Canada: Quebec Budget – Highlights of the Measures Concerning Businesses

This article was originally published in Blakes Bulletin on Cross-Border Tax - May 2005

On Thursday, April 21, 2005, the Government of Québec tabled its budget for 2005-2006. This budget contains several measures directly affecting the tax system applicable to businesses carried on in Québec. In this regard, we have outlined hereinafter some of the main considerations of the measures concerning businesses.

Gradual reduction in the rate of the tax on capital to 2009.

The rate of the tax on capital for both financial institutions and non-financial corporations will gradually be reduced by more than half over the next four years. The reductions will be granted as of January 1st of each year from 2006 to 2009.

Introduction of a credit regarding certain types of investments. Until these reductions take complete effect, the government has proposed a temporary capital tax credit applicable until 2008 for non-financial corporations that make an investment in eligible manufacturing and processing equipment. The non-refundable tax credit is equal to 5% of the amount of the eligible investment acquired in the year by the corporation, up to the tax on capital otherwise payable by it.

The eligible investments in manufacturing and processing equipment will only cover new assets that the corporation acquired after the date of the budget but before January 1st, 2008, and which will begin to be used within a reasonable time during a period of at least 730 days, solely in Québec and mainly in the course of carrying on a business.

Change in the calculation of total assets. The tax legislation will be amended to stipulate that a non-financial corporation must neither include nor deduct an amount shown in its financial statements resulting from an operation between it and a partnership or a joint venture of which it is a member. This is mainly to correct an inappropriate result from the rules currently applicable.

Application of the minimum 120-day holding period rule to bonds issued by partnerships. For taxation years ending after April 21, 2005, the government intends to extend the minimum 120-day holding period rule for the purposes of the reduction in paid-up capital to bonds issued by partnerships. Accordingly, in order for shares, bonds, loans and advances, bankers’ acceptances and other similar securities, as well as certain amounts receivable from another corporation to be able to be applied to the reduction of the paid-up capital of a non-financial corporation, that corporation will have had to have held them for a minimum 120-day holding period, including the end of the taxation year.

Rate raised for large corporations. The corporate tax rate for active income on large corporations will gradually be raised by three percentage points over the next four years. The increase will take effect as of January 1st of each year from 2006 to 2009.

Rate lowered for small corporations. To offset the increase in taxation for large corporations, a small business deduction will be introduced to reduce the tax burden on smaller corporations. This deduction will be available to a corporation that is a Canadian-controlled private corporation (CCPC), and will be limited to the first C$400,000 of active annual income from an eligible business carried on by a CCPC.

The reduction will gradually be phased out for eligible corporations with a paid-up capital (including that of associated corporations) of greater than C$10 million, to disappear completely for corporations with a paid-up capital of greater than C$15 million.

The rate at which the first C$400,000 (or less, depending on the size of the corporation and on the split between associated corporations) of active income will be taxed is 8.5% starting in 2006.

Increase in the level of tax assistance for R&D granted to SMEs. The refundable tax credits for research and development (R&D) carried out in the province of Québec have been increased for some corporations. This credit only applies to a Canadian-controlled corporation that qualifies as an SME (i.e., having assets – including those of associated corporations – of less than C$50 million) and varies depending on the total assets of the corporation – including those of associated corporations). In addition, the tax credit only applies to the first C$2 million invested in R&D and only applies to R&D spending undertaken after the date of the budget and for work subsequent to that date. Subject to the total asset base of the corporation (i.e., if below C$25 million or between C$25 to C$50 million), the rate will increase from 17.5% - 35% to 17.5% - 37.5%. The refundable income tax credit rate applicable to corporations other than Canadian-controlled corporations will remain at 17.5%.

Requirement to carry on a business in Québec and have an establishment. Whereas previously, in order to be eligible for the refundable R&D tax credits, it was sufficient to carry on a business in Canada and to do, or have done on your behalf, R&D work in Québec, the tax legislation will be amended so that, in order to be eligible for the refundable tax credit, a person or a partnership will be required to carry on a business in Québec and to have an establishment there. Subject to some exceptions, this change will apply to taxation years that begin after April 21, 2005.

The government budget calls for a refundable tax credit for corporations engaged in the production of ethanol in Québec.

In order to be eligible for the credit, the eligible corporation must have an establishment in the province of Québec where it produces ethanol. This tax credit is available for an eligible corporation for no more than 10 years, beginning after April 1st, 2006 and ending no later than March 31, 2018.

In very general terms, the tax credit is calculated on a monthly basis pursuant to a mathematical formula based on the monthly production of ethanol expressed in litres and a rate depending on the average monthly price of crude oil. The maximum tax credit will be C$0.185 per litre produced. No tax credit will be available for any months where the average price of crude oil exceeds US$65.

Moreover, the credit is subject to a yearly maximum of 126 million litres of ethanol, and a global maximum of 1.2 billion litres of ethanol. There is also a monetary cap on the tax credit, calculated globally, equivalent to the total nominal capacity of the ethanol plant – without exceeding 1.2 billion litres – multiplied by C$0.152.

The government presented a refundable tax credit for major employment-generating projects. However, eligibility is restricted to corporations having an establishment in Québec and carrying on a business with activities in the information technology sector.

This tax credit will be equal to 25% of eligible salaries incurred beginning January 1st, 2005 and disbursed to employees engaged in activities carried out under an eligible contract – without exceeding a credit of C$15,000 per eligible employee per year, to a maximum of 2,000 employees by group of associated corporations. Salaries paid to December 31, 2016 will be eligible for the tax credit. Among other things, the corporation will have to create more than 500 jobs in a period of 24 months counting from the signature of the eligible contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.