry on business and have an establishment in Quebec, the amount of its assets must be less than $50 million and it must have been granted an amount as a refundable R&D tax credit for its taxation year ended in the given year or for one of the three previous taxation years. The increase in the rate will apply to any event relating to a stock option granted by a corporation that agrees, after March 13, 2008, to sell or issue a share.
  • The requirement for commission employees to be away from the local municipal territory of the metropolitan area for not less than 12 hours to claim meal expenses will no longer apply after March 13, 2008.
  • Contributions to the U.S. social security system (e.g. Federal Insurance Contributions Act (FICA) contributions, including Social security and Medicare) will be eligible for the purposes of calculating the foreign tax credit. The modification will apply retroactively as of the 2004 taxation year.
  • The family income brackets to determine the refundable tax credit for child care expenses will be enhanced. As of 2009, the minimum credit rate of 26% will be applicable to family income above $100,550 (currently $85,535).
  • The rate applicable to the refundable tax credits for infertility treatment and adoption expenses will be enhanced from 30% to 50% of eligible expenses up to $20,000, as of the 2008 taxation year.

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Other measures

  • To improve the measures to combat tobacco smuggling, changes will be made to the tobacco tax system to prevent a holder of a manufacturer’s permit from carrying out, for a person who does not hold the required permit, a manufacturing, production, mixing, preparation or packaging service for tobacco intended for sale. A change will also be made to prohibit purchasing or taking delivery of raw tobacco from a person who does not hold the required permits.
  • The Act respecting the ministère du Revenu (AMR) will be amended to give the auditors and inspectors of Revenu Québec, as well as to the investigators in the course of a search, the power to use the computer hardware of the person in the course of exercising such powers.
  • To standardize the powers of seizure relating to all fiscal laws, the AMR will be amended to extend the power of seizure currently stipulated to any thing that is or was used to commit an offence against a fiscal law.

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Harmonization with announced federal measures

  • Quebec’s tax legislation and regulations will be amended to incorporate some of the measures announced in the federal budget, presented on February 26, 2008, including:
    • Implementation of tax-free savings accounts
    • Time limits applicable to registered education savings plans
    • Educational assistance payments from registered education savings plans
    • Adjustments to the gross-up rates applicable to eligible dividends
    • Gifts of publicly-traded securities to registered charities
    • Disposition of taxable Canadian property
    • Amendments to the capital cost allowance applicable to certain types of assets
    • Measures relating to excess corporate holdings by private foundations
  • Some measures have not been retained because Quebec’s tax system has no corresponding provisions or is satisfactory in their regard, including:
    • Measures relating to the scientific research and experimental development – However, an amendment comparable to one of the federal amendments will be made (the limit on R&D spending that gives rise to the grossed-up rate of 37.5% will be raised to $3 million)
    • Adjustments to the rate of the tax credit applicable to eligible dividends
    • The provincial component of specified investment flow-through trusts (SIFTs) – The Minister of Finance has already announced that Quebec’s legislation will be harmonized concerning the introduction of a tax regime relating to SIFTs, while specifying that it will be a separate tax regime. Quebec’s rule will apply as of the 2007 taxation year.
  • Quebec’s sales tax system will be amended to incorporate, subject to specific Quebec features, the federal measures concerning health, long-term residential care facilities and property leases for wind and solar power equipment.

For further details, we refer you to the  Québec Finance website, where you can access the official budget documents without charge.

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