TAXATION IN QUÉBEC 2003

Transcription

1 TAXATION IN QUÉBEC 2003

2 TAXATION IN QUÉBEC 2003

3 Published by the Vice-présidence Stratégies, marketing et communications Updated by PricewaterhouseCoopers, in collaboration with the Direction des stratégies et du marketing of Investissement Québec Design: TGV Publicité design Cette publication est également disponible en français. Legal deposit: 3 rd quarter 2003 Bibliothèque nationale du Québec ISBN: Gouvernement du Québec, 2003 This document may be reproduced in whole or in part provided the source is mentioned. For further information, please contact: Investissement Québec 393, rue St-Jacques Ouest, 5e étage Montréal (Québec) H2Y 1N9 Canada Telephone: Fax: (514) infoiq@invest-quebec.com PricewaterhouseCoopers LLP 1250, boul. René-Lévesque Ouest Bureau 2800 Montréal, (Québec) H3B 2G4 Canada Telephone: (514) Fax: (514) Québec city office of PWC: 900, boul. René-Lévesque Est Québec (Québec) G1R 2B5 Telephone: (418) Fax: (418) Taxation in Québec 2003

4 TABLE OF CONTENTS NOTICE TO READER... 5 TAXATION... 6 CARRYING ON BUSINESS... 6 NON-RESIDENT TAX... 6 INVESTMENT CANADA ACT... 7 COMPETITIVENESS OF QUÉBEC S TAX STRUCTURE... 8 FINANCIAL PRODUCTS OFFERED BY INVESTISSEMENT QUÉBEC... 8 THE TAXATION OF CORPORATIONS... 9 CALCULATION OF TAXABLE INCOME... 9 CAPITAL GAINS... 9 THIN CAPITALIZATION... 9 DEPRECIATION... 9 INCOME TAX PAYROLL TAXES AND OTHER EMPLOYER OBLIGATIONS TAX ON CAPITAL COMMODITY TAXES The Goods and Services Tax (GST) Québec Sales Tax (QST) CUSTOMS DUTIES AND EXCISE TAX MUNICIPAL AND SCHOOL TAXES ELIGIBILITY OF CORPORATIONS FOR TAX INCENTIVES AND OTHER GENERAL CONSIDERATIONS CANADIAN-CONTROLLED PRIVATE CORPORATIONS ASSOCIATED CORPORATIONS ELIGIBLE CORPORATIONS CUMULATION OF TAX CREDITS AND OTHER ASSISTANCE RECEIVED ELIGIBILITY CERTIFICATES OR ATTESTATIONS TAX HOLIDAY FOR NEW CORPORATIONS RESEARCH AND DEVELOPMENT AND OTHER TAX INCENTIVES CONCERNING THE NEW ECONOMY RESEARCH AND DEVELOPMENT Summary of General Rules SR&ED Tax Credits NEW ECONOMY TAX INCENTIVES Tax Incentives for Corporations Carrying Out an Innovative Project within a Biotechnology Development Centre (BDC).. 21 Tax Incentives for Researchers, Experts, Professors and Foreign Specialists Multimedia Titles Technological Adaptation Services OTHER TAX CREDITS AND INCENTIVES FOR CORPORATIONS TAX INCENTIVES CONCERNING THE CULTURAL INDUSTRY Québec Film and Television Productions Film and Television Productions Services Special Effects or Computer Animation Taxation in Québec

5 Dubbing Activities Production of Sound Recordings Production of Performances Book Publishing TAX INCENTIVES TO ASSIST FINANCIAL ACTIVITIES IN QUÉBEC Support for the Development of Securities Stock Exchanges and Securities Clearing-Houses in Montréal International Financial Centres Participation of investment dealers in the Nasdaq Stock Market TAX INCENTIVES TO ASSIST IN THE DEVELOPMENT OF CERTAIN AREAS OR DESIGNATED SITES Aluminum Valley Remote resource Areas Gaspé Peninsula and certain Québec Maritime areas Exploration or Renewable Energy and Energy Conservation Expenditures OTHER SECTORS Design Shipbuilding Maintenance of Racehorses ON-THE-JOB TRAINING PERIODS PERSONAL TAXATION INCOME TAX SIMPLIFIED QUÉBEC TAX SYSTEM REGISTERED RETIREMENT SAVINGS PLAN STOCK OPTION PLANS CAPITAL GAINS EXEMPTION SMALL BUSINESS INVESTMENT CAPITAL GAINS ROLLOVER FOR INDIVIDUALS ALTERNATIVE MINIMUM TAX ATTRACTIVE COST OF LIVING APPENDIX NET COST OF A $100 ELIGIBLE SR&ED EXPENDITURE INCURRED IN QUÉBEC NET COST OF A $100 ELIGIBLE SR&ED EXPENDITURE INCURRED IN ONTARIO COMPARISON OF INCOME TAX Large Corporation with Active Business Income Non-manufacturing Activities GLOSSARY Taxation in Québec 2003

6 NOTICE TO READER The Québec budget, presented on June 12, 2003, brought several major amendments to the tax measures in existence before that date. This brochure presents the tax measures in their amended form as per this last budget, for expenditures incurred after that date. As a general rule, an admissible corporation that obtained the required eligibility certificates or attestations before June 12, 2003, or that has incurred eligible expenditures before that date may benefit from transitional measures under certain conditions. For more details on the tax measures in force before that date, please refer to the Taxation in Québec 2002 brochure. Unless stated otherwise, all amounts in this document are in Canadian dollars. Taxation in Québec

