Quebec budget to boost small-cap investment

The Quebec government tabled its budget yesterday, reintroducing the Quebec Stock Savings Plan (REA).

First launched in 1979, the REA was replaced in 2005 by the SME Growth Stock Plan, also known as “Hooked SMEs.”

REA II, as the program is known officially, is essentially a rebate on the Hooked SMEs program. It affects shares issued by mid-size Quebec companies, with a capitalization of less than $200 million.

“Raising the limit to $200 million will enable many smaller public companies to have access to this system,” says François Prud’homme, a partner at Ernst & Young. The ceiling is double that of the former regime. Individuals will be required to retain their shares for at least two years, compared to three years with Hooked SMEs.

The new REA II program will end on December 31, 2014, but in the meantime, will offer investors a tax deduction of 150% — up from 100% — for eligible shares acquired between March 19, 2009, and January 1, 2011.

“This increase in the deduction is temporary,” said Marie-Claude Riendeau, director general, tax and estate planning at Investors Group. “The new rate will be increased to 100% from January 1, 2011, until the end of the program.”

The government expects that REA II will cost $48 million over the next two years.

“It’s a way to directly involve citizens in the revival of the economy,” said Quebec Finance Minister Monique Jérôme-Forget.

“There will be a temporary increase in the tax credit for the acquisition of shares issued by Fondaction,” said Riendeau, referring to one of the province’s labour-sponsored funds, which the government believes is not sufficiently capitalized. “The tax credit rate will rise temporarily from 15% to 25% with respect to shares acquired after May 31, 2009.”

This rate will revert to 15% when Fondaction hits $1.25 billion.

“Fondaction was born later and did not have the same success as the Solidarity Fund,” Prud’homme points out.

For individuals, the maximum ceiling of $5,000 remains unchanged. With the new rate, the maximum annual credit is $1,250 ($5,000 x 25%) in Quebec, compared to the current $750 ($5,000 x 15%).

“The federal government already grants a tax credit of 15%. Twenty-five percent in Quebec will give a tax credit of 40%,” Prud’homme explains. “This is quite important when we know that many people invest in these funds through their RRSP. They will be able to retrieve 45% tax on their contributions because they use the RRSP, plus another 40%. It’s a net cost of investment, after tax, which is quite minimal.”

Tax: nothing moves

“There are no significant changes to the tax on individuals and businesses,” said Riendeau.

Many measures of Quebec’s 2009-2010 budget are consistent with similar measures announced in the last federal budget. “This is particularly true of the deduction for the loss of investments in an RRSP or RRIF at death,” Riendeau says. The Quebec budget has also increased the maximum withdrawal under the Homeownership Plan (RAP) from $20,000 to $25,000.

Care Expenses

“Some measures that will provide tax savings for certain individuals are enhanced,” said Riendeau. That includes the tax credit for child care expenses, which the government estimates will benefit about 100,000 families.

“Under this budget, the table of tax rates applicable for the purposes of this program is amended for the portion of family income that is between $84,040 and $140,450 for the 2009 taxation year,” she says.

The amount eligible for the tax credit for child care costs increased from $7,000 to $9,000 for children under the age of seven. This increase comes into force in 2009.

Quebec incentive for education savings

The 2009-2010 budget provides some flexibility for the Incentive to Quebec Education Savings plan (IQEE), “in order to encourage more trusts to offer IQEE to their customers and to register with Revenu Québec,” the budget document said.

Introduced in 2007, “the IQEE will be improved,” said Prud’homme. These are more administrative measures. When the scheme was introduced, financial institutions had to adhere. The administrative process is a bit heavy, and many financial institutions have not yet handed over the subsidies to their customers. For example, individuals who have contributed in March 2007 have not yet received their grants under the IQEE. “There is flexibility in how to join the scheme on time and to grant subsidies.”

QST, plus one

But it was not all good news for the taxpayer. The Quebec Sales Tax (QST) will be increased by one point, to 8.5%, effective January 1, 2011.

For low-income earners, the refundable tax credit for the QST is increased by $150 per year for a couple, or $125 for people living alone.

Following the federal government’s lead, the amount of income eligible for the reduced tax rate for small enterprises increased from $400,000 to $500,000, effective March 20, 2009.

The budget also extends the accelerated depreciation for manufacturing and processing equipment, until the end of 2011. Up to 15,000 businesses are eligible.

A measure was also included to accelerate depreciation for computer equipment. The rate will be 100% for property acquired prior to February 2011. This measure will benefit 70,000 companies, said Jérôme-Forget.

(03/20/09)