On June 4, 2014, Carlos J. Leitão, Quebec Minister of Finance, tabled his government’s first budget, which includes a number of tax measures for business.
The following is a summary of the principal budget measures announced. However, these measures do not have force of law until they are enacted by the National Assembly.
In addition to the various tax measures announced, the Minister of Finance expects to create the Québec Taxation Review Committee to make recommendations to the government on personal and corporate taxation. The government will announce the details of the committee’s membership and its terms of reference shortly.
Measures relating to business
The tax rate for manufacturing SMEs is reduced
For purposes of Quebec provincial tax, the general tax rate for corporations is currently 11.9% (or 8% on the first $500,000 of annual income of an eligible business).
The government has announced a progressive reduction in the tax rate for manufacturing SMEs.
A “manufacturing SME” is a Canadian-controlled private corporation whose paid-up capital is less than $15 million and at least 25% of whose activities consist of manufacturing and processing.
A manufacturing SME whose proportion of activities attributable to manufacturing and processing activities is 50% or more may benefit from the maximum additional deduction rate of 2% (4% as of April 1, 2015). Where such proportion is between 50% and 25%, the additional deduction rate the manufacturing SME may claim will be reduced linearly. The additional deduction will apply to the amount regarding which the manufacturing SME benefits from the reduced tax rate of 8% up to a maximum of $500,000. This amount is gradually reduced for corporations with a paid-up capital of between $10 million and $15 million and totally eliminated for corporations whose paid-up capital is $15 million.
Additional deduction for transportation costs of remote manufacturing SMEs
In recognition of the higher transportation costs of manufacturing SMEs that are far from large centres, the budget introduces an additional deduction in computing income corresponding to:
- 2% of gross income, with a ceiling of $100,000 per corporation, for manufacturing SMEs in the intermediate zone;1
- 4% of gross income, with a ceiling of $250,000 per corporation, for manufacturing SMEs in the remote zone;2
- 6% of gross income, with no ceiling per corporation, for manufacturing SMEs in the special remote zone.3
This additional deduction rate will apply for taxation years ending after June 4, 2014. However, where the taxation year of a manufacturing SME includes June 4, 2014, the additional deduction rate will apply in proportion to the number of days of such taxation year that follow June 4, 2014.
Reduced contribution to the Health Services Fund to boost innovation in SMEs
Until the end of 2020, SMEs that hire specialized employees will enjoy a holiday from the contribution to the Health Services Fund for such new specialized employees.
- for employers whose payroll does not exceed $1 million, the reduction will completely eliminate the contribution to the Health Services Fund payable for such new specialized employees;
- employers whose payroll is between $1 million and $5 million will receive a partial reduction in the contribution payable for such employees in inverse proportion to the size of their payroll.
Generally, this tax relief will apply in respect of any eligible employee who is hired after June 4, 2014.
Introduction of new tax incentives to foster the marine industry
To encourage Quebec shipowners, including cruise and excursion businesses, to modernize and renew their fleet of vessels through a qualified Quebec shipyard, there will be:
- an additional capital cost allowance of 50% for the construction or renovation of vessels;
- the creation of a tax-free reserve to fund maintenance, renovation or construction work on vessels.
In most instances, these changes will apply to tax-free reserves constituted after June 4, 2014 and to the cost of work performed on a Canadian vessel in an eligible Quebec shipyard between June 5, 2014 and December 31, 2023.
Amendments to the Mining Tax Act
To support the processing of minerals that require the use of a hydrometallurgy process, the government proposes to change the calculation of the processing allowance so that the cost of assets used in hydrometallurgy may be taken into consideration. Hydrometallurgy is a process for extracting various metals from an ore or concentrate and for purifying and separating them.
The Mining Tax Act will be amended to allow the value of gemstones to be determined outside the mine site with the authorization of the Minister of Energy and Natural Resources.
These amendments will apply to an operator for a taxation year commencing after December 31, 2013.
20% reduction in tax assistance allowed for businesses
To restore order to public finances and ensure adequate funding of public services, the government believes it is essential that the tax assistance allowed for businesses be tightened.
