This information bulletin provides a detailed description of a number of changes to the tax lawsthat, for the most part, are designed to improve the integrity and coherence of the tax system.

It also states the position of the ministère des Finances concerning a number of announcementsby the Department of Finance Canada, including those of the federal Budget Speech of lastMarch 23 on the regulatory reform respecting registered charities. For information concerning thematters dealt with in this information bulletin, contact the Secteur du droit fiscal et de la fiscalitéat (418) 691-2236.

The French and English versions of this bulletin are available on the website of the ministère desFinances at: www.finances.gouv.qc.ca

Paper copies are also available, on request, from the Direction des communications, at(418) 528-9323.

Technical Adjustments to Various Tax Lawsand Harmonization Measures

2004-9November 12, 2004

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2004-9November 12, 2004

Technical Adjustments to Various Tax Laws and HarmonizationMeasures

1. MEASURES CONCERNING INDIVIDUALS.................................................... 3

1.1 Tax treatment of certain benefits designed to replace an income orfinancial support ............................................................................................... 3

1.2 Reducing unfairness related to the reception of certain benefits froma public indemnity plan..................................................................................... 7

1.3 Tax treatment of financial assistance paid under the Solidaritéjeunesse program........................................................................................... 18

1.4 Application for exemption from tax withholding at source............................... 19

1.5 Rounding of parameters subject to automatic indexation............................... 21

2. MEASURES CONCERNING BUSINESSES.................................................. 23

2.1 Adjustments to refundable tax credits allowed in certain regions ................... 23

2.2 Refundable tax credit for R&D........................................................................ 27

2.3 Adjustment to the penalty for false statement or omission ............................. 28

3. OTHER MEASURES ..................................................................................... 30

3.1 Limitation on estimates eligible for the purposes of the calculation ofthe Québec sales tax regarding the sale of road vehicles .............................. 30

3.2 Increase in the exemptions granted for determining premiums underthe prescription drug insurance plan .............................................................. 31

3.3 Harmonization with federal measures relating to the regularotyreform respecting registered charities ............................................................ 32

3.4 News releases 99-111 of December 16, 1999, 00-101 ofDecember 21, 2000 and 2003-032 of June 23, 2003 ..................................... 34

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2004-9November 12, 2004

1. MEASURES CONCERNING INDIVIDUALS

1.1 Tax treatment of certain benefits designed to replace anincome or financial support

Many Québec laws stipulate that, following an accident or injury, certain benefits designedto replace an income or financial support may be paid to the victim of such accident orinjury or to the members of his family.

In general, these benefits must be included in calculating the income of the person whoreceives them and, accordingly, are considered in the calculation of the governmentassistance provided by various transfer programs and the refundable and non-refundabletax credits that reduce with income. However, no tax is payable regarding such benefitssince a corresponding deduction is allowed in the calculation of taxable income.

To ensure that the rules applicable for the purpose of calculating the income used todetermine government assistance more adequately reflect the financial situation oftaxpayers receiving benefits designed to replace an income or financial support, a numberof amendments will be made to the tax legislation.

Clarifications regarding the nature of the benefits to be included inthe calculation of income

Currently, the tax legislation stipulates that an individual must include in the calculation ofhis income, an amount, other than a prescribed amount, received as compensation underan employees' or workers' compensation law of Canada or a province in respect of aninjury, a disability or death. This inclusion covers, in particular, income replacementindemnities paid under the Act respecting industrial accidents and occupational diseases,the Workers’ Compensation Act and the Act respecting indemnities for victims ofasbestosis and silicosis in mines and quarries.

It also stipulates the inclusion in the calculation of income, of income replacementindemnities granted under the Act respecting occupational health and safety as well aspensions received under the Automobile Insurance Act, except for a death benefit paidregarding a person who suffered bodily injury before January 1, 1990, the Crime VictimsCompensation Act, the Act to promote good citizenship or a similar law of anotherprovince.

Essentially, the amounts to be thus included are amounts designed either to replacelabour income or to offset the loss of financial support following the death of an accidentvictim or a bodily injury. However, as currently worded, the tax legislation does not affordthe same treatment to all benefits that may be paid for any of these purposes under apublic indemnity plan.

Accordingly, changes will be made to the tax legislation to better define the type of benefitsthat must be included in the calculation of income.

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2004-9November 12, 2004

• Income replacement indemnity and compensation for the loss offinancial support paid under public indemnity plans

As of taxation year 2005, the tax legislation will be amended to stipulate that an individualwill be required to include in the calculation of his income, any benefit consisting of anincome replacement indemnity or compensation for loss of financial support he receives,under a public indemnity plan, following an accident, employment injury, bodily injury ordeath or with a view to preventing bodily injury.

In this regard, the expression “public indemnity plan” means any plan established under alaw of Québec or elsewhere, other than the Act respecting the Québec Pension Plan, theCanada Pension Plan or any other law establishing a plan equivalent to the QuébecPension Plan, that provides benefits following an accident, employment injury, bodily injuryor death or to prevent bodily injury.

The plans stipulated by the Workers’ Compensation Act, the Act respecting industrialaccidents and occupational diseases, the Automobile Insurance Act, the Act to promotegood citizenship, the Crime Victims Compensation Act, the Act respecting indemnities forvictims of asbestosis and silicosis in mines and quarries, the Act respecting occupationalhealth and safety and the Public Health Act are included in this expression.

Moreover, the expression “income replacement indemnity” means any benefit that is paidto compensate the total or partial incapacity of a person to earn labour income or the lossof employment insurance income, unless, according to the terms of the public indemnityplan, no employer may – whether or not he is personally required to pay all or part of thebenefits stipulated by the plan – obtain reimbursement of the expense attributable to thebenefit he paid. For this purpose, any benefit calculated on the basis of a person’searnings as recognized by the public indemnity plan will be deemed paid to compensatethe total or partial incapacity of such person to earn labour income.

For example, the following amounts determined by the Commission de la santé et de lasécurité du travail (CSST) will be considered income replacement indemnities:

— pensions for permanent total disability, pensions for permanent partial disability,pensions for temporary total disability and pensions for temporary partial disabilityin accordance with the Workers’ Compensation Act;

— financial assistance payments for social stabilization or economic stabilization inaccordance with the Regulation respecting social stabilization and economicstabilization programs;

— income replacement indemnities in accordance with the Act respecting industrialaccidents and occupational diseases;

— supplementary indemnities under the Act respecting indemnities for victims ofasbestosis and silicosis in mines and quarries.

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2004-9November 12, 2004

However, the following benefits, for example, will not be considered income replacementindemnities:

— the net salary or wages paid by an employer, in accordance with the Act respectingindustrial accidents and occupational diseases, for the portion of the workdayduring which a worker becomes unable of performing his job because of anemployment injury, when he would normally have worked during such portion of theday, had he not been disabled;

— the net salary or wages paid by an employer, in accordance with the Act respectingindustrial accidents and occupational diseases, for each day or portion of a daywhen, at his request, a worker was absent from work to undergo a medicalexamination;

— the remuneration paid by an employer, in accordance with the first paragraph ofsection 36 of the Act respecting occupational health and safety, for the first fivework days of cessation of work because of a worker’s protective re-assignment.

The amounts an employer pays a worker in accordance with a public indemnity plan andthat do not qualify as an income replacement indemnity because no employer may, underthe terms of the plan, obtain reimbursement of the expense attributable to them, must beincluded in the calculation of the worker’s income from an office or employment.

The expression “compensation for loss of financial support” means any benefit payable asa pension, including a lump sum replacing pension payments, that, because of the deathof a victim of an accident, employment injury or bodily injury, is granted to the survivingspouse or to the persons who, under the public indemnity plan, were considereddependants of the victim.

For example, pensions received under the Automobile Insurance Act as a death benefitpaid regarding a person who suffered bodily injury before January 1, 1990 will beconsidered compensation for the loss of financial support.

For greater clarity, an individual who must include, in calculating his income for a giventaxation year, a benefit consisting of an income replacement indemnity or compensationfor loss of financial support he receives, under a public indemnity plan, may deduct, incalculating his taxable income, for the year, an equivalent amount.

• Amounts paid in 2004 by an employer to a worker who suffered anemployment injury

The existing tax legislation stipulates that a worker who suffers an employment injury mustinclude, in calculating his income, any amount, other than a prescribed amount, that hereceives as compensation under an employees' or workers' compensation law of Canadaor a province in respect of an injury, a disability or death.

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2004-9November 12, 2004

For taxation year 2004, an indemnity paid by an employer must be considered aprescribed amount if, under the terms of the law stipulating its payment, no employer –whether or not he is personally required to pay all or part of the indemnities stipulated bysuch law – may obtain reimbursement of the expense attributable to the indemnity.

