Effective April 22, 2005, the SME Growth Stock Plan replacing the former Quebec Stock Savings Plan (QSSP) came into force to promote the financing of businesses in the growth and expansion phases. Initially, it was expected that this plan would be terminated on December 31, 2009.
Since its introduction in 2005, the SME Growth Stock Plan has been substantially amended in order to render it more attractive for the investors and to extend its scope to a larger number of businesses. One of the most recent amendments to the SME Growth Stock Plan was announced in the Budget of the Québec government tabled on March 19, 2009.
New Name, Asset Test Increased to $200 millions, Reduced Holding Period and Improved Deduction
With these most recent amendments, the name of the plan was changed to Stock Savings Plan II (“SSPII”). In addition, the amount of assets required to qualify a corporation for the SSPII is increased from $ 100 millions to $ 200 millions.
Generally, under the SSPII, an individual residing in Québec can deduct 100 % (rate temporary increased to 150 %) of the acquisition cost of certain categories of securities issued by an eligible issuing corporation to the extent that such individual holds the securities for a minimum holding period, this period being shortened by one year.
Holding Period Reduced by one Year
In fact, in order to maintain the tax benefit relating to the SSPII, an investor must hold the acquired eligible securities during a certain period of time (the “Minimum Holding Period”). However, the investor need not hold the same securities acquired initially. He only needs to hold in his plan, on December 31 of the year of acquisition as well as on December 31 of the two subsequent years (previously under the SME Growth Stock Plan : three subsequent years), the securities initially acquired or other securities acquired in replacement thereof (valid share - see below).
Moreover, these replacement securities must also be acquired within a period extending up to the last day of the second month following the date on which the security was sold. Accordingly, the investor may have the benefit of a three month period. On the other hand, an investor will nonetheless continue to be required to hold in his plan the securities initially acquired or other securities acquired in replacement thereof as of December 31 of each applicable year.
Thus, for example, an investor who withdraws an amount from his SSPII account in November must cover this withdrawal on or before the following December 31.
Extension of the Plan and Temporary Increase of the Deduction to 150 %
While it was expected that initially the tax benefits of the SME Growth Stock Plan would be terminated on December 31, 2009, the SSPII extends the deadline for five (5) years, i.e. until December 31, 2014. Moreover, under the SSPII, the tax deduction is temporarily increased to 150 % of the acquisition cost. Thus, the 150 % deduction (instead of 100 %) will apply to all investments made between March 20, 2009 and January 1, 2011 and included in the plan on or before January 31 of the year following the investment. On the other hand, the annual deduction cap will be maintained to 10 % of the individual’s total income for a year.
Any corporation willing to issue securities eligible to the SSPII must obtain a favorable advance ruling from Revenu Québec based on an application containing a prospectus setting that such securities are eligible to the SSPII. In addition, the corporation must have assets of less than $ 200 millions.
A deduction is also granted to individuals who invest in certain investment funds. In short, in rder for an investment fund to be eligible to a SSPII, the fund shall undertake to acquire the eligible shares or own valid shares. We will analyze below what are eligible shares or valid shares.
Eligible Issuing Corporation
In order to be an eligible issuing corporation, the particular corporation must meet all of the following criteria:
1) It is a Canadian corporation with assets of less than $200 million.
The assets referred to are those shown in the financial statements of the eligible issuing corporation for the taxation year preceding the one during which the eligible issuing corporation makes a public offering of shares under the SSPII, and include the assets of any other corporation with which the eligible issuing corporation is associated (for tax purposes), on a worldwide basis, at any time during the twelve months preceding the time of the offering.
2) Its senior management is in Québec and more than half of the salaries paid to its employees during its last taxation year were paid to employees of an establishment located in Québec.
3) Throughout the preceding 12 months, it carried on a business and had at least five full-time employees who are not insiders or persons related to such insiders.
To determine if this criterion is satisfied, account is taken of certain corporate reorganizations such as mergers and winding-ups.
4) No more than 50 % of the value of its property consists of investments other than eligible investments.
Essentially, the 50 % of the value of property criterion is designed to exclude holding companies (with passive investments) to ensure that the plan benefits only active commercial corporations.