Therefore, the tax legislation will be amended to reduce the rate of the following refundable tax credits by 20%:
- Refundable tax credit for technological adaptation services
- Refundable tax credit for design
- Refundable tax credits for the production of multimedia titles
- Refundable tax credit for major employment generating projects
- Refundable tax credit for job creation in the resource regions, the Vallée de l’aluminium and in Gaspésie and certain maritime regions of Quebec (reduction of the rate of the tax credit by 10% for each of the years 2014 and 2015)
- Refundable tax credit for job creation in Gaspésie and certain maritime regions of Quebec in the fields of marine biotechnology, mariculture and marine products processing (reduction of the rate of the tax credit by 10% for each of the years 2014 and 2015)
- Refundable tax credit for resources
- Tax benefits relating to flow-through shares (reduction of both additional deductions for a total of 20%)
- Refundable tax credit for international financial centres
- Refundable tax credit relating to a new financial services corporation
- Refundable tax credit for the hiring of employees by a new financial services corporation
- Refundable tax credit pertaining to the diversification of markets of Quebec manufacturing companies
- Refundable tax credit to foster the modernization of the tourism accommodation offering
- Refundable tax credit for Quebec film and television production
- Refundable tax credit for film production services
- Refundable tax credit for film dubbing
- Refundable tax credit for sound recording production
- Refundable tax credit for the production of shows
- Refundable tax credit for book publishing
- Refundable tax credit for the production of multimedia environments or events staged outside Quebec
- Refundable tax credit for on-the-job training periods
- Refundable tax credit for manpower training in the manufacturing, forest and mining sectors
Generally, these changes will come into force after June 4, 2014.
Measures concerning scientific research and experimental development
20% reduction in tax assistance
A person who carries on a business in Canada and carries out in Quebec, or has carried out on his behalf in Quebec, scientific research and experimental development (R&D) under a contract may receive various refundable tax credits. The budget proposes to reduce the rate of the refundable tax credits for R&D by 20%.
Specifically, the rates of the various refundable tax credits for R&D will be amended as follows:
Click here to view table.
These changes will apply to R&D expenditures incurred after June 4, 2014 or R&D expenditures incurred under a research contract entered into after June 4, 2014.
Elimination of the increase from 17.5% to 27.5% in the rate of the refundable tax credit for R&D salary in relation to biopharmaceutical activities
Currently, an eligible biopharmaceutical corporation may receive, for a taxation year, a refundable tax credit for R&D salary equal to 27.5% of its eligible R&D expenditures for such year, which percentage may be increased to 37.5%.
The budget proposes to eliminate this increase in the rate of the refundable tax credit for R&D salary in relation to an eligible biopharmaceutical corporation commencing on June 4, 2014. Accordingly, Investissement Québec will not accept applications for an initial certificate submitted by a corporation as of that date.
The rate of the tax credit will therefore be reduced to 22% and the increase in the rate will be a maximum of 30% in the case of a Canadian-controlled corporation.
However, a corporation previously recognized by Investissement Québec as an eligible biopharmaceutical corporation may continue to benefit from the increase in the rate of the refundable tax credit for R&D salary for its taxation year including June 4, 2014.
This change will apply to R&D expenditures incurred after June 4, 2014, or R&D expenditures incurred under a research contract entered into on or after June 4, 2014.
Refundable tax credit for the development of e-business (TCEB)
The TCEB, at a rate of 30%, is granted to a qualified corporation that pays salaries to eligible employees carrying on an eligible activity. The amount of the tax credit may not exceed $20,000 per employee annually.
The rate of this tax credit will be reduced to 24% for salaries incurred regarding an eligible employee after June 4, 2014. In addition, the annual cap of $20,000 per employee will be maintained and will not be raised to $22,500 as of January 1, 2016 as was previously announced.
Tax credit for investments relating to manufacturing and processing equipment
A qualified corporation that acquires qualified property may receive, regarding the eligible expenses it incurred, the tax credit for investments relating to manufacturing and processing equipment.
Elimination of the increase in the rate of the tax credit for investments for certain administrative regions and RCMs and reduction of the base rate and the increases in the rate of the tax credit for investments
The budget proposes to amend the tax legislation to eliminate the rise of five percentage points in the increase in the rate of the tax credit for investments that is granted to a qualified corporation that does not receive the tax credit for job creation regarding qualified property acquired for use mainly in the eastern part of the Bas-Saint-Laurent administrative region or in an intermediate zone. The legislation will also be amended so that the base rate and the increases in the rate of the tax credit for investments are reduced by 20%.