It follows that the indemnities paid in these circumstances must no longer receive the taxtreatment applicable to income replacement indemnities but rather must be included in thecalculation of income from the worker’s office or employment.

More specifically, this measure will cover, regarding Québec’s legislation on industrialaccidents for injury, disability or death, the following indemnities:

— the net salary or wages paid by an employer, in accordance with the Act respectingindustrial accidents and occupational diseases, for the portion of the workdayduring which a worker becomes unable of performing his job because of anemployment injury, when he would normally have worked during such portion of theday, had he not been disabled;

— the net salary or wages paid by an employer, in accordance with the Act respectingindustrial accidents and occupational diseases, for each day or portion of a daywhen, at his request, a worker was absent from work to undergo a medicalexamination.

• Amounts paid under the Public Health Act

For almost 20 years, people who suffer bodily injury caused by voluntary vaccinationagainst certain diseases or infections or by compulsory vaccination may receiveindemnities calculated according to the rules stipulated in the Automobile Insurance Actand its regulations.

Although the tax legislation did not specify the tax treatment applicable to theseindemnities, they have always received, rightly, the tax treatment applicable to indemnitiespaid under the Automobile Insurance Act.

To maintain the integrity of the tax system, the tax legislation will be amended to specifythat, for a taxation year prior to taxation year 2005, pensions paid under the compensationprogram for victims of a vaccination established under the Public Health Act must receivethe tax treatment they would have received had they been paid under the AutomobileInsurance Act.

Deduction relating to the reimbursement of a benefit over-payment

Under the current tax legislation, when, during a given taxation year, an individual repaysan amount received as a benefit from a public indemnity plan that he included incalculating his income for the year or a prior taxation year, the amount so repaid cannot bededucted in calculating his income for the year.

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2004-9November 12, 2004

Considering that the amount of benefits to be included in the calculation of income is takeninto consideration in determining the government assistance granted by the varioustransfer programs and refundable and non-refundable tax credits that reduce with income,the tax legislation will be amended to stipulate that an individual may deduct, in calculatinghis income for a given taxation year, the amount of benefits he repaid during the year,provided such amount was included in calculating his income for the year or a priortaxation year.

However, since the amount of benefits received during a taxation year prior to a giventaxation year in which they were repaid was deductible in calculating taxable income forsuch prior taxation year, the tax legislation will be also be amended to stipulate that theamount thus reimbursed that is deducted in the calculation of income for the given taxationyear must be included in calculating taxable income for the year.

In addition, the tax regulations will be amended to stipulate that the CSST and the Sociétéde l’assurance automobile du Québec (SAAQ) must also indicate on the information returnthey are required to file for a given calendar year, using the prescribed form, the amount ofbenefits that were repaid during such calendar year in excess of the amount of benefitsdetermined or paid during such year.

These amendments will apply as of taxation year 2004.

1.2 Reducing unfairness related to the reception of certainbenefits from a public indemnity plan

The March 30, 2004 Budget Speech announced that, to reduce the unfairness related tothe reception of certain income replacement indemnities, the beneficiaries of suchindemnities would, as of taxation year 2004, have to adjust their tax payable to allow forthe fact that personal tax credits and basic compulsory employee contributions are takeninto account both in the method used to determine these indemnities and in the calculationof the tax payable in respect of their other income.

Briefly, this adjustment means, for taxation year 2004, the inclusion in the calculation of taxotherwise payable of beneficiaries of such indemnities resulting in a reduction of theamount of their personal tax credits and, as of taxation year 2005, the reduction of thebasic amount granted for the purpose of calculating the basic personal tax credit for theyear.1

To better reflect the specific features of the various public indemnity plans, which stipulatein particular that income replacement indemnities can be reduced in certaincircumstances, various changes will be made regarding the determination of the amount ofthe adjustment for taxation year 2004 and subsequent years.

1 As of taxation year 2005, following the simplification of the personal income tax system, a complementary amount is

added to the amount of recognized essential needs to form the basic amount that is allowed for the purposes ofcalculating the basic personal tax credit.

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2004-9November 12, 2004

Adjustment to tax payable

An individual who is resident in Québec at the end of the 2004 taxation year must include,in the calculation of his income tax otherwise payable for the year, an amount equal to thelesser of $1 840 or 20% of all the amounts each representing the adjustment calculatedregarding a covered benefit that is attributable to the year and of which he is thebeneficiary, provided such benefit was determined in such year.

As of taxation year 2005, an individual who is resident in Québec at the end of a giventaxation year must reduce the basic amount allowed him for the year for the purposes ofcalculating the basic personal tax credit, by an amount equal to all the amounts eachrepresenting the adjustment calculated regarding a covered benefit that is attributable tothe given year and of which he is the beneficiary, provided such benefit was determined insuch year.

However, for a given taxation year, this tax adjustment must not exceed the total of theamount of recognized essential needs and the minimum amount used to determine thecomplementary amount for the purposes of calculating the basic personal tax credit for theyear, hereunder called the “maximum amount of the adjustment”.

Retrospective determination of a covered benefit

When a covered benefit attributable to a given year is determined – for the first time oronce again2 – in a later year and such determination, had it been made in the given year,would have given rise to an adjustment of tax other than the one that was made, suchdetermination will produce tax consequences for the year in which it is made, if thebeneficiary of the covered benefit is resident in Québec at the end of the said year.

More specifically, these tax consequences, which will result in an addition in thecalculation of tax otherwise payable or a refundable tax credit, as the case may be, mayoccur when, in a given taxation year, a covered benefit attributable to a taxation year priorto the given year but later than taxation year 2003, hereunder called “prior year”, isdetermined and such determination, had it been made in the prior year, would haveresulted in changing the amount taken into consideration in the calculation of tax otherwisepayable by the beneficiary of the covered benefit for such year as the total of the amountseach representing the adjustment calculated regarding a covered benefit attributable tosuch year.

Accordingly, when, in a given taxation year, a covered benefit attributable to a prior year isdetermined, the beneficiary of such benefit will be required to include, in the calculation ofhis tax otherwise payable for the given year, the amount obtained, for such year, using therectification formula described below, provided such amount is positive.

2 This new determination may result in increasing, reducing or eliminating the amount of the adjustment regarding a

covered benefit attributable to a given taxation year.

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2004-9November 12, 2004

However, if the amount obtained for such taxation year using the rectification formula isnegative, the beneficiary of the covered benefit may claim, for the year, a refundable taxcredit equal to such amount.

Rectification formula

Difference3 betweenthe tax the bene-ficiary would havehad to pay for theprior year had thedetermination of thecovered benefitbeen made in suchyear and the taxpayable by thebeneficiary for theprior year

+

Difference4 between the amount thatthe eligible spouse of the beneficiaryfor the prior year deducted incalculating his (her) tax otherwisepayable for such year as transfer ofunused tax credits between spousesand the amount that such spousecould have deducted as such forsuch prior year had the deter-mination of the covered benefit beenmade in such year – withoutexceeding his (her) tax otherwisepayable for the prior year calculatedexcluding the deduction for thetransfer of unused tax creditsbetween spouses5

+

Total of each of theamounts that thebeneficiary obtainedfor the refundable taxcredit for a previoustaxation year furtherto the application ofthis formula regardinga covered benefitattributable to theprior year

–

Total of each of theamounts that thebeneficiary wasrequired to includein the calculation ofhis tax otherwisepayable for aprevious taxationyear further to theapplication of thisformula regardinga covered benefitattributable to theprior year

For example, an individual with unused tax credits amounting to $1 840 for taxation year2004 and whose eligible spouse for the year deducts an amount of $200 in the calculationof his (her) tax otherwise payable for the transfer of unused tax credits between spouseswill, if a covered benefit attributable to taxation year 2004 of which he is the beneficiary isdetermined, for the first time, during 2005, be required to include a maximum amount of$200 in the calculation of his tax otherwise payable for taxation year 2005.

The beneficiary of a covered benefit attributable to taxation year 2004 with tax payable forsuch year of $2 000 after making a tax adjustment of $1 578.74 regarding such benefitmay, in the event that the amount of the adjustment regarding the benefit – that initiallywas $7 893.72 – is reduced further to a new determination during a subsequent taxationyear, receive a refundable tax credit for such year corresponding to 20% of the amount bywhich the adjustment is reduced.

3 For greater clarity, the term “difference” is used to take a negative result, if any, into consideration.4 Ibid.5 For greater clarity, the amount of tax otherwise payable, for the prior year, by the spouse of the beneficiary must be

calculated taking into account the deduction for alternative minimum tax carried forward that would have been grantedto him (her) for the year.