7 TAXATION Québec administers and collects its own corporate and personal income taxes under the Québec Taxation Act. While the Canadian Income Tax Act and the Québec Taxation Act are separate laws, the Québec Act is virtually identical to the federal Act with respect to the computation of taxable income for corporations and individuals. Low tax rates on corporate profits and favourable investment tax incentives make the Québec tax system highly competitive, compared with those of neighbouring Canadian and American jurisdictions. Carrying on Business A foreign investor can carry on business in Québec in the same manner as a Québec entrepreneur, i.e. as a sole proprietor, as a partner in a partnership or as a shareholder of a corporation. Foreign investors who wish to carry on business in Québec normally establish a corporation that bears a limited liability. The corporation is a legal entity distinct from its shareholders; it can be incorporated under the Canada Business Corporations Act or the Québec Companies Act. Such a corporation is taxed on its income from all sources. Non-Resident Tax A foreign investor may also carry on business directly in Québec by establishing a branch. A company that is incorporated in another jurisdiction has only to comply with the provincial registration requirements. The Canadian government levies a 25% branch tax on profits earned in Canadian branches. This rate may be less if a bilateral tax convention is in force between Canada and the country of residence of the investor. For example, the tax convention between Canada and the United States reduces this rate to 5%. Furthermore, this convention also exempts from this branch tax the first $500,000 of profits earned in Canada. This tax rate is generally applied on the federal taxable income less all taxes payable to Canada and less an investment allowance. The branch tax is an additional tax over and above the taxes levied on corporations as described in the following section. In addition, certain payments made to non-residents such as dividends, interest, royalties, management or administration fees, are subject to a federal withholding tax. The prescribed rate is 25% but it may be less if a bilateral tax convention exists between Canada and the country of residence of the beneficiary. Depending on the type of payment, the withholding tax rate ranges from 0% to 15%. Moreover, in its international tax negotiations, the Canadian government is prepared to reduce down to 5% the withholding tax rate on direct dividends paid to foreign corporations, provided the measure is reciprocal. For example, the third protocol between Canada and the United States reduces the withholding tax rate on direct dividends to 5% if the beneficial owner is a corporation that owns at least 10% of the voting rights. Whatever the form of investment used to carry on business in Québec, both the federal and Québec taxation systems allow credits and deductions for foreign taxes paid in order to avoid double taxation. 6 Taxation in Québec 2003

8 Investment Canada Act The objective of the Investment Canada Act is to encourage investment in Canada by Canadians and non- Canadians in order to contribute to economic growth and employment opportunities. Under this Act, all new business creations and business acquisitions by foreign investors must be declared by filing a notice within 30 days. The following table describes the type of acquisitions that necessitate a preliminary review by federal representatives: Direct Investment 1 Indirect Investment 2 Less than $5 million Between $5 million and less than $223 million $223 million and more Less than $50 million $50 million and more Notice Review Notice Review Notice Review Notice Review Notice Review Investor yes no yes no 4 yes yes yes no yes no WTO 3 Investor non-wto Member yes no yes yes yes yes yes no yes yes 1 A direct investment includes the acquisition of the voting shares of a Canadian corporation, or the acquisition of all, or almost all, of the business assets of a Canadian business. The rules provided for direct acquisitions also apply for an indirect investment, if the value of the assets of the business located in Canada represents more than 50% of the total value of the business assets. 2 An indirect investment refers to the acquisition of a voting interest in a unit, controlling directly or indirectly another corporation carrying on a Canadian business. These rules apply only for those indirect investments for which the value of the assets of the business located in Canada represents less than 50% of the total value of the business assets. 3 The non-canadian investor or the non-canadian vendor is ultimately controlled by a resident of a country that is a member of the World Trade Organization (WTO). 4 A review is required for any investment of more than $5 million in the following sectors: financial services, transportation, uranium and cultural businesses. Taxation in Québec

9 Competitiveness of Québec s Tax Structure Corporations that have an establishment in Québec are subject to a general tax rate of 9.04% until March 14, 2003 (this rate reflects the base 8.9% rate adjusted by the 1.6% Youth Fund contribution). As of March 15, 2003, the general tax rate is 8.9% because the Youth Fund contribution ceased to apply 1. Numerous corporations may also benefit from one of the tax holidays outlined in this document and be completely tax-exempt for a specified period of time. The Québec tax regime offers very compelling incentives to businesses in several sectors of activity, such as research and development, the knowledge-based economy sector, the financial sector and the cultural industry. Other incentives are available to businesses operating in certain designated areas of Québec. Furthermore, the Québec taxation system enables corporations to draw high-skilled workers into Québec. Foreign specialists, researchers and, teachers may, under certain conditions, enjoy a partial five-year tax holiday. The Québec and federal tax regimes also offer incentives for stock option plan subscribers. Financial Products Offered by Investissement Québec Investissement Québec offers various financial products, such as loans and loan guarantees. For more information on these products, please visit the website of Investissement Québec at the following address: 1 For more information regarding the applicable corporate tax rates, see Tax Rates on page Taxation in Québec 2003

