The goal of the newly elected majority government (Government) is to create both wealth and employment in Quebec. To achieve this goal, the Government needs to end the structural imbalance of public finances. There are two pillars underlying this goal: a growing economy and sound, balanced public finances. The Government has identified five measures for achieving economic prosperity: support for private investors, a maritime strategy, revival of the Plan Nord, promotion of natural resources, and investment in infrastructure.
Stabilizing public finances is the cornerstone of a return to a balanced budget. The deficit for 2013-14 will be C$3.1 billion, C$600 million greater than expected. The expected deficit for 2014-15 is C$2.35 billion. A balanced budget may be achieved in 2015-16 with an economic growth rate of 1.8% in 2014 and 2% in 2015.
The 2014-15 budget (Budget), unveiled on June 4, 2014 by Minister of Finance Carlos Leitao (Minister), confirms that the balanced budget will come without raising taxes, except for measures to which a large majority of citizens subscribe. To this end, the Minister announced a reduction of Government expenses as well as a reduction in the growth of spending below the growth of revenue. Two committees will be created to ensure a balanced budget: one – the Québec Taxation Review Committee – whose mandate is to examine the Quebec taxation system and propose changes to make the system more competitive and review tax expenditures; and another – the Ongoing Program Review Committee – whose focus is to review Quebec programs with a view to reduce or revise their scope. An in-depth exercise in controlling public finances has been put in place. This process will require rigor on the part of the Government over the next two years. To date, no Quebec government has succeeded in such an exercise.
The Budget affects a number of fiscal programs in order to centre Quebec’s fiscal policy on the two pillars identified by the Government. Certain measures are new while others present important changes to existing programs, notably to refundable tax credits for businesses. Nevertheless, the Budget includes no tax increases for businesses or individuals.
Below we present certain fiscal measures that may be of interest to businesses and employers. Nevertheless, certain measures announced in the Budget could be addressed in a distinct Bulletin, including certain proposals regarding opportunities for development of Quebec’s natural resources and the limited amendments to the mining tax regime. Noteworthy in this connection is the contemplated transfer of the responsibility relating to the application and enforcement of the Mining Tax Act, currently held by the Minister of Energy and Natural Resources, to the Minister of Revenue as of April 1, 2015.
RELAUNCHING SMALL AND MEDIUM BUSINESSES (SMEs)
The budget contains three measures to support SMEs.
Reduced tax rate for manufacturing SMEs
The general corporate tax rate in Quebec is 11.9%. However, Canadian-controlled private corporations with paid-up capital of C$10 million or less enjoy a tax rate deduction of 3.9% on the first C$500,000 of annual income – the small business income ceiling – from an eligible business.
To help manufacturing SMEs become more competitive, they may also benefit from an additional deduction of up to 4% of their tax rate. This additional deduction may only be claimed for income subject to an 8% tax rate. The final determination of the rate of this additional deduction will depend on the proportion of the SMEs’ activities that consist of manufacturing and processing.
The expression “manufacturing SME” means a corporation of which at least 25% of its activities consist of processing and manufacturing. Two items will be considered in determining the proportion of a corporation’s activities attributable to manufacturing and processing activities: assets and labour. More specifically, the Budget includes a formula for determining the rate of the additional deduction. Corporations for whom manufacturing and processing represent 50% or more of their activities may benefit from the maximum additional deduction rate each year applicable to that taxation year. Corporations for whom manufacturing and processing represent between 25% and 50% of their activities may claim an additional deduction which will be reduced linearly based on the proportion of those activities.
The maximum additional deduction a manufacturing SME may claim will be 2% taxation years ending after June 4, 2014, while a deduction rate of 4% will apply to the taxation year ending after March 31, 2015. Where the taxation year of the manufacturing SME includes June 4, 2014 or March 31, 2015, the rate is adjusted in proportion to the number of days of such taxation year that follow June 4, 2014 or March 31, 2015.
Additional deductions for transportation costs to remote manufacturing SMEs
To improve the competitiveness of remote manufacturing SMEs, Canadian-controlled private corporations whose paid-up capital is less than C$15 million may claim an additional deduction in calculating their net income to reflect the higher transportation costs attributable to the distance of certain regions from Quebec’s major urban centres. The amount of the additional deduction for taxation year will depend on a number of factors, including the region where the corporation carries out its activities, the level of its manufacturing activities, the size of the corporation, its gross income in the given taxation year, as well as a regional cap. The amount of this additional deduction, for a taxation year, may reach 6% of the gross income for the given taxation year.
