The Finance Minister Carlos J. Leitão announced in the 2018 Québec Budget of March 27 a number of important measures, including measures aimed at expanding the Québec Sales Tax (“QST”) base to digital business in Québec and various income tax measures aimed at promoting, supporting and accelerating the expansion of the digital economy in Québec.
Sales Tax Measures
The current QST system, which was largely enacted in 1992, did not envision the digital economy, particularly in the application of the place of supply rules. When non-resident suppliers do not have a sufficient presence in Québec to be considered to be carrying on business in Québec, they are not required to register, collect and remit the QST, even if they make taxable supplies to purchasers located in Québec.
This problem became of particular concern in Québec recently, in light of the growing importance of the digital economy.
The Act Respecting the Québec Sales Tax prescribes that it is the purchaser located in Québec who has the obligation to self-assess the QST on incorporeal movable property and services acquired from abroad and on goods and services imported from other Canadian provinces. Very few Québec consumers effectively self-assess and pay the QST on such purchases.
The 2018 Québec Budget provides that non-resident suppliers will have the obligation to register with Revenue Québec, under a new specified registration system, for the purpose of collecting and remitting the QST applicable to their taxable supplies of incorporeal movable property and of services made in Québec to specified Québec consumers. The expression "specified Québec consumers" will refer to a person who is not registered for QST purposes and whose usual place of residence is located in Québec. Moreover, in the case of suppliers located in Canada who are non-residents of Québec, this registration requirement will also apply to the collection and remittance of the QST applicable to taxable supplies of corporeal movable property made in Québec to specified Québec consumers.
This registration requirement will also apply to digital property and services distribution platforms with respect to taxable supplies of incorporeal movable property or of services received by specified Québec consumers, where these digital platforms control the key elements of transactions with specified Québec consumers, including billing, transaction terms and conditions, and delivery terms. In general, a digital platform will refer to a platform providing services to non-resident suppliers (e.g., application stores or websites) through which non-resident suppliers will make taxable supplies of incorporeal movable property or of services to specified Québec consumers.
These measures will come into effect on January 1st, 2019 for non-resident suppliers located outside Canada and on September 1st, 2019 for non-resident suppliers located in Canada.
It will be interesting to monitor the reaction of the federal government, particularly considering the Comprehensive Integrated Tax Coordination Agreement Between the Government of Canada and the Government of Québec (“Canada-Québec CITCA”) and the constitutional aspects of the issue which could ultimately invalidate or impact the scope of the measures announced. Of particular interest will be whether the federal government perceives the new measures as a material breach of the Canada-Québec CITCA of if it will seek compensation or consider terminating the Canada-Québec CITCA or rather if it will consider adopting similar measures for GST/HST purposes.
Income Tax Measures
The 2018 Québec Budget announced a number of tax measures that may be of interest for taxpayers in the intellectual property and information technology sectors. The key measures are: (i) the replacement of the additional capital cost allowance (“CCA”) of 35 percent by an additional CCA of 60 percent, (ii) the broadening of the sectors of activity eligible for the tax holiday for large investments projects, and (iii) the introduction of a refundable tax credit to support the digital transformation of print media.
Before the 2018 Québec Budget, an additional deduction for CCA applied to manufacturing or processing equipment and general-purpose electronic data processing equipment (which, for example, includes system software, desktop computers, tablets, server computers, storage devices, monitors, disk drives, cables, and printers) acquired before April 1, 2019. This enhanced CCA deduction was available for a period of two years starting from March 28, 2017.
To encourage investments in these assets and to further support businesses in their development efforts, the 2018 Québec Budget announced that a further enhanced CCA deduction of 60 percent will replace the current 35 percent deduction introduced in 2017 and will apply to the same assets and for the same two year period.
In general terms, the property in question must be new at the time of acquisition and be acquired (and, generally, used) before April 1, 2020, for the enhanced CCA deduction to be available.
Since 2013, a corporation that carried out a large investment project in Québec may, under certain conditions, claim a tax holiday in respect of the income from its eligible activities relating to such project and a holiday from employer contributions to the Health Services Fund regarding the portion of wages paid to its employees that is attributable to the time they devote to such activities (the “Tax Holiday”). Partnerships carrying on a large investment project in Québec may, under certain conditions, also claim the Tax Holiday. An annual certificate in respect of the large investment project must be obtained each year throughout the life of the project in order to claim the Tax Holiday.
To qualify as a large investment project, an investment project must, among other things, pertain to activities in the following sectors: manufacturing, wholesale trade, warehousing and storage or data processing, hosting and related services. The capital investment threshold that must be met for project qualification purposes is, generally, $100 million. This threshold must be met within a period of 60 months beginning on the date the initial qualification certificate is issued in respect of the investment project.
Under the 2018 Québec Budget, investment projects for the development of eligible digital platforms may, under certain conditions, be recognized for the purposes of the Tax Holiday.
In brief, the term “eligible digital platform” will, for the purposes of the Tax Holiday, mean certain computer environments that enable content management or use, that serve as an intermediary in accessing information, services or property supplied or edited by the corporation or partnership, or by a third party, and that are not tax-exempt platforms.
The 2018 Québec Budget states that the digital transformation of print media companies in Québec has become imperative to help safeguard Québec’s print media and maintain their original written content on general-interest news geared specifically to the Québec public. To that end, a temporary refundable tax credit has been introduced by the 2018 Québec Budget to support the start or continuation of the digital conversion of print media companies.
Very generally, this refundable tax credit will provide companies with up to $7 million in government assistance every year in respect of expenditures they incur after the day of the budget speech and before January 1, 2023 for the purpose of the digital transformation of their print media activities. Such activities will include the development of information systems and the integration of technology infrastructure.
In order to be eligible to such measures print media businesses will have to, in addition to having a newsroom in Québec, obtain a qualification certificate issued by Investissement Québec each year confirming that, for a particular year, the company produced and disseminated a print or digital information medium having original written information content with respect to politics, the municipal sector, international news, culture, business and the economy, local interest news, and miscellaneous news items.