Introduction

In his second budget Quebec's Minister of Finance, Mr. Raymond Bachand reiterated the government's goal of returning to a balanced budget during the 2013-2014 fiscal year in order to face the challenges which lie ahead for Quebec. To ensure Quebec's development, the budget allocates $171,000,000 to new initiatives in 2011-2012, $215,000,000 in 2012-2013 and $335,000,000 in 2013-2014.

The principal initiatives in the budget are:

• to continue the implementation of the Northern Plan with a view to optimizing the yield on natural resources;
• to increase university funding and encourage experienced workers to remain in the labour market;
• to develop export markets and encourage entrepreneurship and support business succession;
• to promote Quebec cultural industry on the world stage and support the digital shift in the cultural industry.

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Measures concerning individuals

Individual tax rates

There will be no changes with respect to the tax rates for individuals.

Tax credit for experienced workers

To encourage experienced workers to stay in or return to the labour market, the Quebec government will establish a tax credit of approximately 15% for individuals over 65 beginning in the 2012 taxation year. The tax credit applies to eligible work income (salaries, business income) in excess of $5,000 a year to a maximum of:

• $3,000 in 2012;
• $4,000 in 2013;
• $5,000 in 2014;
• $8,000 in 2015;
• $10,000 for years after 2015.

The unused portion of the tax credit cannot be applied to another year nor transferred to a spouse.

An individual who expects to earn an eligible amount in excess of $5,000 in a given year can request that his employer reduce the tax deducted at source on the remuneration to be paid during the year in order to take into account the credit.

Greater access to the credit for informal caregivers

Currently, an informal caregiver can claim a refundable tax credit for each eligible relative they house in a dwelling owned or leased by the caregiver or their spouse. The credit is limited to $1,075.

Beginning in 2011, two (2) new categories of informal caregivers will be eligible for the credit:

• an informal caregiver who lives with an eligible relative who is incapable of living alone as a result of a severe and prolonged mental or physical impairment in a dwelling owned or leased by the eligible relative or his/her spouse; and
• an informal caregiver who lives with and takes care of a spouse aged 70 years or more, where the spouse suffers from a severe and prolonged mental or physical impairment which makes the spouse incapable of living alone.

Replacement of the tax credit concerning the acquisition of a green vehicle

The current refundable tax credit which can reach $8,000 will be replaced by a rebate available when the taxpayer purchases or leases an electric vehicle beginning January 1st, 2012. The program will apply to rechargeable hybrid electric vehicles and on vehicles which are entirely electric and capable of travelling on public roads where the speed limit exceeds 50 kilometres per hour. The rebate will vary between $5,000 and $8,000, depending on the battery capacity calculated in kilowatt hours. In order to encourage taxpayers not to wait until 2012 before buying a vehicle, the tax credit for vehicles using less than 2.99 litres of gasoline per 100 kilometres will be increased from $3,000 to $7,769.

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Measures related to business

Corporate tax rates

There will be no change with respect to the tax rates for corporations.

Introduction of a refundable tax credit for the production of cellulosic ethanol and changes to the existing credit for the production of ethanol

In order to promote the production of ethanol, a new refundable tax credit applicable to the production of cellulosic ethanol will be established beginning on the day following the budget speech. This credit can reach as much as 15¢ per litre of eligible cellulosic ethanol produced and will be granted when an eligible producer produces cellulosic ethanol before April 1st, 2018.

In order to obtain such a credit, the following rules apply:

• An eligible corporation is a corporation other than an exempt corporation or a crown corporation (or one of its subsidiaries) which carries on the business of producing cellulosic ethanol from an establishment in Quebec.
• The ethanol must have been produced in Quebec from eligible materials using a thermochemical process not including a fermentation procedure and must be sold as fuel.
• To be eligible "cellulosic ethanol" for the purposes of the tax credit, reference is made to the number of litres of ethanol that a corporation produces in Quebec and the quantity of ethanol sold in Quebec by an agent-collector under licence.
• A monthly production ceiling with respect to eligible ethanol will be applied and will correspond to the daily production of 109,589 litres multiplied by the number of days in each month. This ceiling must be shared among associated corporations. Corporations which are not associated will be permitted to share their production infrastructures.
• Manufacturing and processing equipment used in the production of cellulosic ethanol will not be eligible for the investment tax credit on manufacturing and processing equipment.

In light of the establishment of a new refundable tax credit for the production of cellulosic ethanol, changes will be made to the rules concerning the existing investment tax credit in order to simplify administration. These changes are described below and will apply from the date of the budget.