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2004-9November 12, 2004

Covered benefits

For the purposes of the measures relating to reducing the unfairness related to thereception of certain benefits from a public indemnity plan, when the expression “coveredbenefit” applies to a benefit attributable to taxation year 2004, it means either of thefollowing benefits:

— a benefit, other than an excluded benefit, intended to compensate the total orpartial incapacity of a person to earn labour income, established on the basis of netincome and determined in accordance with the Workers' Compensation Act, theAct respecting industrial accidents and occupational diseases, the Act to promotegood citizenship, the Crime Victims Compensation Act or the Act respectingoccupational health and safety;

— a pension established on the basis of net income and determined by the SAAQ inaccordance with the Automobile Insurance Act or the Public Health Act, except fora death benefit paid regarding a person who suffered bodily injury prior toJanuary 1, 1990;

— any other similar payment made under an employees’ or workers’ compensationlaw of another province or of Canada for injury, disability or death.

For this purpose, the expression “excluded benefit” means the following benefits:

— the net salary or wages paid by an employer, in accordance with the Act respectingindustrial accidents and occupational diseases, for each day or portion of a day thata worker must be absent from his work to receive care or undergo medicalexaminations in relation to his injury or to carry out an activity as part of hispersonal rehabilitation program;

— a financial assistance payment for social stabilization or for economic stabilizationstipulated in the Regulation respecting social stabilization and economicstabilization programs.

Furthermore, where the expression “covered benefit” applies to a benefit attributable to ataxation year after taxation year 2004, it means any benefit consisting of an incomereplacement indemnity or compensation for loss of financial support that is established onthe basis of net income and determined under a public indemnity plan, following anaccident, employment injury, bodily injury or death or with a view to preventing bodilyinjury.6

However, the net salary or wages paid by an employer, in accordance with the Actrespecting industrial accidents and occupational diseases, for each day or portion of a dayin which the worker must be absent from his work to receive care or undergo medicalexaminations in relation to his injury or to carry out an activity as part of his personalrehabilitation program will not be considered a covered benefit.

6 In this regard, the expressions “income replacement indemnity”, “compensation for loss of financial support” and

“public indemnity plan” have the same meaning as they have for the purposes of the inclusion measure described insubsection 1.1 of this information bulletin.

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2004-9November 12, 2004

Calculation of the adjustment regarding a covered benefit

The calculation of the adjustment regarding a covered benefit attributable to a giventaxation year varies depending on whether the benefit is determined by the CSST, theSAAQ or another entity.7

• Covered benefits determined by the CSST

The adjustment regarding a covered benefit determined by the CSST that is attributable toa given taxation year is equal to the amount corresponding to the total of the amountsobtained using the following formulas:

— when the covered benefit is paid by an employer for the first 14 full days followingthe beginning of the disability, the lesser of the amounts calculated using thefollowing formulas:

Conversion ratefor the year x Total covered benefits paid by the employer for the first

14 full days following the beginning of the disability

Basic amount used, for the year,for the purposes of calculating

tax withholdings at source 0.90 x

Number of days of the yearexcluding Saturdays and

Sundays

x

Number of days, excluding Saturdays andSundays, included between the day of thestart of disability and the day closest to the

return to work and the 15th full dayfollowing the start of disability8

— in all other cases, for each day included in the given year for which a coveredbenefit is determined, the lesser of the amounts calculated using the followingformulas:9

Gross annual incomeused to determine the

benefit0.90 xConversionrate for the

yearx

Number of days of theyear

–Employmentreduction for

the year

Excess of 1over thebenefit

reductionrate

x

7 The expression “other entity” refers to an entity responsible for determining a covered benefit stipulated under a law of

a province, other than Québec, or a Canadian employees’ or workers’ compensation law, in the case where thecovered benefit is determined for taxation year 2004 and, in other cases, to an entity responsible for determining acovered benefit stipulated by a public indemnity plan established by a law, other than a law administered by the CSSTor the SAAQ.

8 When the period of 14 days following the disability overlaps two taxation years, only the days included in the taxationyear regarding which the covered benefit is attributable are to be taken into consideration.

9 For greater clarity, when the amount calculated using either of the formulas is less than zero, such amount is deemedto be equal to zero.

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2004-9November 12, 2004

Employment reduction for the year

Gross annual income of a suitable job or job held

Conversion ratefor the year

xNumber of days of the year

x

Recognized amounts used toestablish net income used for

determining the benefit0.90Number of days of the year

–Employmentreduction for

the year

Excess of 1 overthe benefit

reduction rate x

Employment reduction for the year: the lesser of:

Gross annual income of asuitable job or job held

Recognized amounts usedto establish net income of a

suitable job or job held Conversion rate

for the year x

Number of days of the year

AND

Number of days of the year

• Covered benefits determined by the SAAQ

The adjustment regarding a covered benefit determined by the SAAQ attributable to agiven taxation year is equal to the total of the amounts each of which corresponds, foreach day included in the year for which a covered benefit is determined, to the lesser ofthe amounts calculated using the following formulas:10

Gross annualincome used todetermine the

benefit

Reductionfor socialbenefits0.90 x

Conversionrate for the

yearx

Number ofdays of the

year

–

Rateattribut-able to ajob held

x

Employ-ment

reductionfor the year

x

Excess of1 over the

benefitreduction

rate

–Number ofdays of the

year

Employment reduction for the year

Gross annual income of a suitable job or job held

Conversion ratefor the year

xNumber of days of the year

10 Ibid.

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2004-9November 12, 2004

x

Recognized amountsused to establish net

income used fordetermining the benefit

Reduction forsocial benefits0.90

Number of days ofthe year

–

Rateattributableto a job held x

Employ-ment

reductionfor the year

x

Excess of 1over thebenefit

reductionrate

–

Number of daysof the year

Employment reduction for the year: the lesser of:

Gross annual income of asuitable job or job held

Recognized amounts usedto establish net income of a

suitable job or job held Conversion rate

for the year x

Number of days of the year

AND

Number of days of the year

• Covered benefits determined by an entity other than the CSST and theSAAQ

The adjustment regarding a covered benefit that is attributable to a given taxation year isequal to the lesser of the amounts calculated using the following formulas:

Conversion rate for the year x Total covered benefits attributable to the year

Amount of recognized essential needs and minimumamount used to determine the complementary amount

for the purposes of calculating the basic personaltax credit for the year11 0.90 x

Number of days of the year

xNumber of days of the year forwhich covered benefits were

determined

• Definitions of certain terms of the formulas

For the purposes of the various formulas used to calculate the adjustment regarding acovered benefit attributable to a given taxation year, the expression:

— “Benefit reduction rate” means, for a given day that is included in the given yearand for which a covered benefit attributable to the year is determined, thepercentage applied to reduce this benefit.

11 However, when the covered benefit is attributable to taxation year 2004, the numerator shall read: “Amount of

recognized essential needs for the purposes of calculating the basic personal tax credit and the flat amount under thesimplified tax system”.

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2004-9November 12, 2004

— “Conversion rate for the year” means the rate obtained by dividing the rate of thefirst taxable income bracket of the tax table applicable for the given taxation year bythe rate applicable, for such year, to the conversion of the amounts of recognizedessential needs into personal tax credits.12

— “Gross annual income of a suitable job or job held” means, for a given day that isincluded in the given year and for which a covered benefit attributable to the year isdetermined, the gross annual income relating to a suitable job or a job held –including, when the benefit is determined by the CSST, the gross annual incomefrom any benefit paid to the beneficiary, because of his termination of employment,under a law of Québec or elsewhere, other than the Act respecting industrialaccidents and occupational diseases – that is taken into consideration in thedetermination of the covered benefit for the day. However, in the case where thecovered benefit attributable to the year is subject to an annual adjustment,13 thisexpression, when used to determine the gross income of a suitable job, means, fora given day for which the benefit is determined, the amount that the gross annualincome relating to a suitable job that is taken into consideration in the determinationof the benefit would have been for such day if, as of the year following for which itwas established for the last time, it had been adjusted according to the same rulesas the covered benefit.

— “Gross annual income used to determine the benefit” means, for a given day that isincluded in the given year and for which a covered benefit attributable to the year isdetermined, the gross annual income used as the basis for determining thecovered benefit for such day. However, in the case where the covered benefitattributable to the year is subject to an annual adjustment,14 this expression means,for a given day for which the benefit is determined, the amount that the grossannual income used as the basis for determining the benefit for such day wouldhave been had it been adjusted according to the same rules as the covered benefit.