Click here to view table.
The other rules that apply for the determination of the rate of the tax credit for investments applicable to a qualified corporation regarding the eligible expenses it incurred to acquire a qualified property will apply with the necessary adaptations.
Elimination of the additional increase in the rate of the tax credit for investments for manufacturing SMEs
The additional increase of ten percentage points in the rate of the tax credit for investments that applies regarding expenses eligible for the additional increase incurred by a qualified corporation will be eliminated.
Generally, these changes to the tax credit for investments will apply regarding eligible expenses incurred after June 4, 2014.
However, these changes will not apply regarding eligible expenses incurred between June 5, 2014 and June 30, 2015, to acquire a qualified property no later than June 4, 2014, or to acquire a qualified property after such date, where the qualified property is acquired in accordance with a written obligation entered into no later than June 4, 2014, or the qualified property is a property whose construction was under way on June 4, 2014.
Refundable tax credit relating to buildings used in the course of manufacturing or processing activities by a Quebec manufacturing SME
A refundable tax credit relating to buildings used in the course of manufacturing or processing activities by a Quebec manufacturing SME was introduced on October 7, 2013.
A qualified corporation that acquires a building or makes an addition to a building may receive, under certain conditions, a tax credit for buildings regarding its eligible expenditures relating to such building or addition.
The tax credit for buildings will be eliminated as of June 4, 2014. Accordingly, expenditures relating to a building incurred after June 4, 2014 will not give rise to the tax credit for buildings.
However, a qualified corporation or a qualified corporation that is a member of a qualified partnership may continue to receive the tax credit for buildings regarding its expenditures relating to a qualified building, or its share of the expenditures relating to a qualified building incurred after June 4, 2014, but before July 1, 2015, if such expenditures are incurred to acquire a building, or an addition to a building, no later than June 4, 2014, or for such an acquisition after that date where such property is acquired in accordance with a written obligation entered into no later than June 4, 2014, or where construction of such property by the qualified corporation or by the qualified partnership, or on its behalf, was under way on June 4, 2014.
Refundable tax credit for the integration of information technologies in manufacturing SMEs
Information Bulletin 2013-10 introduced a new temporary refundable tax credit to support Quebec manufacturing SMEs that want to invest in technology and integrate information technologies in their business processes.
In the context of the revision of preferential measures for businesses, Investissement Québec will stop issuing the certificates necessary to receive the refundable tax credit for the integration of information technologies in manufacturing SMEs as of June 4, 2014, and for the entire period of the revision of this fiscal measure.
Measures applicable to labour funds
Currently, there is no annual cap on the issue of shares by the Fonds de solidarité FTQ. Meanwhile, there is a $200 million annual cap on the issue of shares by the Fondaction for its 2013-2014 fiscal year. The cap was to be increased to $225 million for 2014-2015.
The government is announcing that share issues by labour funds will be capped in their 2014-2015 fiscal year.Consequently, for their fiscal year commencing on June 1, 2014, the cap will be:
- $650 million for the Fonds de solidarité FTQ;
- $200 million for the Fondaction.
Furthermore, in the event that, at the end of its 2014-2015 fiscal year, the amount of paid-up capital issued during that fiscal year exceeds the maximum authorized amount for the year, the Fonds de Solidarité FTQ will have to pay a special tax equal to 15% of the excess and the Fondaction will have to pay a special tax equal to 25% of the excess.
Measures applicable to Capital régional et coopératif Desjardins
Since Capital régional et coopératif Desjardins (CRCD) was formed, the government has supported its mission by allowing individuals who acquire its shares to claim a tax benefit. The budget contains various measures that affect CRCD, including the following:
- to encourage CRCD investments, the government is announcing that it intends to include in the resource regions covered by the program regional county municipalities (RCMs) outside resource regions that are facing substantial economic difficulties;
- the government is announcing that an investment that does not include any security or hypothec made by CRCD, after December 31, 2013 and before January 1, 2018, in an eligible entity located in a territory identified as facing economic difficulties will, up to an amount of $500,000, be deemed grossed up by 100% for purposes of the investment requirement;
- other territories and RCMs will be considered for purposes of the gross-up relating to an investment made in a territory identified as facing economic difficulties;
- the applicable rate for purposes of the calculation of the tax credit for the acquisition of CRCD shares will be reduced from 50% to 45% for shares acquired after February 28, 2014. Accordingly, the maximum amount an individual may deduct in calculating his tax otherwise payable for a given taxation year for shares acquired during a capital-raising period beginning in such year will decline from $2,500 to $2,250 and the special tax relating to excessive capitalization will be adjusted accordingly.
