On March 17, 2016, the Quebec government (Government) unveiled the 2016-2017 budget (Budget). The Government confirmed that it balanced the books for 2015–16 and anticipates maintaining a balanced budget for 2016–17. The balanced budget comes without raising any income taxes, sales taxes or fees. The balanced budget is, however, based on certain important assumptions, including an economic growth of 1.5 per cent in 2016 based in large part on sustained growth in exports and household consumption, and controlled program spending growth of 2.7 per cent in 2016.
The Budget sets forth new initiatives to spur Quebec’s economic growth, including through increased support for small and medium-sized businesses (SMBs) such as an additional reduction in the health services fund (HSF) contribution and targeted incentives to support manufacturing firms in their innovation processes. In addition, the Government reiterated its continued desire to focus on and intensify its efforts to combat tax evasion and so-called tax avoidance and aggressive tax planning. The Government also proposes in the Budget significant new measures that modify existing rules related to counteract tax planning related to avoiding duties on transfers of immovable property.
Below we highlight certain notable measures announced in the Budget that may be of interest to businesses.
Reduction of HSF Contribution Rate for SMBs
Generally, the HSF employer contribution rate is 2.7 per cent if total payroll is C$1-million or less (the “base rate”) and increases linearly to a maximum of 4.26 per cent for total payroll between C$1-million and C$5-million. In an effort to reduce the tax burden on SMBs, the base rate for eligible specified employers (essentially, SMBs in the primary and manufacturing sectors) was reduced to 1.6 per cent as of 2015 and further measures were announced last year for the reduction of contribution rates for SMBs in sectors other than the primary and manufacturing sector. Continuing with its effort to reduce the tax burden on SMBs, the Government proposes in the Budget to further reduce the base rate to 1.45 per cent for eligible specified employers gradually over a five-year period beginning in 2017. The base rate will also be gradually reduced for SMBs outside the primary and manufacturing sectors from 2.7 per cent to two per cent over the same period. The contribution rates for eligible specified employers and other SMBs with a total payroll between C$1-million and C$5-million will also be gradually reduced.
Consequential amendments will be made to the computation for years subsequent to 2016 of the temporary reduction of the HSF contribution rates for employers in the natural and applied sciences sector.
Family Businesses Transfer: Rules Relaxed
As part of the 2015-16 Quebec budget, in order to facilitate the transfer of a qualified family business, the Government announced that it would amend the Taxation Act (Quebec) to ease the application of certain anti-surplus stripping rules that essentially re-characterize capital gains as deemed dividends in the context of a share transfer of a corporation by an individual to a non-arm’s-length corporation. These alleviating amendments are intended to apply to a disposition of qualified shares of corporations in the primary and manufacturing sectors.
The Government has abandoned the original plan of having a government agency issue a qualification certificate to taxpayers wishing to benefit from the proposed alleviating provisions. The Budget instead sets out seven objective qualification criteria for the transfer of a qualified family business. Generally, the transferor must be an individual other than a trust that played (or whose spouse played) an active role in the business being transferred during the 24 months preceding the disposition of the shares. Furthermore, the criteria limit the level of control and involvement in the business and the financial interest in the corporation that the transferor (or the transferor’s spouse) can maintain following the transfer. Also, there must be some active involvement in the business carried on by the corporation (or the corporation in which the corporation in question had an interest) by at least one person participating in the body of the shareholders of the acquirer (or by the spouse of such person) for a certain period following the share transfer.
The Budget does not change the technical conditions and the type of corporations affected, which were announced in the 2015–16 Quebec budget. These measures will apply to the disposition of shares occurring after March 17, 2016.
New Deduction for Innovative Manufacturing Corporations (DIC)
The Government introduces in the Budget a new deduction for Quebec SMBs in the primary and manufacturing sectors.
The applicable general tax rate in Quebec is currently 11.9 per cent. Canadian-controlled private corporations with paid-up capital of C$10-million or less enjoy a reduction of 3.9 per cent on the first C$500,000 of annual income, which lowers the tax rate from 11.9 per cent to eight per cent on the first C$500,000 of annual income. This reduction in the tax rate is known as the small business deduction (SBD).
The C$500,000 limit is gradually reduced for corporations with paid-up capital over C$10-million and falls to zero for corporations with paid-up capital of C$15-million or more.
The new DIC will more specifically target corporations that cannot claim the SBD. Thus, it applies only to corporations having a paid-up capital of at least C$15-million. The paid-up capital of any corporation associated with the particular corporation would be taken into account in calculating the C$15-million threshold.
The new deduction will effectively reduce the applicable tax rate to four per cent on the first C$500,000 of annual income earned by a qualifying corporation, meaning a corporation with at least 50 per cent of activities in the manufacturing and processing sector carried out in Quebec.
The DIC will be determined as a specified annual percentage of the lesser of: i) the value of all “qualified patented features” incorporated into a qualified property sold or rented in the year, or ii) 50 per cent of the net income earned from the sale or rental of such qualified property.