— “Rate attributable to a job held” means, for a given day that is included in the givenyear and for which a covered benefit attributable to the year is determined, a rate of100%, unless only a portion of the net income earned from holding a job is to beused to reduce the benefit determined for the day, in which case, it means thepercentage attributed by the public indemnity plan regarding the net income earnedfrom holding the job.15

12 For taxation year 2004, the conversion rate is 80%.13 This specific condition applies to any covered benefit that must, according to Québec legislation, be adjusted annually,

in a prescribed way and prescribed times, in accordance with section 119 of the Act respecting the Québec PensionPlan. Such adjustment is stipulated, in particular, in section 48 of the Automobile Insurance Act as it was worded onDecember 31, 1989.

14 Ibid.15 For example, the first paragraph of section 56 of the Automobile Insurance Act stipulates that where a victim holds a

job at which he earns a gross income less than that on which the SAAQ calculated a benefit, the latter is reducedsolely by 75% of the net income from such job.

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2004-9November 12, 2004

— “Recognized amounts used to establish net income” means, for a given day that isincluded in the given year and for which a covered benefit attributable to the year isdetermined:

– where the covered benefit attributable to the year is determined by theCSST, the total of the amounts that the CSST estimated for the year as theamount of recognized essential needs for the purposes of calculating thebasic personal tax credit and the flat amount under the simplified taxsystem, in the case where the given taxation year is taxation year 2004 and,in other cases, the total of the amount of recognized essential needs and ofthe minimum amount used to determine the complementary amount for thepurposes of calculating the basic personal tax credit for the year;

– where the covered benefit attributable to the year is determined by theSAAQ, the total of the amount of recognized essential needs for thepurposes of calculating the basic personal tax credit for taxation year 2003and the estimated annual amount, on the basis of the parameters applicablefor 2003, as employee contributions to the Québec Pension Plan andemployment insurance that is taken into consideration in the determinationof the benefit for such day, in the case where the given taxation year istaxation year 2004 and, in other cases, the total of the amount of recognizedessential needs for the purposes of calculating the basic personal tax creditfor the year and the estimated annual amount for employee contributions tothe Québec Pension Plan, the parental insurance plan16 and employmentinsurance that is taken into consideration in the determination of the benefitfor such day.

— “Reduction for social benefits” means, for a given day that is included in the givenyear and for which a covered benefit attributable to the year is determined, theproduct of the multiplication of the conversion rate for the year by the annualamount of benefits for old age pension or the annual amount of a disability benefitpayable under an income security program of another jurisdiction equivalent to thatestablished by the Act respecting the Québec Pension Plan, as the case may be,for the given year, used to reduce the benefit determined for the day.

Application details

• Death or cessation of residence

For the purposes of the measures relating to reducing the unfairness related to thereception of certain benefits from a public indemnity plan, where an individual dies orceases to reside in Canada during a given taxation year, the last day of his taxation yearwill be deemed to be the day of his death or the last day on which he resided in Canada,as the case may be.

16 This plan, established under the Act respecting parental insurance, will become effective on the date set by the

government.

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2004-9November 12, 2004

• Individuals who reside in Canada for part of a year

Where an individual resides in Canada for only part of a taxation year, the amount of theadjustment regarding a covered benefit attributable to such year must be determined bytaking into account only a benefit that may reasonably be considered as entirelyattributable to any period of the year throughout which the individual resides in Canada.

Moreover, for the purposes of calculating the maximum amount of the adjustment, theamount of recognized essential needs and the minimum amount used to determine thecomplementary amount for the purposes of calculating the basic personal tax credit willcorrespond respectively to the portion of that amount represented by the ratio between thenumber of days included in any period of the year throughout which the individual residedin Canada and the number of days in the calendar year.17

• Individual residing in Québec and carrying on business in Canada butoutside Québec

According to the existing tax rules, individuals who reside in Québec at the end of a giventaxation year and who carry on a business in Canada outside Québec must do a proratecalculation to determine their income tax payable under certain provisions of the taxlegislation.18

For these individuals, the tax adjustment for a given taxation year regarding any coveredbenefit attributable to such year that was determined in such year may not exceed theportion of the adjustment calculated in their regard for the year represented by theproportion used to determine their tax payable for such year.

In addition, for the purposes of the calculation of the maximum amount of the adjustmentfor a given taxation year, the amount of recognized essential needs and the minimumamount used to determine the complementary amount for the purposes of calculating thebasic personal tax credit correspond, respectively, to the amount obtained by applying, toeach of these amounts, the same proportion as the one used to determine the tax payablefor such year.19

Moreover, in the case where a covered benefit attributable to a given taxation year isdetermined retrospectively, the term of the rectification formula bearing on tax payable orthat would have been payable by the beneficiary for the given year must be calculated, ifthe beneficiary carried on a business in Canada but outside Québec in such year, takinginto account the proportion used to determine his tax payable for the year.

17 For taxation year 2004, the breakdown will apply to the amount of $1 840 – which represents the maximum amount of

the adjustment for that year.18 This calculation is carried out on the basis of the proportion existing between the income earned in Québec and the

income earned in Québec and elsewhere, as determined by the tax regulations.19 Supra, note 17.

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However, this proportion must not be applied to the amount obtained using the rectificationformula.

For greater clarity, the term of the rectification formula bearing on the amount that theeligible spouse of the beneficiary for the prior year deducted or could have deducted incalculating his (her) tax otherwise payable for the year as transfer of unused tax creditsbetween spouses must be determined by taking into account, if applicable, the proportionused to determine the tax payable of the eligible spouse for the year.20

• Individuals who go bankrupt during a year

Under the tax legislation, an individual who goes bankrupt during a calendar year isdeemed to have two taxation years during that calendar year: the first covering the periodfrom January 1 to the day before the bankruptcy (pre-bankruptcy); the second covering theperiod from the day of the bankruptcy to December 31 (post-bankruptcy).

For the purposes of the calculation of the maximum amount of the adjustment for each ofthe pre-bankruptcy and post-bankruptcy taxation years, the amount of recognizedessential needs as well as the minimum amount used to determine the complementaryamount for the purposes of calculating the basic personal tax credit correspondrespectively to the portion of that amount represented by the ratio between the number ofdays in the taxation year concerned and the number of days in the calendar year.21

For greater clarity, the amount of the adjustment regarding a covered benefit attributable toa pre-bankruptcy or post-bankruptcy taxation year must be determined by taking intoaccount only the portion of the covered benefit that may reasonably be considered asentirely attributable to such year.

Moreover, when an individual goes bankrupt during a calendar year in which a coveredbenefit has been determined retrospectively, the rule under which the bankrupt's taxationyear is deemed to begin on the date of the bankruptcy and the current taxation year isdeemed to end the day before that date will not apply to the amount of the rectification thatmust be made for such year.

• Alternative minimum tax

The amount of the adjustment that must taken into consideration for the purposes ofcalculating an individual's tax otherwise payable for a given taxation year must also betaken into consideration for the purposes of calculating the alternative minimum taxapplicable to such individual for the year.

20 The tax legislation stipulates that individuals who reside in Québec and who carry on a business in Canada, outside

Québec, those who reside in Canada, outside Québec, and who carry on a business in Québec, as well as those whodo not reside in Canada but who are in particular employed in Québec or carry on a business there must do a proratecalculation to determine their income tax payable.

21 Supra, note 17.

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An individual must also take into account, in calculating the alternative minimum taxapplicable to him for a given taxation year, the amount he will be required to include in thecalculation of his tax otherwise payable for the year following a retrospective determinationof a covered benefit.

• Indians or persons of Indian ancestry

The measures relating to reducing the unfairness related to the reception of certainbenefits from a public indemnity plan will not apply to a covered benefit that replaces anincome situated on a reserve or premises and is determined regarding an Indian or aperson of Indian ancestry.

Information return

For any year after 2003, the CSST and the SAAQ must produce an information return, onthe prescribed form, indicating, for any covered benefit they determine during the year, theamount of the adjustment calculated regarding such benefit as well as the year to which itis attributable.

This information return must be sent to the Minister of Revenue no later than the last dayof the month of February of the calendar year following the one during which a coveredbenefit has been determined. A copy of this return must also be sent, by the samedeadline, to the beneficiary of the covered benefit.

1.3 Tax treatment of financial assistance paid under theSolidarité jeunesse program

From November 1, 2000 to March 31, 2003, the Solidarité jeunesse project offered youngpeople from 18 to 20 years of age who were otherwise eligible for income securitybenefits, the opportunity to embark on a period of reflection and guidance leading to asocial and vocational integration initiative to prevent, as far as possible, recourse andlong-term dependence on income security.

