Press Release

2003-2004 BUDGET
CHANGING GOVERNMENT INTERVENTION IN THE ECONOMY

Québec, June 12, 2003 – “We must change the focus of government intervention in order to meet Quebecers’ most pressing needs. We are currently paying more in support for businesses than for daycare services. Our government undertook to make services to the public a priority. And we will do that,” said Finance Minister Yves Séguin in the 2003-2004 Budget Speech.

Reduction in FAIRE program funding and review of government investment in government corporations

The Minister announced that the government would launch an in-depth review of the subsidies, loans and other forms of assistance granted to businesses, and maintain only those that are truly effective and essential. The first concrete step in this direction announced by Mr. Séguin is a reduction in the funding of the FAIRE program managed by Investissement Québec. “This is necessary not only because of the current budgetary context, but also to halt the escalation in commitments. The current commitments under the program will cost Quebecers $1.8 billion over the next few years. This leaves the government that much less manoeuvering room,” the Minister of Finance explained.

Mr. Séguin also noted that the rise in Québec’s debt in recent years stems largely from an increase in investments by the government in its enterprises. An in-depth review of the mandates of these corporations, particularly the SGF and the Innovatech corporations, which has already been announced and aims to cut down on their interventions, will enable the government to reduce its investments. The Minister of Finance explained that the review will also cover all loans and advances granted. The projected amount of these loans and advances in 2003-2004 will be revised downward after all issues have been examined.

Reduction in tax expenditures, and other measures to tighten the taxation system

As part of the change in government intervention in the economy, the 2003-2004 Budget Speech is reducing tax expenditures by introducing various measures to tighten the corporate taxation system.

“The cost of tax assistance for businesses has more than doubled since 1997, reaching almost $2 billion. In 2000 2001, the tax expenditures introduced in Québec to support businesses were double those in Ontario, even though the economy of our neighbours is twice as large as ours. What is more, according to available data, without further government involvement, these tax expenditures would have continued to climb, growing by more than 9% within the next two years,” the Minister said.

The measures announced by Mr. Séguin to tighten tax expenditures in favour of businesses represent a 27% reduction in tax assistance to businesses, and will enable savings of $759 million over a full year.

Elimination of tax benefits in designated sites

As of today, the tax benefits granted to businesses looking to set up in the following designated sites are being terminated: E-Commerce Place, E-Commerce Zone, the Cité du multimédia, information technology development centres, the Centre national des nouvelles technologies de Québec, new economy centres, the Zone de développement des biotechnologies, innovation centres, the Cité des nutraceutiques, the Cité de l’optique, the Technopôle Angus and the Mirabel zone.

“We have noted that the designated-sites model does not meet public-interest criteria. In general, our government does not believe in this outdated intervention model, which consists in imposing a geographic location rather than allowing entrepreneurs to use their judgment,” the Finance Minister explained.

However, the Minister emphasized that the government will honour the commitments already made to businesses located in these sites that have borne substantial start-up costs in return for formal promises of government assistance.

The elimination of these tax benefits for designated sites will enable the government to save more than $1 billion by 2013.

Abolishment of seven specific advantages

Seven other tax benefits that target businesses and are no longer justified will be abolished. This will ultimately result in savings of $134 million.

Chief among these measures are the benefits granted to banks and savings and credit unions. Their lower taxation rates and basic tax on capital exemptions will be eliminated.

Lastly, the measure regarding the 125% accelerated depreciation on investments in the manufacturing sector is also being abolished since this measure did not produce the anticipated results. “From now on, manufacturing businesses in Québec will be entitled to the 30% annual depreciation rate in effect in the rest of Canada,” Mr. Séguin stressed.

Lower rates for all tax credits and tax holidays

The Finance Minister also announced that all of the tax credits and tax holidays for businesses will henceforth be tightened. “The goal is to rethink our fiscal policy and, at the same time, reduce our budgetary shortfall,” the Minister explained.

Most of the tax credits and tax holidays for businesses are being decreased by 25%, while the most strategic ones, that is, those for culture and R&D, are being cut by 12.5%. These measures will result in annual savings of $202 million.

Tightening of tax benefits for heads of companies

The 2003-2004 Budget Speech provides for restrictions on certain benefits targeting primarily heads of companies and their senior executives. From now on, securities options will be taxed at a rate 25% higher than the current rate. In addition, to curtail abuse, entertainment expenses will henceforward be capped at 1% of a business’s annual sales. These two measures will ultimately represent savings totalling $23 million.

Tightening of assistance for business capitalization

In addition, the 2003-2004 Budget is announcing certain measures to limit the cost of tax assistance granted by the Québec government for business capitalization, such as that granted to labour-sponsored funds and Capital régional et coopératif Desjardins. The amount of capital they will be able to obtain under the Québec tax credit will be reduced for one year.

All other such measures—the Québec Stock Savings Plan (QSSP), Québec business investment companies and the Cooperative Investment Plan—will be re-evaluated. In the meantime, the Minister announced a moratorium on the related tax benefits, except in the case of work cooperatives.

Lower tax on capital for SMEs

Mr. Séguin also announced that the government would act this year on its intention to reduce the tax on capital payable by SMEs. Beginning on January 1, 2004, all SMEs whose paid-up capital is less than $600 000 will be exempt from the tax. As of that date, 70% of Québec businesses will no longer pay tax on capital. The Finance Minister indicated that the rate reduction for the other businesses had to be deferred on account of the budgetary shortfall.

Lastly, the Minister of Finance plans to help SMEs by raising the threshold below which they are exempt from the requirements under the legislation governing labour training. A bill will be tabled by the government to raise that exemption, which is currently $250 000, to $1 million.

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