10 THE TAXATION OF CORPORATIONS Calculation of Taxable Income The taxable income of a corporation is based on its net earnings as reported in the financial statements and determined according to generally accepted accounting principles in Canada. Certain items are then deducted or added to the amount of earnings as required by the federal or Québec income tax acts. These items are essentially the same for federal and Québec purposes. The main items of reconciliation of accounting and taxable income are discussed below. Capital Gains Fifty percent of capital gains realized are included in income and subject to tax at the normal rates. Fifty percent of the capital losses may be deducted from taxable capital gains of the year. Net capital losses may be carried forward indefinitely or carried back three years, but may only be deducted from taxable capital gains 2. Thin Capitalization Interest paid by a corporation on debt owed to certain non-resident shareholders is not deductible in the computation of its taxable income if the interest-bearing debt owed to these non-resident shareholders exceeds twice the amount of their capital contribution in the form of shares and retained earnings of the corporation. Depreciation Tax depreciation is optional and usually more generous than the one used for accounting purposes. Generally, depreciation for tax purposes can commence at the earlier of the time the depreciable property is available for use for the purpose of earning income, or 24 months after the property is acquired. Moreover, depreciation in the year of acquisition is generally limited to one-half of the normal deduction (half-year rule). 2 The same rates apply to the disposition of eligible capital property, such as goodwill. Taxation in Québec

11 The table below lists the most common depreciation rates used in the federal, Québec and United States tax regimes for the 2003 taxation year. TYPE OF ASSET Federal and Québec System American System 11,12 (% of declining balance) (recovery period in years) Buildings and other structures Automobiles, trucks, tractors, lift trucks 30 3 or 5 3, 9 Passenger vehicles costing over $30,000 (before GST/QST) Trailers and heavy trucks used for freight transport Small tools and application software , 5 or 153, 5, 10 Computers and system software , 5 or 153, 10 Manufacturing tools and machinery 30 3, 5, 7, 10,15, 20 3, 6 Patents (with limited or unlimited term) Licences or permits (with limited term) Straight-line Licences or permits (with unlimited term) Application software usually refers to software that instructs the computer to carry out specific applications related to managing and processing data. System software refers to the general operating system that enables application software to be run and directs and coordinates the different operations of the computer. Computer software includes a license to use computer software. 2 Straight-line depreciation. 3 The depreciation rates vary from year to year. Assets having a recovery period of 3, 5, 7 and 10 years are depreciated on a declining balance basis with a transition to the straight-line method. 4 The depreciation rate is multiplied by the percentage of business use. Depreciation deduction is subject to specific dollar amount limits. 5 Small tools are included with manufacturing tools. 6 Depending on business sectors. 7 Depreciable over the life of the licence or permit. A licence to use computer software is excluded from this class, see note (1). 8 The depreciable amount represents 75% of the cost. A licence to use computer software is excluded from this class, see note (1). 9 Tractors may be depreciated over a three-year period. 10 Application and system software may be depreciated over 15 years if acquired in a transaction involving the acquisition of assets constituting a trade or business. Otherwise, computer software is generally depreciated using the straight-line method over three years. 11 An additional first year 30% depreciation is allowed for assets put to use before January 1, This additional depreciation is available for (1) property to which modified accelerated cost of recovery system (MACRS) rules apply and having a recovery period of 20 years or less, (2) water utility property, (3) computer software and (4) certain qualified leasehold improvements. 12 Additional depreciation is also allowed for personal property used more than 50% in the operation of an active business. The maximum amount available for 2003 and thereafter is $25,000. The annual depreciation ceiling is reduced by the excess of the cost of qualified property put to use during the year over $200,000. The depreciation deduction may not exceed taxable income for the year. 10 Taxation in Québec 2003