On April 1, 2003, because of its success, the Solidarité jeunesse project became a regularprogram of the ministère de l’Emploi, de la Solidarité sociale et de la Famille. By raisingthe eligible age limit, the program gradually reached more people and is now geared toyoung people age 18 to 24.

The Solidarité jeunesse program operates essentially under the same formula as the initialproject.

During the first phase of the program, young people are directed by an external resourceto participate in structured activities to help them reorient themselves and develop anaction plan for self-sufficiency. During this phase, the young people receive the followingamounts of financial assistance:

— a basic allowance corresponding to the benefit they would have received had theybeen accepted for employment assistance, to which $30 per week may be added;

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— reimbursement of certain additional expenses attributable to their participation inthe program, in particular travel and child-care expenses.

The goal of the second phase of the program is to carry out the participant’s action planthat, generally, results in their entering the labour market or returning to school.

In addition, since April 1, 2004, some participants in the program may, during the secondphase, join an active measure determined by Emploi-Québec and receive financialassistance in this regard. This financial assistance includes a basic allowance, for anamount corresponding to the benefit they would have received had they been accepted foremployment assistance, as well as, according to the active measure in which theyparticipate, an increase in this allowance and reimbursement of certain expenses relatingto their participation.

From a tax point of view, the payments received by young people during the first phase ofthe initial Solidarité jeunesse project were taxable, except for the portion attributable tochild-care expenses. In addition, these payments were not subject to deductions at sourcefor income tax payable.

Accordingly, so that the financial assistance paid under the Solidarité jeunesse programreceives the same tax treatment as that applied to the financial assistance paid under theinitial Solidarité jeunesse project, the tax legislation will be amended to stipulate that anyamount received as financial assistance under the Solidarité jeunesse program, except forthe portion of such amount that relates to child-care expenses, will be taxable.

For greater clarity, the amounts paid under the Solidarité jeunesse program will not besubject to withholding at source for income tax.

This change will apply as of taxation year 2003.

1.4 Application for exemption from tax withholding atsource

A person who pays, at any time during a taxation year, remuneration, a retirement benefit,employment insurance benefits or other similar amounts must withhold an amount onaccount of tax payable by the recipient for the year.

In general, the amount the payer must withhold regarding such a payment is equal to theamount determined according to a mathematical formula authorized by the Minister ofRevenue or in accordance with tables prepared by him, taking into account in particularthe amount of personal tax credits of the recipient attributable to a given pay period.

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However, under the existing tax regulations, an employer must not retain any tax at sourcefrom the remuneration he pays an employee for a given year if such employee has filed aSource Deductions Return advising him that his income from employment for the year willbe less than the net amount22 he claims for the year in such return.

To prevent an employee who receives other payments on which no tax is withheld atsource23 from having a balance of tax payable when he files his tax return and to allow forthe fact that the rate applicable to the conversion of the amounts of recognized essentialneeds into personal tax credits does not correspond to the rate applicable to the firsttaxable income bracket of the tax table, changes will be made to the terms and conditionsgoverning the application for exemption from tax withholding at source.

More specifically, the tax regulations will be amended to provide that an employer must notwithhold any tax at source on the remuneration he pays to one of his employees24 during agiven taxation year if such employee files the Source Deductions Return advising that hisincome from all sources for the year will be less than the aggregate of the followingamounts:

— the product obtained by multiplying the total of the amounts used in calculating thepersonal tax credits he indicates in his return by the effective rate applicable for theyear;

— the total of the amounts that may be applied to reduce the remuneration on whichtax is withheld at source for the year that he will indicate in his return.

For this purpose, the effective rate applicable for a given taxation year means the rateobtained by dividing the rate applicable, for the year, to the conversion of the amounts ofrecognized essential needs into personal tax credits by the rate applicable, for the year, tothe first taxable income bracket in the tax table.25

These changes will apply as of taxation year 2005.

22 This net amount consists, first, of amounts used in the calculation of personal tax credits (i.e. the basic amount, the

amount for spouse reduced by, if applicable, the spouse’s income, the amounts for persons living alone, with respectto age and for retirement income, the amounts for a person suffering from a severe and prolonged mental or physicalimpairment and the amounts for a dependant reduced by, if applicable, the income of the dependant) and, second,amounts that may be applied to reduce the remuneration on which tax must be withheld at source (i.e. the amountsthat may be deducted as support payments and the amounts that may be deducted by individuals who live in arecognized remote area for the deduction for residence).

23 For instance, a retirement pension from the Québec Pension Plan, an old age security pension, dividends or interest.24 I.e. a person holding a job or an office with an employer.25 For taxation year 2005, the applicable effective rate will be 1.25.

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1.5 Rounding of parameters subject to automatic indexation

The March 30, 2004 Budget Speech announced that the main parameters of the personalincome tax system would be indexed as of January 1, 2005 using a new indexing factorthat notably will disregard any change in liquor and tobacco taxes.26

To determine the value of a parameter subject to automatic indexation for a given taxationyear, the indexing factor calculated for such year must be applied to the value of theparameter established for the preceding year.27

In general, where the amount obtained after applying the indexing factor to a givenparameter is not a multiple of 5, it must be adjusted to nearest multiple of 5 or, if it isequidistant from two multiples of 5, to the nearest higher multiple of 5. However, in certaincases, it is stipulated that the adjustment must be made to nearest multiple of 1 to preventan adjustment to the nearest multiple of 5 from being without effect.28

Considering that the parameters of the refundable tax credits that are automaticallyindexed, except for the applicable reduction thresholds, would be five times higher werethey to be converted into an amount of recognized essential needs giving rise to anon-refundable tax credit,29 the tax legislation will be amended to stipulate that, wheresuch parameters must be used for a taxation year after taxation year 2004, they will beadjusted to the nearest multiple of 1.

The following table lists all the parameters that, where the amount resulting from indexingis not a multiple of 1, must be adjusted to the nearest multiple of 1 or, if equidistant fromtwo multiples of 1, to the nearest higher multiple of 1. The shaded areas of the tablehighlight the parameters that, when used after December 31, 2004, will be subject to suchadjustment.

26 More specifically, the new indexing factor will correspond to the percentage change in the overall average Québec

consumer price index without alcoholic beverages and tobacco products (QCPI-WAT) for the 12-month period endingon September 30 of the year preceding the one for which an amount is to be indexed, compared with the averageQCPI-WAT for the 12-month period that ended on September 30 of the year prior to the year preceding the one forwhich an amount is to be indexed.

27 The indexing factor applicable for taxation year will be 1.427347987%.28 The adjustment must be made to the nearest multiple of 1 or, if the result is equidistant from two multiples of 1, to the

nearest higher multiple of 1, regarding the monthly allowance for handicapped children used to calculate therefundable tax credit for child assistance, the basic amount, the amount for spouse and the amount for a person livingalone used for the purpose of calculating the refundable tax credit for the Québec sales tax (QST) and the monthlybasic amount, amount for spouse and amount for a dependant used for the purpose of calculating the refundable taxcredit for individuals living in a northern village.

29 The applicable rate for the conversion of the amounts of recognized essential needs into non-refundable tax credits iscurrently of 20%.

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PARAMETERS SUBJECT TO ADJUSTMENT TO THE NEAREST MULTIPLE OF 1(in dollars)

PARAMETER 2004 2005

Refundable tax credit for child assistance

Maximum basic amount for a 1st child1 n/a 2 000Maximum basic amount for a 2nd and 3rd child1 n/a 1 000Maximum basic amount for a 4th child and subsequent children1 n/a 1 500Maximum amount for a single-parent family1 n/a 700Minimum basic amount for a 1st child2 553 561Minimum basic amount for a 2nd child and subsequent children2 510 517Minimum amount for a single-parent family 2 276 280Monthly allowance for handicapped children2 119.22 121

Refundable tax credit for the QST

Basic amount 163 165Amount for spouse 163 165Amount for a person living alone 110 112Refundable tax credit for medical expenses

Maximum amount 535 543Refundable tax credit for individuals living in a northern village

Monthly basic amount 38 39Monthly amount for spouse 38 39Monthly amount for a dependant 15 15

1. This amount will be automatically indexed as of January 1, 2006.2. The amount shown for 2004 refers to the amount that had been announced in the March 30, 2004 Budget Speech as

being the amount that, after indexing, would be allowed as of January 1, 2005.