A qualified patented feature refers to an invention which results, in whole or in part, from research and development (R&D) work that was carried out by the qualifying corporation in Quebec and with respect to which the said corporation was granted a refundable R&D tax credit.
The value of a qualified patented feature will be determined on the basis of the incremental net income earned from the sale or the rental of a property reasonably attributable to the additional value added by the qualified patented feature.
The DIC will apply only in respect of a taxation year beginning after December 31, 2016.
Significant Proposals to Duties on Transfers of Immovables
The Government proposes a series of measures that will significantly amend the system of duties applicable to transfers of immovables located in the province of Quebec. While the legislation underlying the amendments was not included in the Budget documents, the proposals will apply to transfers of immovables made after March 17, 2016.
The Act Respecting Duties on Transfers of Immovables (Quebec) stipulates that all municipalities must collect duties on the transfer of immovables within their territory. Except where certain exemptions provided for in the law apply, the transferee or transferees of the immovable must pay a transfer duty. The amount of the transfer duty is established according to the basis of imposition of the transfer duty, as defined in the law.
The proposals announced in the Budget address:
- The time at which the transfer duty becomes payable
- The rules applicable to certain exemptions and
- Situations involving closely related legal persons, namely companies
The measures are not a complete overhaul of the currently available exemptions, but are seemingly targeted at certain schemes. Considering that legal entities other than companies such as partnerships and trusts are customarily and legitimately chosen by purchasers of immovables, it is disappointing that the Government did not seize the opportunity to include such legal entities among those that could benefit from the exemptions.
Transfer Duty Exigibility
Under existing law, the transfer duty liability is created at the moment that the immovable is transferred. However, the duty is only payable when the transfer is registered in the land register, therefore, certain transactions could be structured such that the transfer would never be registered and the transfer duty would never became payable.
The Budget states that the law will be amended such that the transfer duty will become due on the date the immovable is transferred.
Unregistered Immovables Transfer
In connection with the measures regarding the exigibility of the transfer duty, a mechanism for disclosure of the transfer of immovables not registered in the land register has been introduced. The Government proposes in the Budget that transferees of immovable not registered in the land register be required to notify the municipality where the immovable is located within 90 days of the transfer. If the transferee fails to do so, only the transferee will be required to pay a special duty equal to 150 per cent of the transfer duty of the immovable. Circumstances where legal titles to immovables are held by nominees for the benefit of the true owner appear to be targeted by this measure. Structures involving nominees should be revisited in light of this proposal and more specifically, the actual legislation that will implement such proposal.
Exemptions Revision and Revocation
The Government proposes in the Budget to amend the conditions applicable to the exemption based on the percentage of voting shares held by a company. The percentage will be established by calculating the number of votes tied to the shares rather than the number of voting shares held. The Government seems to be targeting structures that relied on the exemption on the basis of holding a specified percentage of the voting shares of all of the voting shares of a company regardless of whether such percentage resulted in the holder controlling the company. This proposal could be viewed more as the clarification of an existing measure than the introduction of a new measure.
The Government also imposes an obligation to maintain the exemption condition relating to the percentage of voting rights of a company for a period of 24 months following the immovable’s transfer to a company and, in the case where a company that claimed the exemption transferred the immovable to a natural person, for 24 months preceding the immovable’s transfer. A disclosure mechanism has also been introduced whereby disclosure would have to be made to the municipality where the immovable is located within 90 days of the date on which the exemption conditions ceases to be met. The municipality could then claim the regular transfer duty. If the transferee fails to disclose, only the transferee will be required to pay a special duty equal to 150 per cent of the transfer duty of the immovable.
The exemption relating to the holding of at least 90 per cent of the fair market value of the issued shares held by a company in another company has been revoked. Unfortunately, no measure has been proposed to preserve the policy goals of the exemption, which only applied in relatively narrow circumstances where companies belonged to the same group.
A separate bulletin discussing these measures in more detail will be prepared in the coming days in collaboration with our real estate group.
CHANGES TO TAX-ADVANTAGED FUNDS
Recognizing the importance of the tax-advantaged funds in Quebec’s economic development and their contribution to finance businesses in all sectors of activity and at all development stages, the Government proposes in the Budget certain measures to increase the support of these tax-advantaged funds in Quebec businesses.
Capital régional et coopératif Desjardins (CRCD)
CRCD was formed to provide development capital to Quebec SMBs located in resource regions and to cooperatives. In order to facilitate CRCD raising capital, individuals are entitled to a tax credit of 45 per cent based on the subscription price they paid for the CRCD shares. CRCD reached its capitalization ceiling of C$1.25-billion in 2013 and, since then, has been limited in its annual issuance of shares to the amount of the previous year’s redemptions for a particular capital-raising period (which begins March 1 of a year and ends the last day of February of the following year).