12 Income Tax TAX RATES (for taxation years ending December 31, 2003) Rates applicable to manufacturing corporations Québec Ontario 1 British New Alberta Columbia Brunswick % % % % % Federal tax Provincial tax Combined tax rate Rates applicable on the first $225,000 of taxable income of a CCPC* 4 Federal tax Provincial tax Combined tax rate Rates applicable between $225,000 and $300,000 of taxable income of a CCPC* Federal tax Provincial tax Combined tax rate Rates applicable to non-manufacturing income from an active business Federal tax Provincial tax Combined tax rate Rates applicable to investment income earned by private corporations Federal tax Provincial tax Combined tax rate Note: In the United States, the federal corporate income tax rate is identical, irrespective of the activities of the business (i.e. manufacturing or not). Differences may occur at the state or city level. For a comparison of the rates, see Table C in the Appendix. * See page 16 for the definition of Canadian-controlled private corporation (CCPC). 1 Large corporations that have either gross revenues exceeding $10 million, or assets exceeding $5 million, on an associated basis, are subject to a 4% minimum tax. 2 The base rate is 28% for corporations that are eligible for a reduced rate (CCPCs or manufacturing corporations) and investment income earned by private corporations, and 23% in other cases. A 1.12% surtax is added to the base income tax (after the provincial abatement of 10%). The 28% base rate is reduced by 16% for income eligible for the small business deduction (see note 4). For income earned by an active business that exceeds $225,000 up to $300,000 and that ranges in between the applicable ceiling and $300,000, the rate is reduced by 7%. The 28% base rate is also reduced by 7% for income attributable to manufacturing and processing activities. A 6-2/3% refundable tax applies on investment income earned by private corporations, raising the rate to 35.79% for this type of income. 3 Up until March 14, 2003, corporations having a permanent establishment in Québec were subject to a general tax rate of 8.9%, to which was added a supplementary contribution to the Youth Fund equal to 1.6% of the income tax otherwise payable. This contribution ceased to apply on March 14, 2003 so that only the 8.9% base rate applies thereafter. An income tax rate of 16.25% applies to income other than income from an active business to which an additional 1.6% of the income tax payable was added for the contribution to the Youth Fund up until March 14, To determine the applicable rates for 2003, a prorating has been made to consider the repeal of the Youth Fund contribution effective March 14, This reduced rate applies to the first $225,000 of taxable income of an active business carried on in Canada (including income of associated Canadian corporations). As announced by the Minister of Finance in his February 18th, 2003 Federal Budget, the threshold amount of $200,000 has been increased to $225,000 as of January 1st, 2003 and will continue to increase by $25,000 a year to reach $300,000 as of January 1st, The reduced rate applies only if the corporation's taxable capital for the purposes of the federal large corporations tax is less than $10 million during the preceding fiscal year. Between $10 million and $15 million, the limit is gradually reduced. 5 The tax rate for CCPCs is 5.5% and is applicable for revenues up to $320,000. A surtax applies, clawing back the small business deduction when the income falls between $320,000 and $800,000. For revenues between $320,000 and $800,000, the tax rate is 17.17% on income of non-manufacturing corporations and 14.67% on income of manufacturing corporations. 6 Effective April 1 st, 2003, the base income tax rate and the manufacturing and processing income tax rate for large corporations is reduced from 13.00% to 12.5%. A prorating is made for the 2003 calendar year. 7 Effective April 1 st, 2003, the applicable rate of 4.5% is reduced to 4%. On that date, the taxable income ceiling earned by a corporation carrying on an active business in Canada is raised from $350,000 to $400, The tax rate for CCPCs is 3% and is applicable for revenues up to $400,000. Taxation in Québec

13 Payroll Taxes and Other Employer Obligations These payments are deductible in computing taxable income. The figures shown apply for Statutory holidays 8 days Annual vacation 2 weeks after 1 year, 3 weeks after 5 years Vacation pay 4% of annual earnings, 6% after 5 years Employment insurance 2.94% of salary (insurable maximum is $39,000) Québec Pension Plan 4.95% of eligible salary, less the $3,500 base exemption (the maximum eligible salary is $39,900) Health Services Fund 4.26% of the total payroll 1 Manpower training 1% of the gross payroll, less eligible training expenses 2 Labour standards % of the total payroll (insurable maximum is $53,500) Occupational health and safety 4 The average rate of contribution is 1.85% of salary (insurable maximum is $53,500) Minimum wage $7.30/hour (tip-workers: $6.55/hour) 5 Overtime Hourly rate x 1.5, after 40hrs/week. 1 The rate of contribution for an employer whose total payroll is equal or less than $1 million is 2.7%. When the total payroll is greater than $1 million but less than $5 million, the rate varies between 2.7% and 4.26%. When it exceeds $5 million, the rate is 4.26%. 2 Businesses with payrolls of less than $250,000 are exempted. The new government proposed on June 12, 2003 in its budget speech to increase the threshold to $1 million. 3 This contribution payable to the Ministère du Revenu du Québec finances the Labour Standards Commission whose purpose is to establish uniform labour standards across Québec. 4 Employer contributions are used to compensate victims of industrial accidents and occupational diseases, to finance the activities of the Commission de la santé et sécurité du travail which manages the mandatory public insurance plan and to promote the health, safety and physical well-being of workers. The rate of assessment varies depending on the type of business activity. 5 These hourly rates are applicable as of February 1, They are usually revised at the beginning of the year. Tax on Capital Québec levies a tax on the capital of all corporations that have a permanent establishment in Québec during the year. For corporations other than banks, loan and trust companies, the rate of tax is 0.6% of the paid-up capital. A deduction from the paid-up capital of $250,000 3 is allowed to corporations and must be shared among the members of a group of associated corporations. In general, paid-up capital, reduced by the deduction allowed with respect to the value of investments in other corporations, is equal to the net assets value plus long-term debts and advances to the corporation. This tax is deductible in the computation of the federal and Québec taxable incomes of the corporation. The federal government levies a large corporations tax, at a rate of 0.225% on taxable capital used in Canada by corporations 4. The taxable capital is calculated in a manner similar to the paid-up capital for Québec purposes. A deduction exempts from this tax the first $10 million of taxable capital 5. In the case of corporations within the same related group (associated in the case of CCPCs), the capital deduction must be shared amongst members of the group. The large corporations tax is reduced by the amount of the 4% surtax charged on federal income tax. Any excess of the surtax over the large corporations tax for the current year may be applied to reduce the large corporations tax of the three preceding years and seven subsequent years. 3 This deduction will reach $600,000 on January 1 st, The large corporations tax will be eliminated effective as of January 1 st, The large corporations tax rate will be reduced as follows: 0.200% as of January 1 st, 2004, 0.175% as of January 1 st, 2005, 0.125% as of January 1 st, 2006 and % as of January 1 st, The capital deduction will increase from $10 million to $50 million, effective for taxation years ending after Taxation in Québec 2003