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2. MEASURES CONCERNING BUSINESSES

2.1 Adjustments to refundable tax credits allowed in certainregions

In recent years, three refundable tax credits were put in place to encourage job creation inQuébec's resource regions, namely the refundable tax credit for the Vallée de l'aluminium,the refundable tax credit for the Gaspésie and certain maritime regions of Québec and therefundable tax credit for processing activities in the resource regions.

In general, these tax credits are granted with respect to the increase in payroll attributableto eligible employees of an eligible corporation operating in a target region, for fiveconsecutive calendar years.

More specifically, to determine its refundable tax credit, an eligible corporation mustcompare the payroll of a given calendar year with that of its reference calendar year. Thisreference calendar year generally corresponds to the calendar year preceding the oneduring which the corporation began to carry on a certified business, i.e. a businessregarding which Investissement Québec issued an eligibility certificate.

According to existing terms and conditions, an eligible corporation may request, following amajor unforeseen event causing the suspension of its activities, the cancellation of aneligibility certificate issued for a given calendar year. Such a corporation may, when itresumes activities, apply for an eligibility certificate regarding a subsequent calendar yearif it otherwise satisfies the other eligibility conditions. However, the corporation mustresume its activities in the same municipality or in a municipality that is no more than40 kilometres distant.

Moreover, territorial exclusivity is allowed regarding specific activities carried out in certainresource regions of Québec. For example, an activity covered by the refundable tax creditfor Gaspésie and certain maritime regions of Québec, such as the manufacturing ofwind-power generators, may not be recognized as the activity of a certified business forthe purposes of the refundable tax credit for processing activities in the resource regions.

To enable a corporation that must cease activities following a major unforeseen event toobtain a tax credit for the stipulated period of five years, even if it does not resumeactivities in the same municipality or in a municipality that is no more than 40 kilometresdistant, the application details of the three refundable tax credits granted in the resourceregions will be adjusted.

In addition, a clarification will be made to the notion of certified business, for the purposesof the refundable tax credit for Gaspésie and certain maritime regions of Québec, toconfirm the territorial exclusivity granted to these regions regarding the manufacturing ofwind-power generators.

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Refundable tax credit for the Vallée de l'aluminium

Briefly, the refundable tax credit for the Vallée de l'aluminium is granted regarding theincrease in payroll attributable to eligible employees of an eligible corporation operating inthe administrative region of Saguenay-Lac-Saint-Jean, for five consecutive calendar years.

To be eligible, a corporation must carry on a certified business, i.e. a business regardingwhich an eligibility certificate was issued by Investissement Québec and whose activitiesconsist, in particular, in manufacturing finished or semi-finished products from aluminumthat has undergone primary processing.

To determine its refundable tax credit for a given calendar year, an eligible corporationmust compare the payroll for such given calendar year with that of its reference calendaryear. This reference calendar year generally corresponds to the calendar year precedingthe one during which the corporation began to carry on a certified business.

As mentioned above, an eligible corporation may request, following a major unforeseenevent causing the suspension of its activities, the cancellation of an eligibility certificateissued for a given calendar year. Upon resumption of its activities, such a corporation mayapply for an eligibility certificate regarding a subsequent calendar year if it otherwisesatisfies the other eligibility conditions. In such a case, the reference calendar year of thenew certificate generally corresponds to the calendar year preceding the one during whichInvestissement Québec issued the new certificate.

Under the existing terms and conditions, to take advantage of the adjustment relating tothe eligibility certificate, following a major unforeseen event, a corporation must resume itsactivities in the same municipality or in a municipality that is no more than 40 kilometresdistant. This criterion was introduced to mitigate the impacts of a major unforeseen event,while providing a measure of stability for a local economy.

Various factors may influence a corporation in deciding to resume activities outside themunicipality where it previously carried on its business, including some over which thecorporation has no control such as regulatory constraints or the lack of municipalinfrastructures sufficient to the needs of the business.

Accordingly, to recognize that, in some circumstances, a corporation may be unable toresume its activities in the same municipality or in a municipality that is no more than40 kilometres distant, while maintaining the objective that led to the introduction of thiscriterion, the application details of the refundable tax credit for the Vallée de l’aluminiumwill be eased in the specific case where the corporation resumes its activities beyond the40-kilometre limit.

More specifically, Investissement Québec may, at the request of an eligible corporation,cancel the eligibility certificate issued to such corporation regarding a given calendar year.However, such cancellation will become effective only as of the calendar year following thelast calendar year for which the tax credit was claimed.

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Such an eligible corporation may, at a later date, apply for an eligibility certificate regardinga subsequent calendar year, even though it resumes its activities in a municipality that ismore than 40 kilometres distant from the one where it previously carried out its activities.However, the reference calendar year of the new certificate will then correspond to thecalendar year of the certificate that was cancelled.

The period of eligibility for the tax credit, following the issuing of the new eligibilitycertificate, shall be established by considering the number of years during which thecorporation received the tax credit.

For example, during calendar year 2003, an eligible corporation ceases to carry on its solecertified business after a fire. In the course of the same year, the corporation obtains thecancellation of the eligibility certificate issued for calendar year 2002. This cancellation willbecome effective in calendar year 2003. If the corporation obtains an eligibility certificatefor calendar year 2005, i.e. when it resumes activities, the eligibility period will be fourconsecutive calendar years because it had already received the tax credit for calendaryear 2002. Since the corporation resumes its activities in a municipality that is more than40 kilometres distant from the one where it previously carried on its certified business, thereference calendar year will then be calendar year 2001, i.e. the reference calendar yearof the certificate that was cancelled.

This change will apply as of calendar year 2002.

Refundable tax credit for Gaspésie and certain maritime regions ofQuébec

Briefly, the refundable tax credit for Gaspésie and certain maritime regions of Québec isallowed with respect to the increase in payroll attributable to eligible employees of aneligible corporation operating in the administrative regions of Gaspésie–Îles-de-la-Madeleine, Côte-Nord, Bas-Saint-Laurent and the Matane RCM, for five consecutivecalendar years.

To be eligible, a corporation must carry on a certified business, i.e. a business regardingwhich an eligibility certificate is issued by Investissement Québec and whose activities arein particular the manufacturing and processing of finished or semi-finished products in themarine biotechnology, wind-power generator manufacturing or mariculture fields.

• Correlative change to the refundable tax credit for the Vallée del’aluminium

Like the change made to the refundable tax credit for the Vallée de l’aluminium, thechange to the application of the 40-kilometre criterion, in the case of a major unforeseenevent, will also apply in the case of the refundable tax credit for Gaspésie and certainmaritime regions of Québec.

This change will apply as of calendar year 2002.

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• Clarification to the notion of certified business

As mentioned above, the activities covered by the refundable tax credit for Gaspésie andcertain maritime regions of Québec, may not be recognized as activities of a certifiedbusiness for the purposes of the refundable tax credit for processing activities in resourceregions.

For example, the manufacturing of wind-power generators must be carried out in theregion of Gaspésie−Îles-de-la-Madeleine or in the Matane RCM, even if this activity couldotherwise be considered as the manufacturing of a finished product from metal, which iscovered by the tax credit for processing activities in resource regions.

The definition of a wind-power generator varies depending on the reference source used.For instance, the mast of a wind-power generator could be considered a structuresupporting the wind-power generator rather than one of its components.

According to this interpretation, the making of a mast of a wind-power generator would bean activity covered by the tax credit for processing activities in resource regions because itwould then be considered as the making of a finished product from metal. On the otherhand, if the mast of a wind-power generator is considered a component of the wind-powergenerator, its making would then be an activity covered by the refundable tax credit forGaspésie and certain maritime regions of Québec.

To remove any doubt and better reflect the objective of the territorial exclusivity grantedregarding activities carried out in the maritime regions, namely, among other things, tostimulate the development of the wind-power generation sector, the notion of certifiedbusiness will be clarified to indicate that the manufacturing of wind-power generatorsincludes the manufacturing of its main components, in particular the tower, the rotor andthe nacelle.

This clarification will apply as of calendar year 2005.

However, to avoid penalizing a corporation on the basis of the interpretation given to theexpression wind-power generator, a clarification will also be made to the refundable taxcredit for processing activities in the resource regions to enable a corporation to have themanufacturing of components of wind-power generators recognized, under certainconditions, as the activity of a certified business, for calendar years prior to 2005. Thisclarification is described below.

Refundable tax credit for processing activities in the resourceregions

Briefly, the refundable tax credit for processing activities in the resource regions is grantedregarding the increase in payroll attributable to eligible employees of an eligiblecorporation operating in a resource region of Québec, for five consecutive calendar years.

