Bulletin d information

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1 Bulletin d information Gouvernement du Québec Ministère des Finances 97-4 July 3, 1997 Subject: Improved tax assistance for the marine industry and other tax measures IMPROVED TAX ASSISTANCE FOR THE MARINE INDUSTRY The Budget Speech of last March 25 announced that studies were under way to improve tax measures relating to Québec s marine industry and that the ministère des Finances would release details of the new rules in this regard. The new rules are given below. Their main effect is to raise the tax credit for shipbuilding, introduce a new tax credit for the conversion or substantial transformation of a ship and to ease the measure reducing the tax on capital. Refundable tax credit for shipbuilding The refundable tax credit for shipbuilding was introduced in the May 9, 1996 Budget Speech. For a taxation year of a taxpayer carrying on shipbuilding business in Québec, this tax credit corresponds to an amount equal to 40% of eligible construction expenditures incurred in the year, relating to the construction of an eligible ship. However, the tax credit cannot exceed 20% of the cost of construction of the ship incurred at the end of the year.

2 - 2 - Apart from the cost of plans and specifications, eligible construction expenditures generally consist of the salaries of persons employed by the taxpayer in an establishment of such taxpayer located in Québec who work directly on the construction of the eligible ship. They also include a portion of the expenses incurred under a contract with a sub-contractor. For the purposes of this tax credit, the notion of ship includes semi-submersible drilling platforms stabilized with submersible pontoons at a more stable depth and by anchors. However, a jack-up type drilling platform installed on the ocean floor is not considered a ship. Two changes are made to the tax credit to raise the rate and broaden application to ships built as part of a production run after the construction of a prototype ship. Increased rate of tax credit for shipbuilding The rate of the refundable tax credit for shipbuilding is raised from 40% to 50% of eligible construction expenditures incurred in a taxation year. However, the current limit relating to the cost of construction of the ship remains in place. This change applies to eligible construction expenditures incurred after March 25, Eligibility of ships built as part of a production run Currently, to be eligible for this tax credit, the ministère de l Industrie, du Commerce, de la Science et de la Technologie (MICST) must issue a certificate for the ship, certifying that it will be a prototype ship with a gross tonnage of at least one hundred tons. Henceforth, additional ships built from essentially the same plans and specifications as those used for a prototype ship will also be eligible for the tax credit. The following table shows the rates and details of the tax credit applicable to eligible ships.

3 - 3 - Eligible ships Rate of tax credit applicable to eligible construction expenditures Limit relating to the cost of construction incurred at the end of the taxation year Prototype ship 50% 20% 1 st unit of production run 37.5% 15% 2 nd unit of production run 25% 10% 3 rd unit of production run 12.5% 5% Additional ships - - The MICST must issue a certificate, according to terms and conditions similar to those stipulated for the prototype ship, to the effect that it is the first, second or third unit of the same run, as the case may be. Eligible construction expenditures will include the same items as those currently admitted for the prototype ship, i.e., essentially the cost of plans and specifications (except to the extent that they were an eligible expenditure for the prototype ship or another unit of the same run), wages incurred with persons employed by the eligible taxpayer who work directly on the construction of the eligible ship, as well as a portion of the cost of a sub-contract. These changes apply to eligible construction expenditures incurred after March 25, 1997.

4 - 4 - New refundable tax credit for the conversion of a ship To encourage major ship conversion work in Québec shipyards, a refundable tax credit for the conversion of ships is introduced. The notion of taxpayer eligible for this new tax credit will be the same as for the application of the tax credit for shipbuilding. For a taxation year, this tax credit will correspond to an amount equal to 50% of eligible conversion expenditures incurred in the year relating to the conversion of an eligible ship. However, the amount of the refundable tax credit, for a taxation year, for the conversion of an eligible ship, may not be greater than the excess of 20% of cost of conversion of the ship incurred at the end of such year, over the amount of such tax credits for prior years. To be eligible for this tax credit, the ship must be converted in a shipyard located in Québec, as part of a conversion project for which the MICST has issued a certificate prior to the beginning of work. The purpose of the conversion must be to convert the ship into a prototype ship according to criteria similar to those applied for the refundable tax credit for shipbuilding. Ships converted as part of a production run The first, second and third units converted according to essentially the same plans and specifications as a converted prototype ship will also be eligible for a refundable tax credit, at rates of 37.5%, 25% and 12.5% respectively of eligible conversion expenditures and subject to limits calculated using the same rules as those mentioned previously for the conversion of the prototype ship, but whose rates will be 15%, 10% and 5% respectively of the cost of conversion incurred at the end of the year. The MICST must issue a certificate, according to similar terms and conditions as those stipulated for the prototype ship, to the effect that the ship is the first, second or third, as the case may be, of the same production run. Eligible conversion expenditures Eligible conversion expenditures, relating to an eligible ship, consist of the same items as those currently admitted under the definition of eligible construction expenditures and listed above, adapted to include the wages of employees working directly on the conversion of the eligible ship.