14 COMMODITY TAXES THE GOODS AND SERVICES TAX (GST) The goods and services tax (GST) is a form of value-added tax similar to that now levied in Europe, New Zealand and Australia. The tax is applied on a transactional basis and on a large range of products and services. The GST does not usually represent a cost of doing business. The GST is collected by a registrant person from its clients, and such person is generally entitled to claim a refund or credit for any tax paid on the purchase of goods or services used in its commercial activities. The GST is computed at the rate of 7% of the selling price of a given supply of goods and services, or 15% in the case of the harmonized sales tax (HST) levied in three of the Atlantic Provinces 6. The credit for tax paid or payable, referred to as an input tax credit, is available to each person in the production and distribution chain, except for the final consumer who does not carry on a commercial activity, and a few businesses (for example financial institutions) which make so-called exempt supplies. Therefore, in general, the full burden of the tax is borne either by the final consumer or by these businesses. In a given period, a business must remit the total amount of tax collectible on its sales, less input tax credits it is entitled to claim. If the level of input tax credits exceeds the amount of GST collected, the business is entitled to a refund. In general, all goods and services which businesses sell, import, or supply in Canada are subject to GST, unless they are specifically designated as either zero-rated or exempt. QUÉBEC SALES TAX (QST) The QST represents a value-added tax very much based on the GST, but applied to transactions made or deemed to be made in Québec. The GST and QST principles of application are identical. Hence, businesses are generally entitled to recover the QST paid on their purchases, subject to certain restrictions in effect for large businesses. These restrictions apply to motor vehicles, fuel, electricity, gas, combustibles or steam, telephone or telecommunication services, meals and entertainment. Over the years, the introduction of several exceptions has permitted a substantial reduction in the cost of these restrictions. For example, the QST levied on heavy weight motor vehicles, heating oil, the energy used to power production equipment and Internet access services is now refundable. Thus, any entity that carries on business in Québec should first verify whether it qualifies as a large business under the Act and whether it is covered by the restrictions and the applicable exceptions: generally, a business qualifies as a large business if its Canadian annual gross sales, including those of associated persons, exceed $10 million. As is the case under the GST system, the final consumer who does not carry on a commercial activity must bear the cost of the QST, along with businesses making exempt supplies. To that effect, one has to remember that for QST purposes, financial activities are zero-rated instead of being exempt as is the case under GST. As a result, the QST applicable on related costs and purchases can be recovered as a refund. 6 Namely Nova Scotia, New Brunswick and Prince Edward Island. Taxation in Québec

15 Exports Subject to certain exceptions and qualifying conditions, exports of goods and services are generally zerorated or deemed to be made outside Canada for GST purposes. In either case, the supplier/exporter does not have to collect GST from its non-resident clients, but he can still recover the GST applicable on related inputs. Hence, in general, such supplies to non-residents do not bear any GST cost, whether on the sales price or on inputs which are directly or indirectly attributable to them. Similar rules apply for QST purposes to goods intended to be shipped outside Québec and to services supplied to non-residents of Québec. Imports Upon the importation of goods into Canada, the importer of record is responsible for paying the GST on imported goods when they are released from customs. An input tax credit (ITC) for the GST paid can generally be claimed if the goods were imported for consumption, use or supply in the course of commercial activities. For QST purposes, when a person imports or brings into Québec goods for use in the course of its commercial activities and in respect of which the person would otherwise be entitled to an input tax refund (ITR), no QST is payable at the time of importing or bringing the goods into Québec. Administrative Matters and Other Duties Therefore, businesses located in Québec benefit from a very favourable commodity tax system which basically eliminates the tax cost from their business inputs. Most U.S. states and the majority of other Canadian provinces do not have such a favourable system in place. Moreover, an agreement was reached with the federal government to significantly simplify the administration of sales taxes in Québec. Under that agreement, the Ministère du Revenu du Québec has control over the administration of both the federal GST and provincial QST in Québec territory, thereby allowing Québec businesses to deal with one level of government for their sales tax issues. The QST rate is 7.5% and it applies to the selling price including GST. The combined rate of commodity taxes on a good or service, which is subject to both the GST and QST, is therefore %. In addition to the QST, specific taxes or duties are applicable in Québec on goods such as alcoholic beverages, tobacco products, tires, and petroleum products. 14 Taxation in Québec 2003

16 Customs Duties and Excise Tax In addition to the GST, federal excise taxes or duties are levied on specific goods, such as jewellery, alcoholic beverages, tobacco products and petroleum products. With respect to imported goods, customs duties are levied according to the tariff under the Act. These duties are computed on the customs value, and are usually payable at the time of importation. Certain goods may be imported duty-free or benefit from preferential rates, for example, goods from countries with which Canada has signed a free trade agreement (United States, Mexico, Israel and Chile) or goods from developing countries. Since 2002, important changes have been made to customs administration, namely the implementation of the Customs Self Assessment (CSA) Program and the Administrative Monetary Penalty System (AMPS). In addition to customs duties, certain imported goods are subject to antidumping and compensatory duties. These duties are levied in addition to the aforementioned customs duties. Municipal and School Taxes Municipalities have the power to levy taxes on their residents and businesses. The principal form of municipal taxation is a tax levied on the assessed value of real property. A business tax is normally imposed on the leasing value of places of business; in certain municipalities, this tax can take the form of a mandatory permit or licence. The municipalities can also impose a surtax on non-residential real property. These taxes vary considerably from one municipality to another. School boards may also levy a tax based on the assessed value of real property. The school tax is relatively small in Québec. Municipalities are authorized to levy duties with respect to transfers of real property. Taxation in Québec