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To be eligible, a corporation must carry on a certified business, i.e. a business regardingwhich an eligibility certificate is issued by Investissement Québec and whose activitiesconcern in particular the secondary or tertiary processing of wood, metals or non-metallicminerals.

According to the existing terms and conditions, territorial exclusivity is granted regardingspecific activities carried out in the maritime regions and in the Vallée de l'aluminium. Forexample, an activity covered by the refundable tax credit for Gaspésie and certainmaritime regions of Québec, such as the manufacturing of wind-power generators, can notbe recognized as the activity of a certified business for the purposes of the refundable taxcredit for processing activities in resource regions.

• Correlative change to the refundable tax credit for the Vallée del’aluminium

Like the change made to the refundable tax credit for the Vallée de l’aluminium, thechange to the application of the 40-kilometre criterion, in the case of a major unforeseenevent, will also apply in the case of the refundable tax credit for processing activities in theresource regions.

This change will apply as of calendar year 2002.

• Clarification to the notion of certified business

As a corollary to the clarification made to the refundable tax credit for Gaspésie andcertain maritime regions of Québec, a corporation carrying on a business whose activitiesconsist in manufacturing any of the main components of a wind-power generator, and forwhich an application to obtain an eligibility certificate was made in writing toInvestissement Québec prior to the date of publication of this information bulletin mayclaim the refundable tax credit for processing activities in the resource regions, forcalendar years 2001 to 2004, if it otherwise satisfies the other applicable conditions.

2.2 Refundable tax credit for R&D

A refundable tax credit of 35% is allowed a taxpayer in relation to scientific research andexperimental development (R&D) activities carried out either by an eligible public researchcentre or a research consortium under an eligible research contract concluded by thetaxpayer with such a centre or consortium, or by an eligible university entity under auniversity research contract concluded by the taxpayer with such entity, as the case maybe.

Dual recognition of a research consortium

In the May 14, 1992 Budget Speech, the Consortium de recherche sur la forêt boréalecommerciale was recognized as an eligible university entity.

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On September 26, 2003, the ministère du Développement économique et régional etRecherche (MDERR) issued a certificate recognizing the Consortium de recherche sur laforêt boréale commerciale as an eligible research consortium as of January 1, 2003.

The MDERR’s recognition of the Consortium de recherche sur la forêt boréalecommerciale as an eligible research consortium makes the recognition of this centre as aneligible university entity obsolete for the purposes of the refundable tax credits for R&D.

By being recognized as an eligible research consortium by the MDERR, a contractconcluded with the Consortium sur la forêt boréale may qualify as an eligible researchcontract, provided all the other eligibility conditions are otherwise satisfied.

In this context, the recognition of the Consortium de recherche sur la forêt boréalecommerciale as an eligible university entity is revoked as of January 1, 2003, i.e. theeffective date of the recognition of the Consortium de recherche sur la forêt boréalecommerciale as an eligible research consortium.

For greater clarity, this revocation, by itself, has no impact on the eligibility of the researchcontracts concluded with the Consortium de recherche sur la forêt boréale commerciale,since the contracts may qualify as eligible research contracts for the purposes of therefundable tax credits for R&D, as mentioned above.

Designation of two new eligible public research centres

The Centre de recherche sur les biotechnologies marines (CRBM) will be recognized asan eligible public research centre for the purposes of the refundable tax credits for R&D.

This recognition will apply regarding R&D carried out after July 13, 2004, under an eligibleresearch contract concluded after that date.

The Collège Maisonneuve, regarding its Centre d’études des procédés chimiques duQuébec (Céprocq), will be recognized as an eligible public research centre for thepurposes of the refundable tax credits for R&D.

In this case, a representative of Céprocq and another representative of the CollègeMaisonneuve must intervene in research contracts concluded with taxpayers and theseresearch contracts must in particular specify that the Collège Maisonneuve undertakes tohave the R&D work stipulated in the research contracts carried out by Céprocq.

This recognition will apply regarding R&D carried out after June 30, 2003, under an eligibleresearch contract concluded after that date.

2.3 Adjustment to the penalty for false statement oromission

The Taxation Act stipulates a penalty applicable to any person who makes a falsestatement or an omission, or who participates or acquiesces therein, if such action is takenknowingly or under circumstances amounting to gross negligence.

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Briefly, the amount of this penalty is equal to the greater of $100 or 50% of the amount ofincome tax avoided because of such false statement or omission, of the excess amount ofa deduction obtained because of such false statement or omission, or of the excessamount of a refundable tax credit obtained because of such false statement or omission.

The penalty for false statement or omission is structured so as to impose a penalty onlyregarding a net amount of undeclared income because it makes allowance, in thecalculation of the penalty, for the amount of a deduction allowed in the calculation ofincome and that is fully applicable to the amount that was not indicated in the return butthat should have been included in the calculation of income. Accordingly, under thiscalculation method, no penalty is payable, subject to the minimum amount of $100otherwise stipulated, where the omission or false statement produced no tax benefit to theperson required to provide information.

However, many deductions are allowed only in the calculation of taxable income.30 Suchdeductions are not considered in the calculation of the penalty for false statement oromission. Consequently, a person who omits to declare income otherwise exempt from taxbecause of a deduction stipulated in the calculation of taxable income and applicable tosuch income could have a penalty imposed, although the omission would not haveproduced a tax benefit for him.

This possibility does not appear consistent with the objective of the penalty for falsestatement or omission. The purpose of this section is to penalize a person who omits todeclare income in his tax return when he derives a tax benefit thereby. Consequently,where no tax benefit results from the omission, no penalty should be imposed, subject tothe imposition of the minimum amount of $100 otherwise stipulated.

Accordingly, the tax legislation will be amended. More specifically, the penalty for falsestatement or omission will be amended to make allowance, in the calculation of thepenalty, for the amount of a deduction stipulated in the calculation of taxable income andthat is directly applicable to the undeclared income.

This amendment will apply regarding a penalty for omission or false statement imposedafter the date of publication of this information bulletin.

30 In particular, the tax holidays for foreign researchers, foreign specialists or foreign experts.

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3. OTHER MEASURES

3.1 Limitation on estimates eligible for the purposes of thecalculation of the Québec sales tax regarding the sale ofroad vehicles

To limit the incidence of tax avoidance with respect to transactions relating to used roadvehicles, the Québec sales tax (QST) system includes a measure to determine the valueof such vehicles for the purposes of calculating the tax payable on their sale. According tothis anti-avoidance measure, the QST payable must generally be calculated on the greaterof the sale price the parties agreed to in the transaction, or a base price corresponding tothe average wholesale price indicated in certain reference volumes less $500.

However, when the agreed selling price is less than the base price because the roadvehicle that is sold is damaged or shows unusual wear, the purchaser can have the valueon which the QST must be calculated reduced.

To that end, the purchaser must submit to the Société de l’assurance automobile duQuébec, the seller of the road vehicle or the ministère du Revenu du Québec, as the casemay be, a written estimate of the vehicle or of the repairs to be carried out in respect of thevehicle, made by an estimator of automobile damage who holds an attestation ofprofessional qualification issued by the Groupement des assureurs automobiles (GAA).Estimators who are thus qualified can practice their profession at appraisal centresapproved by the GAA, firms accredited by the GAA or businesses independent of theGAA.

In recent years, it appears that many estimators qualified by the GAA concentrateexclusively on producing estimates of road vehicles for the purpose of calculating the QST,and that these estimates are often well below the true value of these vehicles. Theseestimators generally practice their profession in businesses that are not approved oraccredited by the GAA, so that the latter is not able to monitor the estimates produced bythese businesses.

In this context, the QST system will be changed to limit estimates eligible for the purposesof calculating the tax payable on the sale of road vehicles to those made by qualifiedestimators in the course of practicing their profession in businesses approved oraccredited by the GAA.

This measure will apply to road vehicles regarding which the QST is payable afterNovember 30, 2004. In addition, for the purposes of calculating the QST payable regardingsuch sales, no appraisal made before December 1, 2004 other than by a qualifiedestimator in the course of practicing his profession in a business approved or accreditedby the GAA will be eligible after January 31, 2005.

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3.2 Increase in the exemptions granted for determiningpremiums under the prescription drug insurance plan

The basic prescription drug insurance plan introduced by the Québec government ensuresall Quebecers fair access to the medication required by their state of health. Coverageunder this plan is provided by the Régie de l'assurance maladie du Québec (RAMQ), or byinsurers transacting group insurance or administrators of private-sector employee benefitplans.

