Quebec Budget: Act Two - Highlights of Certain Measures Concerning Businesses

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On May 24, 2007, Monique Jérôme-Forget, Québec Minister of Finance, introduced the 2007/2008 budget of the government of Québec. It is the second budget introduced in slightly more than three months by the Québec government. Québec provincial elections took place last March 26th without the first budget, delivered on February 20, 2007, having been approved. Approval of this second budget in the Québec National Assembly on June 1, 2007 is not assured, as the Liberal government of Québec is in a minority position.

This bulletin summarizes some of the principal tax measures concerning businesses.

ELIMINATION OF THE TAX ON CAPITAL

In order to keep Québec’s tax system competitive, this budget proposes the elimination of the tax on capital as of January 1, 2011. It also proposes a reduction of the tax on capital rate until it is eliminated from January 1, 2011.

The following chart depicts the proposed rates of tax on capital until January 1, 2011:

* If a corporation’s taxation year does not coincide with the calendar year, the rate effectively applicable for such taxation year that straddles two calendar years will be a weighted rate reflecting the number of days of the taxation year included in each of the two calendar years.

The budget also proposes to make technical changes to the capital tax system prior to its elimination. The technical changes proposed are in respect of (i) the presentation of non-consolidated financial statements for the purposes of the tax on capital; (ii) the presentation in financial statements of an interest in a partnership using the equity method or the cost method; and (iii) precisions concerning securities issued by a government and the notion of “bond” for the purposes of the reduction of paid-up capital.

MEASURES ANNOUNCED IN THE FEBRUARY 20, 2007 QUÉBEC BUDGET

The Québec budget of May 24, 2007 restated essentially all of the measures concerning businesses announced in the February 20, 2007 budget. Except for the extension and the improvement of the capital tax credit, which will cease being effective earlier as a result of the proposed elimination of the tax on capital, all the other measures announced in the February 20, 2007 budget concerning businesses are renewed and apply in accordance with the same terms and conditions and on the same dates as those stipulated at that time. For further information in respect of the business related measures announced in the Québec budget on February 20, 2007, we invite you to consult our February 2007 Blakes Bulletin on Tax.

HARMONIZATION WITH FEDERAL LEGISLATION

March 19, 2007 Federal Budget

The Québec budget announced that Québec’s tax legislation and regulations will be amended to incorporate, with appropriate adaptations, certain federal measures contained in the March 19, 2007 federal budget, including, the:

• increase of the lifetime capital gains exemption for qualified small business corporation shares from CAD 500,000 to CAD 750,000;
  
  
• restrictions on interest deduction in respect of borrowings to finance investments in foreign affiliates (as modified significantly by the News Release 2007-041 of the Department of Finance (Canada), May 14, 2007);
  
  
• updating of the concept of “prescribed stock exchange”; and
  
  
• amendments pertaining to capital cost allowance applicable to certain assets, particularly to the manufacturing and processing industry.

All of these measures will be adopted only after the approval of any federal law and/or regulation giving effect to them. The measures will apply as of the same dates as they will for the purposes of the federal tax system.

For more information on the measures announced by the federal government, we invite you to read our March 20, 2007 Blakes Bulletin on Tax in respect of the last federal budget and our May 15, 2007 Blakes Bulletin on Tax in respect of the Department of Finance (Canada) release of May 14, 2007.

Certain Measures Already Announced by the Federal Department of Finance

The Québec budget also announced the harmonization of the Québec legislation with certain measures previously announced by the Minister of Finance of Canada and restated in the federal budget of March 2007, particularly:

• allowing corporations to produce a tax return in a functional currency other than Canadian dollar; and
  
  
• the measures announced on December 28, 2006 to improve the taxation of financial institutions and ensuring better coherence of the tax rules with the accounting standards that came into force on October 1, 2006.

These measures will be adopted only after the approval of any federal law and/or regulation giving effect to them. The measures will apply as of the same dates as they will for the purposes of the federal tax system.

For further information, please contact:

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