17 ELIGIBILITY OF CORPORATIONS FOR TAX INCENTIVES AND OTHER GENERAL CONSIDERATIONS Canadian-Controlled Private Corporations Certain provisions of the tax legislation apply only to Canadian-Controlled Private Corporations (CCPCs). A corporation is generally deemed to be Canadian-controlled if at least 50% of its voting shares are owned by residents of Canada. Associated Corporations The Québec tax incentives based on the increase in payroll and those whose eligibility or level of assistance depend on the amount of assets of the corporation are calculated considering all associated corporations. For that purpose, the following investment corporations, including their subsidiaries, are not considered associated corporations: Investissement Québec, Hydro-Québec CapiTech Inc., Québec universities, the Caisse de dépôt et placement du Québec, the Société générale de financement du Québec, the Innovatech corporations, the Fonds de solidarité des travailleurs du Québec, the Fonds de développement de la Confédération des syndicats nationaux pour la coopération et l emploi (Fondaction) and the Business Development Bank of Canada. Eligible Corporations As a general rule, corporations eligible for the various tax incentives described in this document are corporations that carry on a business in Québec, have an establishment there, and carry on an eligible activity pertaining to a tax incentive. Eligible corporations usually include corporations resident of Canada as well as Québec branches of non-resident corporations. Cumulation of Tax Credits and Other Assistance Received In general, corporations are not allowed to claim more than one tax credit with respect to the same eligible expenditure. In addition, the tax credits claimed are usually reduced by the amount of any governmental and non-governmental assistance received. 16 Taxation in Québec 2003

18 Eligibility Certificates or Attestations In order to benefit from Québec tax incentives, corporations may be required, in addition to filing forms at the same time as their income tax returns, to obtain eligibility certificates or attestations from the following entities or Ministries: Research and Development Ministère du Développement économique et régional 1 New Economy Incentives Investissement Québec 2 Cultural Activities Incentives Société de développement des entreprises culturelles (SODEC) Refundable Tax Credits to Encourage the Investissement Québec 3 Development of Designated Areas Tax Credit for Design and for Marine Construction Ministère du Développement économique et régional 4 Financial Sector and other Incentives Ministère des Finances 5 1 The Ministère issues eligibility certificates for pre-competitive research projects, a catalyst project or environmental technology innovation projects, as well as eligibility certificates for foreign experts and researchers. For tax holidays in respect of post-graduate interns and foreign university professors, an annual certificate must be obtained from the Ministère de l Éducation (MEQ). For the tax credit regarding expenditures incurred pursuant to a research contract with a university entity, a public research centre, a research consortium or a prescribed linkage agency, taxpayers must obtain an advanced ruling from the Ministère du Revenu du Québec. 2 Except for the tax credit for technological adaptation services, for which no certificate or attestation is required. 3 Except for the tax credit for exploration expenditures, or for renewable energy and energy conservation expenditures, for which no certificate or attestation is required. 4 Except for the tax holiday for eligible sailors who must obtain an eligibility attestation issued by the Ministère des Transports, see page Except for the tax holiday for new corporations, the tax holiday for small and medium-size businesses in a remote resource region, and the tax credit for the maintenance of racehorses, for which no certificate or attestation is required. Taxation in Québec

19 TAX HOLIDAY FOR NEW CORPORATIONS New corporations, qualifying as CCPCs other than specified investment businesses and personal services businesses, whose paid-up capital does not exceed $15 million, enjoy a Québec exemption from income tax, tax on capital and the employer contribution to the HSF. The new corporation must not be associated with any other corporation, whether Canadian or foreign. The exemption is available for the first five taxation years of the new corporation. The following table illustrates the maximum tax assistance granted for a new corporation as well as the limit applicable to each exemption. The exemption applies to 75% of taxable income, paid-up capital and salaries paid or deemed paid. Ceiling 75% Applicable Rate Maximum Tax Assistance $ % $ Income tax 200, , ,395 Tax on capital 3,000,000 2,250, ,500 Employer contribution to the HSF 700, , ,175 1 For more information on Québec corporate tax rates, see note 3 under the income Tax Rate table on page The first $250,000 of paid-up capital is capital-tax exempt. 3 For more information on the contribution rate of an employer, see note 1 under the payroll taxes and other employer obligations table on page Taxation in Québec 2003