• The definition of the expression "eligible production of ethanol" will be changed in order to mean, with respect to an eligible corporation, the number of litres of ethanol that are produced by the corporation in Quebec and sold in Quebec, during the period, to a holder of an agent-collector licence and intended for sale in Quebec.
• The annual ethanol production ceiling will be eliminated and replaced by a monthly ceiling corresponding to daily production of 345,205 litres, multiplied by the number of days in a given month.
• Associated corporations will be able to share the monthly production ceiling among them and the rule concerning the ceiling of 1.2 billion litres will be eliminated.
• The rules concerning group production units which apply to this new credit will also apply for the existing refundable tax credit for ethanol.
• Cellulosic ethanol is expressly excluded from the definition of eligible ethanol for the purposes of computing the existing refundable tax credit.
• Manufacturing and processing equipment used in the production of ethanol will not be eligible for the investment tax credit on manufacturing and production equipment.

The refundable tax credit will not be reduced by the amount of assistance received for tax credit for cellulosic ethanol.

Changes to the refundable tax credit for book publishing

Since the year 2000, a refundable tax credit for book publishing has existed. The budget will expand this credit to include expenses incurred in order to publish an electronic or eligible digital version of an eligible book. The credit will be calculated where at least 75% of the costs incurred in the publication of the digital version of the book are paid to individuals residing in Quebec or corporations having an establishment in Quebec. A favourable advance ruling from the SODEC must be obtained in order to insure that the credit is paid. There will be an expansion of the definition of labour attributable to the preparation costs relating to the book so that it includes labour expenses attributable to the digital version.

Changes to the refundable tax credit for eligible sound recordings

The refundable tax credit for eligible sound recordings will be changed to remove the requirement that the recording be on a physical medium. In addition, the notion of retail business for commercial exploitation will be expanded.

Measures to encourage entrepreneurship and business succession

The issue of business succession has attracted the attention of the government because a large number of business owners will likely retire in the coming years. The Minister of Economic Development, Innovation and Export anticipates that approximately 55,000 entrepreneurs will retire between now and 2018.

Business succession should be the subject of a well planned and coordinated process designed to increase the likelihood of success not only for the departing owner but also for those who are taking over the business.

To ensure that Quebecers can plan business succession in a favourable environment, the budget includes the following initiatives:

• $80 million for the creation of new businesses and to assist new entrepreneurs;
• $20 million to develop an entrepreneurial culture;
• $210 million to insure entrepreneurial succession;
• $11 million to support tourism businesses;
• a fund of $30 million for start-up businesses in a technology sector called Capital Anges Québec.

Capital Anges Québec funds

An "Angel investor" is an entrepreneur who makes a private investment in a business which is generally in a start up phase.

To encourage these investors to be involved in the early steps of the development of technology businesses in Quebec, the budgets sets out the creation of the fund Capital Anges Québec. The fund would be a limited partnership and the government would contribute up to 20 million dollars to its initial capitalization. Investissements Quebec would administer the fund.

Investments of an amount of 10 million dollars from entrepreneurs would be matched by investments by the fund. As a result, the total amount available for businesses will be 30 million dollars.

Over the next twelve (12) years, Capital Anges Québec would have the mandate to invest in Quebec businesses which are in the information technology and industrial technology sectors at the earliest stages of their development.

Entrepreneurial succession – Relève Québec Fund

In order to facilitate the transfer of businesses, the budget lays out plans for the creation of the Relève Québec Fund which will be capitalized with an injection of $50 million. The government will contribute $20 million to the capitalization of the funds and the balance will come from the Fonds de Solidarité du Québec as to $10 million, the Fonds d'action as to another $10 million and the final $10 million from the Capital regional et cooperative Desjardins.

Fonds Relève Québec will be structured as a limited partnership and managed by Investissements Québec.

Over the next twelve (12) years, Fonds Relève Québec will offer loans at preferential rates upon business succession in order to finance in part the contribution of funds by the new owners. These loans will have advantageous conditions such as a moratorium on the reimbursement of capital.

In order to access the fund, the business buyer must invest a minimum of $50,000. In addition, the corporation being transferred must have the participation of at least one of the tax advantage funds as an unsecured lender or investor. Loans by Relève Québec will range between $50,000 and $200,000. Where more than one buyer combines to acquire a business, the maximum loan can be increased to $500,000. It is expected that Relève Québec will finance between 330 and 500 projects.

Additional capitalization of local investment funds to foster entrepreneurial succession

In order to increase the availability of capital dedicated to the financing of new entrepreneurs, notably in the regions, an additional $3 million will be allocated in 2011-2012 to the Minister of Economic Development, Innovation and Export. The budget for local investment funds will be increased by $10 million for the most successful local developments centers.

Increasing the capitalization of Capital regional et cooperative Desjardins from $1 billion to $1.24 billion

To allow the CRCD to continue its financing activities with small medium size businesses, the Budget will increase its capitalization from $1 billion to 1.24 billion,

$5 million funds to support the growth of tourism businesses

The budget provides for the creation of an investment fund capitalized with $5 million for the support of tourism businesses. $1.7 million will come from the government and the balance from Filaction.