The value of the property of an issuing corporation is determined on the basis of its last financial statements. However, there may be exceptions to this principle in certain circumstances, in particular for a change in fiscal year or for the first fiscal year. Furthermore, certain adjustments may be made regarding eligible investments in the event of major changes to the composition of the corporation’s assets since publication of its last financial statements. Lastly, streamlining measures take also into account the issuing corporation’s scientific research and experimental development activities.
Moreover, Revenu Québec is granted additional authority to require additional documents it may deem necessary to assess this criterion.
Shares of the eligible issuing corporation must be listed on a Canadian stock exchange. An eligible issuing corporation that makes an initial public offering of shares under the SSPII is required to take the necessary measures for its shares to be listed on a Canadian stock exchange no later than the sixtieth day following the date of the receipt for the final prospectus.
Generally, there are three types of securities for the purposes of the SSPII :
The holder of an “eligible share” is entitled to the deduction. “Eligible share” means a common share with an unrestricted voting right, with respect to which the issuer has received a favorable advance ruling from Revenue Québec in relation to compliance with the objectives of the SSPII. The share must be acquired for cash in the course of a public share offering and be non-redeemable and with no fixed dividend.
A share may not be recognized as an eligible share if it is acquired in the course of an offering from which the proceeds are used to acquire shares or negotiable securities of another corporation. However, exceptions are made regarding the acquisition of a controlled subsidiary. In addition, a share may not be recognized as an eligible share when the use of the proceeds of the offering relates to activities to be carried out outside Québec and, in the view of Revenu Québec, such activities can have a tangible negative impact on the level of employment or the level of economic activity of the eligible issuing corporation, or its subsidiaries, in Québec.
The holder of an eligible security is entitled to the deduction. “Eligible security” means a security acquired for cash by a first acquirer if it is issued by an investment fund whose prospectus stipulates that it is covered by the SSPII and shall be subject to an advance ruling by Revenu Québec.
An investment fund means a mutual fund or open-end investment company that makes a public offering of securities and undertakes, in the final prospectus, to acquire, no later than December 31 of that year, eligible shares with the proceeds from the public offering of securities. In addition, the investment fund shall be the owner, on December 31 of the year and for the minimal holding period, of eligible shares or valid shares (see below).
Moreover, an investment fund shall be established in Québec and the trustee or manager, as the case may be, shall reside in Canada and maintain an establishment in Québec.
Valid share for replacement
The holder of a valid share is not entitled to a deduction per se, but can use it as replacement share. Effectively, to comply with the minimum holding period, an investor can purchase a share on the secondary market to replace a qualifying share or security he disposed of. This operation is generally known as a “covering” operation and the replacement share that could be acquired to that end is called a “valid share”
Briefly, a valid share is a share included on a list drawn up to that effect by the Autorité des marchés financiers (AMF) and acquired in a stock transaction carried out on a stock exchange in Canada.
More specifically, the AMF list includes the name of eligible corporations that carried out an offering under the SME Growth Stock Plan (or under the SSPII) during a maximum period of four years. A corporation which did not carry out such offerings can also be listed on the AMF list if it satisfies certain requirements and if it so applies to Revenu Québec in order to obtain confirmation that (i) the capital stock of the corporation includes shares listed on a stock exchange in Canada that could be an eligible share and (ii) which meets the conditions in order to qualify as an eligible issuing corporation.
In order to encourage registration of a larger number of corporations on the AMF list, the application to Revenu Québec shall be made on a prescribed form if made after June 30, 2009. For requests made before such date, the corporation shall apply to Revenu Québec for an advance ruling.
In short, the SSPII should help in the financing of businesses in the growth and expansion phases.
Indeed, to ensure that the SSPII is more attractive to investors and to extend its scope to a larger number of businesses, the SSPII now applies to larger corporations, i.e. corporations with assets under $200 million compared with $100 million under the SME Growth Stock Plan.
In addition, the deduction for the cost of acquisition of eligible securities will be temporary increased to 150 % (instead of 100 %).
Furthermore, to ensure that the capital invested in the desired market segment remains invested in this market segment throughout the life of the plan, and not just on a short-term basis at year end, the SSPII imposes a minimum holding period of two years after the year of acquisition, being three fiscal periods.