On May 24, 2007, the Quebec Minister of Finance, Monique Jérôme-Forget, tabled the Quebec Government’s 2007-2008 Budget.

The Budget contains tax cuts for individuals starting in 2008 and provides for an accelerated reduction in the capital tax, which will be completely eliminated by January 1, 2011. The Budget also confirms the tax measures that were announced in the last provincial budget on February 20, 2007 and incorporates a number of measures that were presented in the last federal budget on March 19, 2007. However, since the Budget has been presented by a minority government, there is no assurance that the measures announced will pass into law.

The following is a summary of the principal tax measures announced in the Budget.

Measures Concerning Businesses

Elimination of the Capital Tax on January 1, 2011

The rate of the tax on capital applicable to corporations that are not financial institutions will be reduced from 0.49% to 0.36% as of January 1, 2008. It will then be reduced annually by 0.12% as of January 1, 2009. Accordingly, it will fall to 0.24% as of January 1, 2009 and to 0.12% as of January 1, 2010. The tax on capital applicable to such corporations will be completely eliminated on January 1, 2011.

Meanwhile, the rate of the tax on capital applicable to financial institutions will be reduced from 0.98% to 0.72% as of January 1, 2008. The rate will then be reduced annually by 0.24% as of January 1, 2009. Accordingly, it will fall to 0.48% as of January 1, 2009 and to 0.24% as of January 1, 2010. The tax on capital applicable to financial institutions will be completely eliminated on January 1, 2011. The following table shows the changes in the rate of the tax on capital until it is eliminated.

The elimination of the tax on capital on January 1, 2011 will result in the withdrawal of the capital tax credit. Therefore, a corporation will no longer be able to claim the capital tax credit for a taxation year beginning after December 31, 2010 and any unused balance of the capital tax credit at the end of a taxation year including December 31, 2010 will be cancelled.

Certain technical amendments will also be made to ensure that an interest in a partnership is treated similarly to an interest in a corporation for the purposes of the tax on capital. In this connection, a clarification will be made to the calculation details of the paid-up capital of a corporation holding an interest in a partnership. In addition, the notion of bond will be clarified for the purposes of the tax on capital. These amendments will apply to a taxation year of a corporation ending after May 24, 2007.

Resource Regions

An annual indexing factor will be considered in establishing the tax credit beginning in calendar year 2008. More specifically, all the wages paid by a corporation to its eligible employees for the calendar year of the tax credit calculation will be reduced by 2% for the 2008 calendar year 2008 and by 4% for the 2009 calendar year. However, no such adjustment will be made to the refundable tax credit for Gaspésie and certain maritime regions of Quebec or to the refundable tax credit for the Vallée de l’aluminium.

Measures Concerning Individuals Personal Income Tax Reduction

As of January 1, 2008, the first bracket of the tax table will cover the first $37,500 of taxable income, with the second bracket consisting of the portion of taxable income over $37,500, but not exceeding $75,000, and the third bracket corresponding to taxable income over $75,000. As of January 1, 2009, the thresholds and ceilings establishing the taxable income brackets of the tax table will again be automatically indexed each year.

Increase in the Basic Tax Credit

A new basic amount of $10,215 will be introduced and will be automatically indexed annually as of January 1, 2009.

CONFIRMATION OF CERTAIN MEASURES ANNOUNCED IN THE LAST PROVINCIAL BUDGET

Measures Concerning Businesses Major Reduction in the Corporate Tax Rate Applicable to Passive Income

The tax rate applicable to passive income of a corporation with an establishment in Quebec is currently 16.25%. This tax rate will be reduced to 9.9% as of February 21, 2007, and will then increase to 11.4% on January 1, 2008, and to 11.9% on January 1, 2009.

This reduction in the rate is intended to make Quebec’s tax system more competitive with the rates that apply in other Canadian jurisdictions. If a corporation’s taxation year includes periods that straddle the change of rate dates, the tax rate effectively applicable for such taxation year will be a weighted tax rate reflecting the number of days of the taxation year included in each of these periods. Quebec’s tax treatment of dividends paid from investment income will remain unchanged.

Extension of and Improvement to the Capital Tax Credit

In the April 21, 2005 Budget Speech, a capital tax credit was introduced to encourage corporations to make investments in certain sectors. Briefly, this capital tax credit enables a corporation that makes an eligible investment to claim a non-refundable capital tax credit equal to 5% of the amount of such eligible investment.

Eligible investments for the purposes of this capital tax credit are manufacturing and processing equipment. In addition, these assets must, subject to certain transition rules, be acquired before January 1, 2008.

To further stimulate investments in manufacturing and processing equipment, the period during which such investments can be made will be extended until the capital tax is eliminated on January 1, 2011, and the rate of the capital tax credit will be raised to 10%.

Furthermore, in the March 23, 2006 Budget Speech, the rate of the capital tax credit was raised to 15% for certain investments made in the forest sector, i.e., briefly, investments in assets used mainly in sawmill and wood preservation activities and activities involved in the making of veneers, plywood and reconstituted wood products. These assets must, subject to certain transition rules, be acquired before January 1, 2010.

To foster investments to modernize forest sector companies, the period during which such investments can be made will be extended until the capital tax is eliminated on January 1, 2011.

Measures Concerning Scientific Research and Experimental Development

The tax legislation will be amended so that a person or a partnership who carries on a business in Canada and does R&D work in Quebec, or has such work done in Quebec on his behalf, will again be eligible for the refundable tax credit for R&D salary, for university R&D, for pre-competitive R&D and for R&D concerning private partnerships.