The following measures are proposed in the Budget with respect to CRCD:
- In order to allow CRCD to continue its investment in Quebec, special authorization is granted to CRCD to raise a maximum amount of capital of:
- C$135-million for the capital-raising period beginning March 1, 2016
- C$135-million for the capital-raising period beginning March 1, 2017
- Considering the good historical return of CRCD, the tax credit for the acquisition of shares will be reduced from 45 per cent to 40 per cent for shares acquired after February 29, 2016. Accordingly, the maximum amount of non-refundable tax credit relating to the acquisition of CRCD shares will be reduced from C$2,250 to C$2,000.
- Considering the reduction of the tax credit from 45 per cent to 40 per cent, the Government proposes in the Budget corresponding changes to the tax rate applicable to the following special taxes:
- The special tax applicable to a shareholder where the CRCD shares held by such shareholder are redeemed or repurchased by CRCD within seven years of their issuance
- The special tax applicable to CRCD where, for any capital-raising period beginning after February 28, 2014, the amount of paid-up capital for all the shares issued by CRCD during a particular capital-raising period exceeds the maximum amount of capital it is authorized to raise for that particular period
Fondaction, le Fonds de développement de la Confédération des syndicats nationaux pour la cooperation et l’emploi (Fondaction)
Fondaction is a labour-sponsored fund that mainly invests in businesses with a positive social impact. In order to facilitate Fondaction raising capital, Fondaction shareholders benefit from a tax credit computed based on the subscription price they paid for the Fondaction shares. In order to enable Fondaction to raise the optimal level of capital necessary for its investments in the Quebec businesses, the applicable tax credit rate for Fondaction shares acquired after May 31, 2009, and before June 1, 2015, was temporarily increased from 15 per cent to 25 per cent. The applicable tax credit rate was to return to 15 per cent for acquisitions made after May 31, 2015.
The following measures are proposed in the Budget with respect to Fondaction:
- In order to allow Fondaction to continue its investment in Quebec businesses, the applicable tax credit rate is set to 20 per cent for any Fondaction shares acquired after May 31, 2016 and before June 1, 2018
- The maximum amount of capital that Fondaction could raise is limited to C$250-million per fiscal year for the two fiscal years beginning June 1, 2016, and June 1, 2017 respectively
- Under certain circumstances, for purposes of computing the source deduction applicable to an employee, the employer must deduct 100 per cent of the subscription price from such employee’s remuneration in respect of the employee’s acquisition of Fondaction shares made after May 31, 2015, and before June 1, 2018
- Consequential amendments will also be made with respect to certain special taxes
Tax-Advantaged Funds: Investment Requirements
Fonds de solidarité FTQ, Fondaction and CRCD are tax-advantaged funds with specific missions of contributing to the development of Quebec’s economy by investing in Quebec businesses. Therefore, specific investment requirements are imposed on these tax-advantaged funds to ensure that a set percentage of the net assets of such funds is invested in eligible Quebec businesses. In its 2015-16 budget, the Government proposed to increase the investment requirement, which was set at 60 per cent of the net assets of the particular tax-advantaged funds, by one per cent each year up to 65 per cent.
The Government confirms in the Budget the one per cent increase of the investment requirement for 2016-17 and the investment requirement will be 62 per cent for fiscal years beginning after May 31, 2016, with respect to FTQ and Fondaction and for fiscal years beginning after December 31, 2016, with respect to CRCD.
Furthermore, the investment period applicable to a local fund category, generally a local venture capital fund established and managed in Quebec or a local fund recognized by the Minister of Finance, will be extended to May 31, 2021.
The Government also proposes in the Budget certain amendments to the limits applicable to certain categories of eligible investments for purposes of calculating the investment requirement of FTQ.
Beginning March 18, 2016, depending on whether a qualified corporation operates a mineral resource or oil or gas well or not, the refundable tax credit it will be able to claim on eligible mining exploration expenses incurred in the near or far North of Quebec will be increased from 15 per cent to 18.75 per cent and from 31 per cent to 38.75 per cent.
Mining Tax Act Amendments
The Budget proposes certain amendments to the recently enacted Mining Tax Act:
- Changes to the calculation of an operator’s profit margin and determination of an operator’s mining tax on its annual profit for fiscal years that begin after December 31, 2013, in which an operator ceases all activities related to its mining activities
- Taxing recapture for excess depreciation allowance pertaining to transfers, on or after March 17, 2016, of depreciable property among persons who are related if the depreciable property is transferred on a tax-deferred basis unless the transferee is an operator (within the meaning of the Mining Tax Act) for the fiscal year in which the transferee acquires the depreciable property
- A mine operator will, for fiscal years ended after March 17, 2016, no longer be required to reimburse the Minister of Revenue for expenses paid for the services of a gemstone valuator mandated by the Minister of Revenue for the purpose of determining the gross value of annual output of gemstones