5 - 5 - To be eligible, a conversion of a ship must constitute a conversion, significant transformation or major repair of the ship carried out in Québec by the eligible taxpayer. The MICST will study the conversion proposal submitted using various criteria it will release in the near future. In particular, these criteria will deal with the fact that conversion expenses must represent more than 20% of the value of the ship, as determined according to rules to be published by the MICST. However, eligible conversion expenditures will not include an expenditure regarding which another refundable tax credit is otherwise granted. They will have to be reduced by the amount of any government or non-government assistance according to rules similar to those applicable to the tax credit for shipbuilding. Lastly, this new refundable tax credit will not be subject to income tax. Application date This measure applies to eligible conversion expenditures incurred after March 25, Reduction of the tax on capital Deduction regarding ship acquisition costs Currently, for the purposes of the tax on capital, a deduction is allowed in calculating the paid-up capital of a corporation which acquires a ship, for a period including the taxation years during which the ship is under construction, the year it is delivered and the subsequent four years. This deduction is allowed on the basis of the eligible acquisition costs of the ship, provided the ship meets certain requirements and the MICST has issued a certificate for it. One of these requirements concerns the fact that the ship must be intended for navigation in international waters. This requirement is withdrawn.

6 - 6 - In addition, for the purposes of this deduction, eligible acquisition expenses incurred by a corporation, for a taxation year, will include an expense which corresponds, for the years during which the ship is under construction, the year during which construction of the ship has ended and the subsequent four years, to the portion of the capital cost of an eligible ship incurred since the beginning of the construction by the corporation, so that this deduction may also be granted to a corporation who constructs an eligible ship for itself. As a result, the requirement that eligible acquisition costs do not include the amount of an expenditure incurred with a person with whom the corporation or a designated shareholder of the latter is not at arm s length is withdrawn. Lastly, because of extension of the tax credit to ships of the same production run, the MICST may also issue a certificate for these ships for the purposes of this deduction in the calculation of paid-up capital. These changes apply to eligible acquisition costs incurred after March 25, Deduction relating to eligible conversion expenses In addition, eligible conversion expenses incurred by a corporation will also entitle the corporation to a deduction in calculating its paid-up capital. To be entitled to such deduction, these expenses will have to be incurred in relation to a ship with a gross tonnage of at least one hundred tons for which the MICST has issued an eligibility certificate. The ship must be converted in a shipyard located in Québec. Eligible conversion expenses incurred by a corporation in a taxation year mean an expenditure which is incurred in the year by the corporation, which is related to a business it carries on in Québec and which corresponds, for the years during which the ship is being converted, to the portion of the cost of a written conversion contract which has been paid to the executing party since the beginning of the conversion. For the taxation year during which the corporation takes possession of the converted ship and for the subsequent four years, eligible conversion expenses mean the total cost of conversion of the eligible ship under such contract. These expenses will also include an expenditure which corresponds, for the years during which the ship is being converted, for the year during which the conversion of the ship has ended and the subsequent four years, to the portion of the capital cost relating to this conversion incurred since the beginning of the conversion by the corporation.

7 - 7 - However, eligible conversion expenses must be reduced by the amount of any government or non-government assistance. In addition, this deduction will only be granted to a corporation that has entered into the contract for the conversion of the ship (or who will have converted it for itself) and not to another acquirer, and solely for the period, included in the eligibility period, during which it owns the ship. The MICST will also release the criteria for determining whether the object of a given contract is in the nature of a conversion. These criteria will be similar to those applied for the purposes of the refundable tax credit for the conversion of a ship. New units from the same production run of converted ships may be covered by an MICST certificate. This measure applies to eligible conversion expenses incurred after March 25, OTHER TAX MEASURES New category of shares eligible for the stock savings plan for a regional venture capital corporation A regional venture capital corporation (RVCC) has been an eligible corporation under the stock savings plan (SSP) since The funds it collects under a public offering are intended to promote the development of investment corporations whose primary objective is to facilitate the emergence of small or medium-sized manufacturing businesses in the regions, and to support their capitalization. Such a regional investment corporation, in which the RVCC invests, helps to group and promote the broadest possible joint participation of regional economic stakeholders. The shares issued by an RVCC generally entitle taxpayers to a deduction at a rate of 150% of their cost. However, since the last Budget Speech, an RVCC can also issue convertible preferred shares which, in the year of their acquisition, entitle the taxpayer to a deduction equal to 75% of their cost. In addition, common shares obtained by exercising the conversion right entitle the taxpayer to a deduction equal to 75% of their conversion value. To diversify the financial instruments available to RVCCs to fulfill their mission, changes are made to the SSP such that an RVCC is henceforth authorized to issue subordinate voting shares.