This change will apply to R&D expenditures incurred in a fiscal year that began after April 21, 2005. A further amendment will be made so that R&D expenditures incurred in a fiscal year that began after April 21, 2005 by a person or a partnership whose eligibility for the credits was affected by the amendment announced in the April 21, 2005 Budget Speech can be included in a claim for a credit, by the later of August 31, 2008 or the last day of a period of twelve months following the filing deadline for the taxation year in which such expenditures were incurred.

Gradual Reduction in the Tax Holiday Granted to Manufacturing SMEs in Remote Resource Regions

The tax legislation will be amended to reduce the rate of the deduction allowed for manufacturing SMEs in remote resource regions of Quebec. The rate will be reduced from 75% to 50% for the 2008 calendar year and to 25% for the 2009 and 2010 calendar years. Where the taxation year of the eligible corporation does not coincide with a calendar year covered by the change in rate, the change will apply in proportion to the number of days of such taxation year included in the calendar year covered by the change in rate.

Measures Concerning Culture

For many years, the government has made use of tax credits to support Quebec’s various cultural industries. These tax credits are the tax credit for Quebec film and television production, the tax credit for film production services, the tax credit for film dubbing, the tax credit for the production of shows, the tax credit for sound recording production and the tax credit for book publishing. Various technical amendments will be made to these tax credits.

In general, these amendments will apply to claims for refundable credits made after February 20, 2007.

Adjustment to the SME Growth Stock Plan

The tax legislation will be amended so that the 21-day period during which an investor can be in a coverage deficiency position in his Accro PME Plan (which replaced the former Quebec Stock Savings Plan) will be replaced by a period beginning the day after the day of a real withdrawal during a given month and ending on the last day of the second month following such given month. This amendment will allow the investor to remain in a coverage deficiency position for not more than three months. This change will apply as of January 1, 2007. It should be noted that no other change will be made to the Accro PME Plan. Thus, the obligation to hold investments under the plan as at December 31 of the year of acquisition and as at December 31 of the subsequent three taxation years will be maintained.

Adjustment to the Refundable Tax Credit for the Construction, Renovation or Conversion of Strategic Buildings in the Mirabel Zone

Generally, a change will be made to the terms and conditions of the annual certificate that Investissement Québec issues in relation to strategic buildings, such that the space of a strategic building can be occupied by businesses covered by an eligibility certificate issued by Investissement Québec or that would have been covered by such an eligibility certificate if the tax benefits relating to the Mirabel Zone had not been eliminated.

This amendment will apply to eligibility certificates for strategic buildings issued by Investissement Québec after February 20, 2007.

Measures Concerning Individuals

Introduction of a Refundable Tax Credit to Support Education Savings

Financial assistance will be paid through a refundable tax credit for the benefit of children who will be beneficiaries of an RESP. Meanwhile, the federal government provides for a separate system of grants applicable to an RESP.

This refundable tax credit, which will be granted to a trust governed by an education savings plan, will enable families that contribute to an RESP after Budget Day to obtain financial assistance of up to $3,600 per child, on a cumulative basis.

In general, the financial assistance for education savings provided by the tax credit will be equivalent to 10% of the first $2,000 of annual contributions to an RESP for children under age 18.

The Budget contains other measures affecting individuals.

Measures Concerning Consumption Taxes

Measures Concerning the Financial Services Sector

On January 26, 2007, the Minister of Finance of Canada issued, in a news release, draft amendments to the Excise Tax Act, explanatory notes and a background paper concerning a number of measures to improve and simplify the application of the GST and the HST in the financial services sector. The proposed changes to implement, in the federal tax system, a new legislative framework for the allocation of input tax credits of financial institutions will not be incorporated in the QST system since these measures do not correspond to the characteristics of Quebec’s tax system.

Standardized Accounting – Consequential Amendments to the New Rule for Calculating Interest in the Goods and Services Tax System

Currently, interest on amounts of GST owed by a person is based on the rate of Government of Canada Treasury Bills, to which a penalty of 6% is added.

In the May 2, 2006 federal Budget Speech, the Minister of Finance of Canada proposed changing the interest calculation rule stipulated by the Excise Tax Act with respect to the GST to harmonize it with the rule stipulated in other federal tax laws, with effect as of April 1, 2007

Since the QST system is harmonized with the GST system, the same consequential changes will be made to Quebec’s tax system and they will apply on the same date as the corresponding consequential changes in the federal tax system will apply.

HARMONIZATION MEASURES FOLLOWING THE FEDERAL BUDGET

Quebec’s tax legislation and regulations will be amended to incorporate some of the measures announced in the federal budget of March 19, 2007. These harmonization measures will apply as of the same dates and will take into account technical amendments that may be made prior to the federal legislation receiving assent.

Quebec’s tax system will be amended to incorporate, subject to certain specific modifications, the federal measures relating to:

1. the implementation of a registered disability savings plan;

2. donations of publicly listed securities to private foundations and the regime applicable to excess business holdings of private foundations;

3. the elimination of the annual limit applicable to contributions paid under a registered education savings plan and the recognition of certain part-time study programs for the purposes of such a plan;

4. amendments to the capital gains exemption;

5. the limitation on the deductibility of interest relating to active income from a foreign affiliate;

6. the change in the frequency of instalments of Canadian-controlled private corporations from monthly to quarterly;

7. the amendments pertaining to capital cost allowance applicable to certain assets.