As a rule, all persons whose coverage is provided by RAMQ in a given year must, in filingtheir income tax return for that year, pay a premium to finance the Québec prescriptiondrug insurance plan, of which they are beneficiaries. However, to take each person's abilityto pay into account, deductions are granted in calculating this annual premium. The levelof these deductions is set, notably, to exempt from paying the annual premium a person ora couple who receives the maximum amount of guaranteed income supplement from thefederal government.

To adhere to the principle of taking each person's ability to pay into account in determiningthe amount of the premiums that must be paid to finance the Québec prescription druginsurance plan, adjustments must be made to the amounts of the deductions used tocalculate the premiums payable for 2004.

The following table shows the deductions that will be granted in calculating the premiumspayable by persons whose coverage is provided by RAMQ in 2004.

Deductions according to family situationQuébec prescription drug insurance plan (2004)(in dollars)Family situation Deduction

1 adult, no children 12 240

1 adult, 1 child 19 850

1 adult, 2 children or more 22 615

2 adults, no children 19 850

2 adults, 1 child 22 615

2 adults, 2 children or more 25 165

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3.3 Harmonization with federal measures relating to theregularoty reform respecting registered charities

In the federal Budget Speech of March 23, 2004, the Minister of Finance of Canada tabled,in the House of Commons, Supplementary Information as well as a Notice of Ways andMeans Motion to Amend the Income Tax Act, introducing measures concerning theregulatory reform respecting registered charities (BR 25).31

On September 16, 2004, the Department of Finance Canada issued a news release32

accompanied by a draft amendment to the Income Tax Act and related legislationcontaining, with certain changes, the measures relating to the regulatory reform respectingregistered charities announced as part of the March 23, 2004 Budget Speech.

In this regard, Québec's tax legislation will be amended to incorporate some of thesemeasures. However, these measures will be adopted only after the approval of any federallaw arising from this notice of motion, taking into account technical amendments that mightbe made prior to its approval. In general, they will apply on the same dates as for federalincome tax purposes.

Measures retained

Subject to the clarifications mentioned below, Québec's tax legislation will be amended toincorporate, with adaptations based on its general principles, the measures regarding:

— the implementation of an intermediate penalty regime, but only concerningpenalties consisting of a temporary suspension of authorization to issue official taxreceipts;

— the annulment of registration and refusal to grant registration;

— the introduction of a more accessible appeal mechanism enabling the appellant tocontest certain decisions using the objections process rather than turning directly tothe courts;

— rules on disbursement quota.

Measures not retained

Some measures have not been retained, either because Québec’s tax system issatisfactory in that regard or because it does not contain corresponding provisions. Themeasures in question are those relating to the communication of additional informationregarding charities and the ones relating the special tax payable by charities whoseregistration has been revoked.

31 The reference in parentheses corresponds to the number of the budget resolution in the Notice of Ways and Means

Motion to Amend the Income Tax Act tabled on March 23, 2004.32 Department of Finance Canada news release 2004-051.

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Clarifications in respect of some of the measures retained

The measures retained concerning the implementation of an intermediate penalty regime,i.e. those dealing with penalties consisting of a temporary suspension of the authority toissue official tax receipts, will be adapted to:

— grant the Minister of Revenue the capacity to suspend the authority held by aregistered charity, including a registered national arts service organization, to issuereceipts for donations and gifts, bearing the mention that they are Québec incometax receipts, where such organization has contravened the requirements in terms ofregisters and supporting documents or where it has acted in concert with anotherorganization under such suspension to accept, on the latter’s behalf, a gift;

— extend the scope of such suspension to recognized arts and political educationorganizations;

— stipulate that, where the authority to issue official income tax receipts held by aregistered charity, including a registered national arts service organization, is, for agiven period, suspended for the purposes of federal tax legislation and regulation,the authority of such organization to issue receipts for donations and gifts, bearingthe mention that they are Québec income tax receipts shall be deemed, for thesame period, suspended for the purposes of Québec’s tax legislation andregulation, it being understood that, in relation to the period of suspension, anypostponement granted by the Tax Court of Canada must be taken into account.

Moreover, the measures retained regarding the annulment of registration and the refusalto grant registration will also be adapted to:

— grant the Minister of Revenue the authority to refuse to register a charity or aregistered national arts service organization as well as the authority to annul theregistration of such organization;

— in the case of a charity, including a registered national arts service organization,that, because of its registration with the Minister of National Revenue, is deemedregistered in Québec:

– retain, for the purposes of Québec’s tax system, the measure relating to theannulment, by the Minister of National Revenue, of the registration of suchorganization, even if such measure requires no legislative amendment;

– stipulate a rule such that any receipt for donations and gifts bearing themention that it is a receipt for Québec income tax and that was issued bythe organization before its registration was annuled by the Minister ofNational Revenue is deemed a valid receipt for the purposes of Québec’stax system, provided it would have been so if the organization was, at thetime the receipt was issued, a registered charity or, as the case may be, aregistered national arts service organization.

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Concerning the measures retained regarding the introduction of a more accessible appealmechanism, they will be extended to recognized arts and political education organizations.

Lastly, the measures retained regarding the disbursement quota will also be extended torecognized arts and political education organizations, by applying to the latter the samerules as for charitable organizations.

These measures will apply as of the same dates as the federal measures they arise from,except that, for arts and political education organizations:

— the measure granting the Minister of Revenue the capacity to suspend, in certaincircumstances, the authority to issue receipts for donations and gifts, bearing themention that they are Québec income tax receipts will apply regarding a taxationyear that begins after the date of publication of this information bulletin;

— the measures relating to the introduction of a more accessible appeal mechanismwill apply regarding a notice issued after the 30th day following the date on whichthe bill giving effect to them is assented to;

— the measures relating to the rules on disbursement quota will apply regarding ataxation year that begins after the date of publication of this information bulletin.However, to give arts and political education organizations that were recognizedbefore the day following the day of publication of this information bulletin enoughtime to adapt to the requirement to pay 3.5% in relation to their capital assets, thismeasure will apply regarding a taxation year of a recognized arts or politicaleducation organization beginning after December 31, 2008.

3.4 News releases 99-111 of December 16, 1999, 00-101 ofDecember 21, 2000 and 2003-032 of June 23, 2003

On December 16, 1999, the Minister of Finance of Canada announced that the CanadianVenture Exchange or CDNX, resulting from the merger of the Vancouver and Alberta stockexchanges, would be added to the list of securities exchanges in Canada covered by theIncome Tax Regulations. This decision was based on the fact that the Vancouver andAlberta stock exchanges were on that list.

On December 21, 2000, a further announcement adding to that of December 16, 1999,stipulated that the Canadian Venture Exchange had initiated a new class of shares, tier 3,to enable the transfer of shares from the Canadian Dealing Network, which was formerlythe over-the-counter market in Canada. However, since the Network was not on the list ofsecurities exchanges in Canada, tier 3 was not added to this list.

On November 27, 2000, the Winnipeg Exchange was also incorporated into the CanadianVenture Exchange which, in May 2002, changed its official name to TSX VentureExchange.

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As a result of all these changes, the list of securities exchanges in Canada now consists oftiers 1 and 2 of the TSX Venture Exchange, the Montréal Exchange and the Toronto StockExchange.

On June 23, 2003, the Minister of Finance of Canada announced the addition of theLuxembourg and Warsaw stock exchanges (principal and parallel markets) to the list ofsecurities exchanges outside Canada. This change became effective on June 24, 2003.

The notions of “Canadian stock exchange” and “foreign stock exchange” which are theQuébec counterparts of “securities exchanges in Canada” and “securities exchangesoutside Canada” are useful in particular for the purposes of provisions relating to asecurities loan arrangement and those concerning the calculation of income earned inQuébec by persons who do not reside there. Historically, the Québec and federal listshave always been identical.

Accordingly, Québec’s tax legislation will be amended to incorporate the changesdescribed above, which will be applicable as of the time they are for federal tax purposes.

More specifically, since there is no reason for the Québec lists of Canadian stockexchanges and foreign stock exchanges to differ from the corresponding federal lists,Québec’s tax legislation will be amended so that the Québec notions are defined withreference to the corresponding lists established as part of the federal tax regulations.Accordingly, any change made to the federal definitions will henceforth automatically beincorporated into Québec’s tax legislation.

Concerning the Québec list of Canadian stock exchanges, the effect of the reference willbe retroactive to the federal change applied at the earliest of the dates, namelyNovember 29, 1999, the date when the Canadian Venture Exchange was added to thefederal list of securities exchanges in Canada.

Lastly, in the case of the Québec list of foreign stock exchanges, the reference will beretroactive to June 24, 2003, the date when the federal recognition of the Luxembourg andWarsaw stock exchanges (principal and parallel markets) as securities markets outsideCanada became effective.