In the Budget Speech of March 30, 2010, the Minister of Finance of Quebec announced some adjustments regarding the eligibility of corporation for the refundable tax credit for the development of e-business (TCEB). In this post, my goal is limited to present these changes as presented in the budget speech.

Adjustments to the transfer of activities:

These adjustments apply to corporations that, during the taxation year, were the subject of a transfer of activities (acquisition or liquidation) and that required, at the time of the transfer, a minimum of six eligible full-time employees. For those corporation, it’s now possible to qualify the income of the corporation for each of the two parts of the taxation year, before and after the transfer of activities. The criterion relating to proportion of activities will be relaxed to represent this situation.

Measure excerpt:

Concerning the transfer of activities, the qualification of a corporation as a qualified corporation for the taxation year during a transfer of activities is carried out may be made for each of the two parts of the taxation year, i.e the part of such taxation year preceding the transfer and the part of such taxation year following the transfer. In addition, for a corporation to benefit from these adjustments regarding a transfer of activities, the transferred activities must be a scope such that they require, at the time of the transfer, a minimum of six eligible full-time employees.

Business start-up situation:

These adjustments apply to corporations that are in a business start-up situation and employ a minimum of six eligible full-time employees during a taxation year covered by the measure. The corporation may be eligible from the time when it reached the minimum of six employees for the taxation year. The criterion relating to the maintenance of six eligible jobs will be modified to represent this situation.

Measure excerpt:

Concerning the specific case of starting up a business in Quebec, a corporation may qualify as a qualified corporation regarding the part of a taxation year that finishes at the end of such taxation year and starts the day when the corporation’s eligible activities required, at all times during that part of the taxation year, a minimum of six eligible full-time employees. In addition, the corporation must satisfy the two criteria relating to the proportions of activities it carried out and the criterion relating to services supplied, in relation to that part of a taxation year.

Adjustment to the notion non-arm’s-length relationship for the purposes of the criterion relating to services supplied:

This adjustment seeks to clarify the arm’s length principle between corporations. All corporations that provide services to a corporation in which there is significant influence (de facto control) under any agreement are affected by this change. The criterion relating to services supplied will be modified to avoid ambiguity.

Measure excerpt:

Since the question as to whether persons who are not related are not at arm’s length is one of fact, the significant influence arising from an agreement between two persons can create doubt as to a corporation’s qualification as an eligible corporation.

In this context, an adjustment will be made to the notion non-arm’s-length relationship for the purposes of the criterion relating to services supplied, in order to avoid any ambiguity in the case where there is a significant influence arising from an agreement.

Accordingly, for the purposes of the criterion relating to services supplied, a corporation and another person will be deemed to have a non-arm’s-length relationship where the corporation has, in regard to such other person, a significant influence arising from an agreement, such that, if such influence were exercised, the result would be de facto control of the other person by the corporation.

To that end, a significant influence arising from an agreement will include that arising from a franchise, licence, lease, distribution, supply or management agreement or other similar agreement or arrangement, the main purpose of which is to govern relationship between a corporation and another person, regarding the manner in which the business carried on by the other person is to be conducted.

In addition, for the purposes of the criterion relating to services supplied, a corporation and another person will be deemed not to be at arm’s length where the corporation that supplies the services to such other person is not at arm’s length with a person having a significant influence arising from an agreement regarding such other person.

In short, these adjustments will be applied retroactively. It will be possible to take advantage of them after March 13, 2008, and before January 1, 2016.