20 RESEARCH AND DEVELOPMENT AND OTHER TAX INCENTIVES CONCERNING THE NEW ECONOMY Research and Development SUMMARY OF GENERAL RULES Scientific research and experimental development (SR&ED) means systematic, scientific or technological investigation or research, conducted by means of experiment or analysis or pure or applied research, for the advancement of science and the creation of new processes, materials, products or devices, or the improvement of those in existence, even if only slight. A taxpayer that carries on a business in Canada may deduct from its taxable income its current and capital 7 expenditures attributable to SR&ED carried on in Canada or incurred for the use of premises, facilities or equipment used in SR&ED activities. These expenditures may be deducted in the year in which they are incurred and any unused portion may be carried forward indefinitely. Subject to certain conditions, the taxpayer may also deduct its current expenditures incurred in carrying on SR&ED outside Canada, in the year in which they are incurred 8. Generally, current expenditures on SR&ED include the remuneration 9 of personnel directly involved in SR&ED 10, the cost of materials consumed or transformed in SR&ED activities, and the rental cost of SR&ED equipment. They also include certain payments to sub-contractors and third parties 11, and a portion of general and administrative overhead costs directly attributable to SR&ED activities or to the use of premises, facilities or equipment used in SR&ED. SR&ED expenditures do not include capital expenditures incurred in respect of the acquisition of a building including a leasehold interest therein 12, nor expenditures made to acquire rights in, or arising out of, the use of a technology. For federal purposes, SR&ED expenditures must be reduced by the federal tax credit claimed in the previous year, by the Québec tax credit for the current year, and by any form of governmental or nongovernmental assistance. In Québec, the same reductions apply, except that the Québec tax credit does not reduce the Québec SR&ED expenditures. Moreover, in order to encourage foreign corporations not having a permanent establishment in Canada/Québec to grant SR&ED activities to their Québec subsidiaries, amounts received from these corporations for this purpose will not reduce the subsidiaries' eligible expenses for purposes of the federal and Québec tax credit computation. 7 New depreciable property used in SR&ED for all or substantially all of its expected useful life. 8 This expenditure is not an eligible expenditure for purposes of the federal investment tax credit. 9 Remuneration also includes taxable benefits. 10 For employees who hold 10% or more of the shares of the corporation, the wages do not include any bonuses or remuneration based on profits (such as a dividend). 11 Including certain entities, such as a university, college or research institute. 12 Other than expenses incurred for prescribed special-purpose buildings. Taxation in Québec

21 SR&ED TAX CREDITS Canada An eligible taxpayer that carries on a business in Canada and that undertakes SR&ED or causes SR&ED to be undertaken on its behalf may claim a federal non-refundable investment tax credit (ITC) equal to 20% of its eligible expenditures. For CCPCs, the tax credit rate is increased to 35% for the first $2 million of eligible expenditures. To be eligible for this increased rate, the CCPC s income for the prior year, considering all associated corporations must be less than $200, This increased tax credit is refundable in a proportion of 100% for current expenses and 40% for capital expenditures 14. Eligible expenditures must be reduced by the amount of any governmental or non-governmental assistance received, including the Québec tax credit. The unused portion of the ITC may be carried forward in reduction of the federal income tax payable in the three preceding taxation years or the ten subsequent taxation years. Subject to certain exceptions, eligible expenditures include current expenses and capital expenditures otherwise eligible for the SR&ED deduction. For ITC purposes, the taxpayer may choose to calculate its general and overhead expenditures under the proxy method. In this case, the general and overhead expenditures will be replaced by an amount of expenditures equal to 65% of the salaries directly attributable to SR&ED, excluding taxable benefits and bonuses. Québec An eligible taxpayer who carries on a business in Canada and undertakes or causes to be undertaken SR&ED on its behalf may claim a refundable tax credit equal to 17.5% of the salaries paid for SR&ED done by employees of an establishment located in Québec. This credit is fully refundable, for small and large businesses, private or public. This credit is also available for all salaries paid to a related person performing, on its behalf, SR&ED in Québec by virtue of a subcontracting agreement. For contracts concluded with an arm s length person, only 50% of the amount paid will be considered for purposes of the tax credit. The refundable tax credit for SR&ED salaries is also granted to taxpayers that carry out research on behalf of a third party that is not a resident of Canada and does not carry on a business in Canada through a permanent establishment, as long as the activities are carried out in Québec. The tax credit rate of 17.5% increases to 35% in the following situations: The taxpayer is a Canadian-controlled corporation (CCC), private or public, whose total assets for the preceding taxation year do not exceed $25 million, considering associated corporations. The tax credit is gradually reduced to 17.5% when the total assets range between $25 and $50 million. The increased tax credit applies on the first $2 million of annual eligible expenditures paid in Québec. The corporation concludes a research contract with an eligible university entity, an eligible public research centre, an eligible research consortium or a prescribed linkage agency, and for which the taxpayer obtained an advanced ruling from the Ministère du Revenu du Québec The $2 million of expenditures are gradually decreased to nil when the taxable income of the corporation, for its previous taxation year, is between $200,000 and $400,000, considering all associated corporations. When the preceding year ends after 2002, these amounts will be increased to $300,000 and $500,000 respectively. Additional reductions apply if the taxable capital for the purposes of the large corporations tax for the preceding taxation year ranges between $10 and $15 million, considering all associated corporations. For more details on the concept of taxable capital, see Tax on Capital on page Subject to certain conditions, for the portion of expenditures exceeding $2 million, the general 20% tax credit applies and is refundable in a proportion of 40% either in respect of current expenditures or capital expenditures. 15 In general, the amount of eligible expenditures is equal to 80% of the expenditures when they are made by a specified unrelated entity. 20 Taxation in Québec 2003