8 - 8 - For this purpose, a subordinate voting share will mean a share with the same privileges as a common share, but whose voting rights, at a minimum, will be in the ratio of one to ten compared to a common share with full voting rights. Accordingly, such a subordinate share will entitle its holder to participate fully and fairly in a takeover bid; it will guarantee its holder that any consolidation operation or restructuring of the capital of the corporation whose purpose is the conversion or subdivision of common shares with full voting rights into subordinate voting shares must be approved by a majority of minority shareholders. A subordinate voting share issued by an RVCC will entitle the holder to an SSP deduction at a rate of 150% of the cost of the share. Lastly, the measures concerning convertible preferred shares announced in the last Budget Speech will be adapted to enable, under the same terms and conditions, the issue of preferred shares convertible into subordinate voting shares. These changes will apply to shares acquired following a public offering of shares for which the receipt for the final prospectus (or prospectus exemption) is granted after the date of publication of this information bulletin. Details of the calculation of the drug insurance premium collected by the ministère du Revenu Over the past year, the Québec government has implemented a general insurance plan designed to provide the public with reasonable and fair access to drugs individuals need for their health. The coverage provided by the Régie de l assurance-maladie du Québec is funded by a premium which is payable for the first time for taxation year Under the existing rules, the premium payable by a recipient under the public drug insurance plan is set on the basis of a number of parameters, including family income. For this purpose, family income means the excess of the individual s total income and, as the case may be, that of his spouse, over most of the amounts used to calculate personal tax credits. This notion of total income is the one used by the tax system to determine the assistance granted to a household as tax credits for the sales tax, child care expenses, the family tax reduction and the property tax refund.

9 - 9 - Beginning in taxation year 1998, the various reduction thresholds used to determine these tax relief amounts will be replaced by a single reduction threshold, which is set at $ In addition, the family income considered for the application of these measures will be net family income, i.e., the taxpayer s net income calculated for income tax purposes and, as the case may be, that of his spouse at the end of the year. Accordingly, a corresponding change will be made to the Act respecting the Régie de l assurance-maladie du Québec so that the family income considered for the purposes of calculating the premium payable by a recipient of the public drug insurance plan is the same as that used in the tax system for calculating refundable tax credits, i.e., the individual s net income and, as the case may be, that of his spouse at the end of the year. Moreover, the amounts of the deductions taken into account in calculating the premium payable by a recipient and varying according to his familial situation will be replaced by the amounts appearing in the following table. DEDUCTIONS VARYING ACCORDING TO FAMILIAL SITUATION. Drug insurance (year 1997). One adult, no child $. One adult, one child $. One adult, two or more children $. Two adults, no child $. Two adults, one child $. Two adults, two or more children $ These changes will apply as of taxation year 1997 to the calculation of premium payable by a recipient of the public drug insurance program.

10 Adjustments to source withholdings Payment of a retroactive pay increase or bonus Under existing rules, an employer who pays a retroactive pay increase or bonus to an employee whose estimated annual pay, including such payment, does not exceed $5 000, must deduct 8% of such payment. In view of the implementation of the flat amount of $2 350 and the changes to the tax rates under the reform of personal taxation, the $5 000 amount mentioned in the preceding paragraph will be raised to $9 500 and the source withholding rate mentioned therein will rise from 8% to 10%. Corresponding changes will be made to the other rules governing the calculation of source withholdings in the case of payment of a retroactive pay increase or bonus. These changes will apply regarding such payments made after December 31, Fisherman s remuneration Currently, a person who pays remuneration to a fisherman who has made the election stipulated for this purpose in the tax legislation, must deduct 13% of such remuneration while such election is in effect. In view of the changes made to the tax rates under the reform of personal taxation, the rate of such source withholding will be raised from 13% to 20%. This change will apply regarding remuneration paid after December 31, The Kativik Regional Government recognized as a municipality Under the tax legislation, a Canadian municipality is exempt from income tax and the tax on capital. In addition, it can issue receipts for gifts made to it, thus allowing persons who make such gifts to claim tax benefits regarding the amount of their gifts.

11 The Kativik Regional Government, created under the Act concerning northern villages and Kativik Regional Government, within the limits of its jurisdiction, is a form of autonomous local government. It has many of the powers of a municipality and offers many services generally provided by municipalities. For instance, the Kativik Regional Government has authority over local administration, transportation and communications, as well as over police. In fact, the Kativik Regional Government is similar to a regional county municipality. The tax legislation will thus be amended to recognize the Kativik Regional Government as such for the purposes of the Taxation Act. This recognition is effective as of the date of publication of this information bulletin.