Over the past few years, a number of projects have received the support of the Department of Tourism in the context of regional partnership agreements. To foster the tourism efforts associated with these agreements, the Budget increases their allocation by $3 million.

Development of Quebec Exports

A new entity called Exportation Québec will be established under the auspices of the Department of Economic Development, Innovation and Export ("DEDIE"). It will be entirely devoted to supporting exports. The mandate of Exportation Québec will include the following elements:

• to provide consulting services to assist businesses with their export strategies;
• to develop an exporter support network abroad to which a team of Quebec consultants will be attached with a view to supporting exporters in commercializing and selling their products;
• to consolidate partnerships and cooperation initiatives by formulating a common market development strategy and assisting companies abroad;
• to promote Quebec and its exporters abroad as well as the opportunities provided by exports among Quebec entrepreneurs.

The budget also provides for the establishment of a Programme d'Exportation which will allow a number of the initiatives to be combined with a view to improving the support given to Quebec exporters.

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Measures relating to sales tax

Increase in the Tobacco Tax

In order to take into account the increase in the TVQ, Tobacco Taxes will be increased from 2012 in the following manner:

• the specific tax rate per cigarette of 10.6¢ will be increased to 10.9¢;
• the specific tax rate per gram of bulk tobacco or leaf tobacco will be increased from 10.6¢ to 10.9¢;
• the specific tax rate of 16.31¢ per gram which applies to all other tobacco will be increased to 16.77¢ per gram.

Implementation of a new mechanism to manage the tax exemption of Indians regarding fuel tax

Under the Budget, a new mechanism pursuant to which Indians and bands will be able to buy fuel retail on a reserve without paying taxes will be established.

To take advantage of the mechanism, Indians and bands must:

• present to the retailer, a program registration card obtained from Revenu Quebec;
• sign a register kept by the retailer in prescribed form; and
• show the retailer their certificate of Indian status issued by the Department of Indian and Northern Affairs.

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Other budget measures

Régime de rentes du Québec

The rate of assessment for the Régime de rentes du Québec will be increased by 0.15% per year over the next six (6) yeas beginning January 1^st, 2012. The present rate of 9.9% (divided equally between the employer and the employee) will be increased as follows:

• 2012: 10.05%
• 2013: 10.20%
• 2014: 10.35%
• 2015: 10.50%
• 2016: 10.65%
• 2017: 10.89%

As a result, for an employee earning employment income of $40,000 in 2012, this increase will represent an additional weekly amount of 50¢.

To encourage experienced workers to remain in the labour market, the monthly increase of 0.5% currently available on pension payments requested after the age of 65 will be increased to 0.7% starting January 1^st, 2013. In the same vein, the monthly reduction of pension payments where requested before the age of 65 will gradually be changed from 0.5% to 0.6% over three (3) years beginning January 1^st, 2014,

Financing plan for Quebec universities

During the budget speech, the government explained its plan for financing universities over the next six (6) years.

The plan will see universities receiving an additional $850 million annually in 2016-2017.

More than half of the additional revenue, namely $430 million, will come from the government.

Tuition fees will be increased by $325 per year beginning in the fall of 2012 and for the following five (5) years.

Countering tax evasion and unreported work

The government of Quebec has made a priority of combating tax evasion and work under the table.

To this end, the government announces a number of new initiatives:

• the establishment of the Quebec Revenu Agency which will adopt a cost/benefit approach;
• intensification of measures to combat unreported work in the construction industry;
• targeting of measures against organized networks of unreported work;
• concerted efforts to discourage the illegal supply of childcare services;
• broadened efforts to combat tobacco smuggling, especially in neighbourhood smuggling networks;
• increased resources for the AMF to combat economic and financial crime.

It is expected that the Quebec Revenu Agency will have an additional 1,085 employees between now and 2014.

A specialized team dealing with aggressive tax planning has resulted in the recovery of approximately 99.1 million dollars as of January 31^st, 2011. The two (2) principal strategies of aggressive tax planning are the use of different year-ends and the manipulation of the rules concerning the proportion of business done in Quebec.

In the construction sector, the budget proposes to extend the requirement to obtain a compliance certificate for public sector contracts beyond suppliers but also to their subcontractors. This certificate confirms that the business has filed all returns required under Quebec fiscal laws and has no outstanding accounts due to Revenu Quebec.

In order to further discourage under the table work on construction sites, the government will increase administrative and penal sanctions.

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Tax Group

For further information, do not hesitate to contact one of the lawyers in our Tax group.

Montréal :

Barbacki, Richard;
Braman, Fred;
Fontaine, Richard;
Gaudreault-Martel, Julie;
Leduc, Bertrand;
Marchand, Nathalie;
Ménard, Geneviève;
Rodgers, Aaron;
Royal, Normand

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