22 Tables A and B in the Appendix illustrate the net cost of an eligible SR&ED expenditure. New Economy Tax Incentives TAX INCENTIVES FOR CORPORATIONS CARRYING OUT AN INNOVATIVE PROJECT WITHIN A BIOTECHNOLOGY DEVELOPMENT CENTRE (BDC) An eligible corporation, that obtains an eligibility certificate from Investissement Québec and that is a new corporation conducting an innovative project within a BDC, may claim the following tax incentives: A limited five-year tax holiday with respect to income tax, capital tax and employer contributions to the HSF. The tax holiday applies to 75% of taxable income, paid-up capital and salaries paid or deemed paid. A refundable tax credit equal to 30% of the eligible salaries with respect to eligible employees. This tax credit is available for a ten-year period, with respect to eligible salaries paid no later than December 31, This tax credit may not exceed $11,250 per employee, calculated on an annual basis. A refundable tax credit equal to 30% of the acquisition cost or the rental expenses incurred in relation to specialized equipment. Only the equipment acquired during the first three years of the tax holiday and the rent incurred during the five years of the tax holiday may entitle a corporation to claim the tax credit for specialized equipment. The rental of specialized equipment must begin during one of the first three years of the five-year tax holiday period. To be eligible, the equipment must be depreciable property and must be used mainly within a BDC. It must be used exclusively or almost exclusively to earn income from business carried on in a BDC. A refundable tax credit equal to 30% of the amount of eligible rental expenses relating to the short-term rental of eligible specialized installations and incurred during the five-year tax holiday period. The eligible specialized installations include laboratories fitted with specialized equipment and specialized rooms located in a BDC. The corporation may cumulate the tax credit on salaries with the Québec SR&ED tax credit in the following manner: For the first three years of eligibility for the tax holiday, the corporation may not cumulate the two tax credits, but may chose each year, the most beneficial tax credit for each employee. For the following years, the corporation may cumulate the tax credits up to a maximum amount of $25,000 or 60% of the eligible salary, calculated per employee, on an annual basis. An innovative project is a project that includes a planned investigation carried on in order to acquire new technical or scientific knowledge or it may be a transposition work involving research discoveries or other knowledge that is accomplished before commercial exploitation. TAX INCENTIVES FOR RESEARCHERS, EXPERTS, PROFESSORS AND FOREIGN SPECIALISTS The following individuals who do not reside in Canada immediately before entering into a contract with their employer or immediately before the commencement of their duties may claim a limited (75%) fiveyear income tax exemption in Québec with respect to the salaries paid to them. The employer must obtain a certificate and annual attestations from the Ministère du Développement économique et régional or the Ministère de l Éducation du Québec (MEQ) 16. A post-doctoral researcher employed by an eligible university entity or a public research centre. A professor employed by a Québec university and working in the fields of science and engineering, finance, health, or new information and communication technologies. A researcher specialized in the field of pure or applied sciences or a related area, employed by a person that carries on a business in Canada, and that carries out SR&ED in Québec. 16 For more information on the ministries issuing the certificates, see the table on Eligibility Certificates or Attestations on page 17. Taxation in Québec

23 An expert specialized either in the field of management or financing of innovating activities, either in foreign commercialization or transfer of high technology, employed by a person that carries on a business in Canada and that carries out SR&ED in Québec. A specialist employed by a corporation that carries out an innovative project in the field of biotechnology in a BDC. MULTIMEDIA TITLES Eligible corporations that have received a valid favourable advance ruling, a certificate or the attestations from Investissement Québec may claim the following tax incentives: Specialized Component: This component is designed for a specialized corporation, meaning that all or almost all its activities consist in the production of multimedia titles and, as the case may be, perform related SR&ED activities. The tax credit is calculated while considering all the multimedia titles produced. A specialized corporation may claim a refundable tax credit equal to 37.5% on the eligible labour expenditures incurred in the production of multimedia titles if at least 75% of the multimedia titles are both intended for commercialization, without being built to order, and available in French or if 75% of the gross revenues come from such titles. The tax credit rate is reduced to 30% if the titles are not available in French and to 26.25% if the titles are neither intended for commercialization. General Component: This component is designed for a specialized corporation or any other corporation that produces multimedia titles. The tax credit is calculated for each multimedia title produced. A corporation may claim a refundable tax credit equal to 37.5% of the eligible labour expenditures incurred in the production of multimedia titles intended for commercialization and not built to order and available in French. The tax credit rate is reduced to 30% for titles not available in French and to 26.25% if the titles are neither intended commercialization. TECHNOLOGICAL ADAPTATION SERVICES An eligible corporation 17 may claim a refundable tax credit equal to 30% of eligible expenditures incurred with respect to the collection and processing of strategic information or with respect to its joint undertaking in research and innovation. Eligible expenditures include 80% of the fees relating to the services provided, subscription fees for the services and the fees for training 18 and information activities in relation to the services offered. These expenditures must be incurred with an eligible business watch centre, an eligible liaison and transfer centre or an eligible college centre for technology transfer. 17 The corporation s assets, taking into account the assets of associated corporations, for its preceding taxation year, must be less than $25 million. 18 Only the fees for participation in occasional complementary training activities, otherwise than as part of a regular training program, are eligible. 22 Taxation in Québec 2003