Member Article

Introduced in 1979, the Quebec Stock Savings Plan (QSSP) was enormously success ful in the 1980s, encouraging the emergence of numerous Quebec SMEs which later became some of the most noteworthy success stories in Quebec business . On the other hand, the SME Growth Stock Plan, which replaced the QSSP in 2005, achieved a more mixed success . The 2009-2010 provincial budget, presented last March 19, attempts to remedy this situation. Make way for QSSP II !

What are the benefits for individuals?

Under QSSP II , SMEs that meet the eligibility criteria can issue qualifying securities which will enable individuals purchasing such securities to deduct 150% of the purchase price from their taxable income in the year the securities were purchased, provided they are included in the plan by no later than January 31st of the following year. Thus, a taxpayer in the 24% tax bracket in Quebec could reduce his provincial tax burden by $360 for each $1,000 of qualifying securities purchased by him. The actual cost of the securities would therefore be only $640. This advantage, combined with the generally low prices of securities in the current economic climate, should stimulate the issue of securities and even spur a few SMEs to convert into publicly held corporations. However, the 150% figure only applies to securities purchased prior to January 1, 2011 and included in the plan by no later than January 31 st following the year of purchase, at which time the percentage drops to 100%. The securities must be kept in the individual’s QSSP account for a minimum of two years, i.e. on December 31st of the year of purchase and  December 31st of the following two years. Note that during this period the individual may dispose of the securities so acquired provided that he acquires other securities in substitution thereof within two months of the said disposition, issued by a qualifying SME for an amount that is not less than the initial acquisition cost for which a deduction is claimed. In addition, the deduction may not exceed 10% of the individual’s total income for the year.

Which SMEs qualify?

SMEs do not qualify per se. Firstly, the SME must be a Canadian corporation with assets of less than $200 million at the time the securities are issued. The corporation’s financial statements from the preceding financial year are generally used to determine the value of the assets, which must also take into account the assets of any other corporation with which it is “associated”, on a worldwide basis, during the 12 months preceding the time of the offering. In addition, the corporation’s central management must be in Quebec and more than half of the wages of the corporation’s employees during the last taxation year before the offering must have been paid to employees of an establishment located in Quebec. Furthermore, the corporation must have carried on a business and had at least five full-time employees who were not insiders or persons related to insiders during the 12 months preceding the offering. Finally, no more than 50% of the value of the corporation’s assets must consist of investments which are not qualifying investments.

Which securities qualify?

Generally speaking, two types of securities are qualifying securities when an SME makes an initial offering: firstly, non-redeemable common shares with full voting rights and no fixed dividend acquired for cash in a public offering made by a qualifying SME under the QSSP; and secondly, securities issued by an investment fund that invests in qualifying securities and which are acquired for cash by a first purchaser.

What must the SME do?

In order to issue qualifying securities, the SME must not only meet the eligibility criteria under QSSP II , it must also make a public offering of its securities either by filing a prospectus or via a prospectus exemption. There is no minimum or maximum limit to the amount of the financing, nor prescribed use for the financing. In the case of a private SME, the SME should consider whether it is advantageous to convert into a publicly held corporation and make its first public offering.

How do securities of an SME qualify for coverage purposes?

Where an SME does not wish to make a public offering of securities, but wishes to make its shares available to QSSP II investors, it can qualify the securities already issued by it as valid securities for coverage purposes.

Thus, for coverage purposes only, common shares acquired in the secondary market which would be qualifying shares of an SME if they had been issued under QSSP II , are a third form of qualifying security.

In order to qualify, the securities of the SME must be issued and outstanding securities that can be purchased in the secondary market in Canada. Next, the SME must be on the list of companies kept by the Autorité des marchés financiers (AMF) for this purpose and published in the AMF’s weekly bulletin. To be included on the list, the SME must file a form prescribed by Revenue Quebec which confirms that it is a qualifying business for purposes of QSSP II .

In short, the provincial government hopes that this capitalization assistance program will encourage investors to return to the stock market, and help our SMEs to obtain financing. QSSP II came into force on March 19, 2009 and will come to an end on December 31, 2014.

 

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