In its 2012-2013 budget, the Québec government proposed to introduce fiscal measures that will encourage the creation of new financial services corporations ("FSC") via two new refundable tax credits on eligible expenditures and on salaries paid to eligible employees. These proposed incentives would supplement existing tax incentives, including, in particular, the refundable tax credit for international financial centres ("IFC"). The existing IFC regime was first introduced to encourage the development and maintenance of businesses specializing in certain "cross border" financial transactions conducted in the urban agglomeration of Montréal. The proposed FSC measures will provide incentives for new corporations operating anywhere in Québec and participating in a much wider range of financial activities.

The proposed measures target new corporations (partnerships and other unincorporated entities are not eligible) with less than $15 million in net shareholders' equity and having an establishment and carrying on business in the province of Québec. Eligible activities include the provision of various analysis, research, management, advisory and securities trading or distribution services through a securities dealer, or securities advisory or management services through a securities advisor. Qualifying corporations will be entitled to claim refundable tax credits for a period of five years following the initial qualification date and will be subject to annual eligibility certification.

The proposed measures are comprised of two refundable tax credits: one for eligible expenditures and one for eligible salaries. Eligible FSCs will be able to claim a refundable tax credit equal to 40% of eligible expenditures, up to an annual maximum of $150,000. Eligible expenditures include fees and expenses relating to the constitution of an initial regulatory file submitted to a regulatory body, participation in a stock exchange or a subscription for financial analysis or research services, and fees and dues otherwise paid to a recognized regulatory body.

Eligible FSCs will also be entitled to claim a second refundable tax credit equal to 30% of eligible salaries, up to an annual maximum of $30,000 per eligible employee. Eligible employees are those working full-time (at least 26 hours per week for a 40 week period) and for whom at least 75% of their duties are directly attributable to qualifying activities. Eligible salaries are reduced by the amounts received as governmental or non-governmental assistance.

It is noteworthy that the rules in the tax legislation designed to prevent the aggregation of tax assistance on the same expenditure could apply to the proposed FSC credits. In such a case, the expense eligible for an FSC credit would exclude that portion of the expense for which the corporation has already claimed a tax credit, such as, for example, the IFC credit. No guidance in this respect was provided in the budget.

Moreover, as is the case for the IFC regime, the proposed FSC measures will provide a 5-year declining tax holiday for foreign specialists working exclusively for an eligible corporation. In its current form, the tax holiday is comparable to that for an IFC foreign specialist1 except that the deduction for the fifth year is reduced to 25% (as opposed to 37.5%) for FSC foreign specialists.

As mentioned above, the proposed FSC measures will have a broader scope than the existing IFC regime and will provide significant tax benefits for new corporations operating in the financial services sector in Québec. With tax credits for both salaries and expenditures, the FSC measures will provide much welcomed tax relief for new corporations seeking to establish themselves in an already competitive market.

Footnotes

1 100% for the first and second years and 75%, 50% and 37.5% for the third, fourth and fifth years respectively.

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