Transfer to Revenu Québec of responsibilities relating to the application of the Mining Tax Act
Currently, the ministère de l’Énergie et des Ressources naturelles is responsible for the Mining Tax Act. Since most of the information that operators send to the ministère de l’Énergie et des Ressources naturelles in the course of filing their mining tax returns is also required by Revenu Québec, the government is announcing that responsibility for enforcing the Mining Tax Act will be assumed, as of April 1, 2015, by the Minister of Revenue.
Salary paid for the purposes of determining various employer contributions
For purposes of application of certain legislation,5 the budget proposes to change the definition of "base wages” to include any amount paid, allocated, granted or awarded to the employee because of, or in the course of his office or employment by a person not at arm’s length with the given employer, unless such amount would be excluded from the employee’s base wages if it were paid, allocated, granted or awarded by the employer.
Harmonization with certain technical measures included in the federal budget of February 11, 2014
The budget essentially replicates the measures contained in the previous provincial government’s budget tabled on February 20, 2014, regarding harmonization with the measures contained in the federal budget of February 11, 2014.
Harmonization with certain technical measures made public on April 8, 2014
On April 8 2014, the Department of Finance Canada made public, in a news release, draft legislative and regulatory proposals making technical changes to the income tax system and the goods and services tax and harmonized sales tax (GST/HST) system to improve their fairness and certainty.
Measures relating to income tax
The measures relating to income tax deal with the Canadian Film or Video Production Tax Credit and the communication of information. The ministère des Finances had already made Québec’s position on these proposals known and accordingly these measures will not be retained because Quebec’s tax system has its own features regarding the tax assistance granted in relation to a film or television production and the communication of information.
Measures relating to the GST/HST
In accordance with the principle of general harmonization of the Quebec sales tax (QST) system with the GST/HST system, Quebec’s tax system will be changed to incorporate, with adaptations on the basis of its general principles and specific features arising from the provincial context, the following federal measures:
- making technical changes to the provisions concerning real property to ensure consistent treatment of different types of housing and to see that the special valuation rule for subsidized housing applies as it should within the framework of the rules on the place of supply and in the context of a change in the tax rate;
- clarifying the application of GST/HST public service body rebates in relation to non-profit organizations that operate certain health care facilities;
- zero-rating precious metals refining services supplied to non-resident persons not registered for the purposes of the GST/HST system;
- simplifying the tax treatment of the temporary importation of certain railcars;
- codifying the longstanding relieving provisions related to the tax treatment upon re-entry into Canada of Canadian goods on which the GST/HST has already been paid;
- updating certain legislative references stipulated in the regulations, other than the reference stipulated in the Taxes, Duties and Fees (GST/HST) Regulations, which has no equivalent in the QST system.
Measures to fight tax evasion
The budget essentially repeats the measures that were announced in the previous provincial government budget tabled on February 20, 2014.
The following measures are also proposed:
- to more effectively address false billing fraud, the government is announcing that Revenu Québec will be monitoring at-risk registrations more closely to more effectively identify companies that commit such fraud;
- in a context where construction contractors bid on, or carry out construction work or cause it to be carried out without holding a valid licence from the Régie du bâtiment du Québec, the government is announcing that it intends to improve the means of identifying contractors that are in violation of the law. To this end the Régie du bâtiment du Québec will use more site reports from the Commission de la construction du Québec;
- the government is announcing that it will intensify its actions to fight the illicit tobacco trade through ACCES tobacco partners.
Measures relating to individuals
The Budget proposes certain measures relating to individuals, including a change to the mechanism for splitting retirement income between spouses, an increase in the tax credits for experienced workers and the introduction of a refundable tax credit for seniors’ activities.
Revival of the Plan Nord
The government is taking the opportunity presented by the budget to revive and enhance the efforts undertaken in connection with the Plan Nord. Thus, in addition to setting up the Société du Plan Nord, the budget provides for a number of substantial investments amounting to just over $1.125 billion. The government will present its detailed vision, policy options and governance structure for the Plan Nord in the coming months.