The rate of the additional deduction a corporation may claim for a taxation year will depend on the base rate associated with the region where it carries out its activities and on the level of its manufacturing activities. The base rate may be 2%, 4% or 6% of its gross income of the corporation, depending on the region of its activities (three regional zones cover the territory of the province, which vary according to distance from major urban centres). A manufacturing SME whose proportion of activities attributable to manufacturing and processing for a given taxation year is 50% or more may claim the maximum additional deduction available (2%, 4% or 6%, depending on which regional rate is applicable). The applicable rate will be reduced linearly for SMEs whose manufacturing and processing activities represent 25% to 50% of their activities.
Notwithstanding the deduction that may apply under the above formula, the deduction will be capped depending on the corporation’s income for the given taxation year as well the regional cap applicable. For zone 1, the region nearest urban areas, the regional cap will be C$100,000. For zone 2 (intermediate area), the cap is C$250,000. These caps are reduced when the tax year is less than 365 days. There is no cap on deductions for zone 3 (the most remote area). For all corporations, regardless of the zone of their manufacturing activities, the amount of their yearly deduction will be subject to the same formula applicable to tax deductions for small businesses when the paid-up capital is between C$10 million and C$15 million. As such, mining activities must be located in the most remote area and the corporation must have paid-up capital of less than C$10 million to benefit from the maximum additional deduction.
Reduced contribution to Health Services Fund to boost innovation in SMEs
To bolster Quebec SMEs’ capacity to innovate, a temporary reduction in the contribution to the Health Services Fund will be implemented for full-time jobs created in the natural and applied sciences sector (eligible jobs). This reduction will be granted until 2020 for the increase in payroll attributable to the hiring of specialized employees. The employer can be a legal person, a partnership or an individual. For employers whose payroll is C$1 million or less, determined on a consolidated basis, the reduction will completely eliminate contributions to the Health Services Fund payable for new specialized employees. Employers whose payroll is between C$1 million and C$5 million will receive a partial reduction in the contribution payable for such employees. Employers with a payroll above C$5 million are excluded. Eligible jobs must satisfy certain criteria with regard to the length of the employment contract and must appear on the exhaustive list of recognized jobs provided in the Budget. While the last year of this program has been fixed, the start date of this program is not set forth in the Budget.
INCENTIVES TO FOSTER MARINE INDUSTRY
A number of measures will be put in place to stimulate the economic development of Quebec’s coastal regions and give new impetus to marine transportation and tourism. More specifically, the Budget includes two new fiscal measures that will be added to the existing refundable tax credit for the construction or conversion of ships.
Creation of a tax-free reserve
This first measure will allow a Quebec shipowner – a legal person who runs a Quebec business through the intermediary of an organization in Quebec and holds a certificate from the Ministry of Economic Development, Innovation and Export Trade – to create a tax-free reserve. The shipowner will have to maintain separate accounting for the tax-free reserve, though it does not involve the creation of a specific account or a trust. The reserve will allow shipowners to maintain and improve the ships in their fleet or to build new ships.
The Budget specifies that the vessel or shipyard to which these measures apply must be an eligible vessel or shipyard. A prescribed procedure must be respected, including precise measures as to the duration of the reserve, first withdrawal and management of funds. An eligible shipowner’s tax-free reserve will end no later than December 31, 2033. Precise rules to deter inappropriate tax planning are included in the Budget.
This measure applies to tax-free reserves duly created after June 4, 2014.
Additional capital cost allowance of a vessel
To support Quebec’s shipyards, a second measure is included in the Budget so that a Quebec shipowner may claim an additional deduction for work done to a vessel in a Quebec shipyard. Current tax legislation and regulations allow a taxpayer to deduct a rate of 33.33% of the cost of a Canadian vessel, which is defined as a vessel that was built in Canada, is registered in Canada, and was not used for any purpose before being acquired by the taxpayer.
To support Quebec’s shipyards, Quebec’s tax legislation and regulations will be amended so that a taxpayer may claim an additional capital cost allowance where the taxpayer has such a vessel built or has renovation work done on it by a Quebec shipyard.
This additional deduction will apply solely to work a taxpayer has done by a qualified shipyard. The additional deduction will correspond to 50% of the amount the taxpayer deducts in calculating the taxpayer’s income for a taxation year on account of the capital cost allowance in relation to the cost included in the separate class applicable to a Canadian vessel and relating to work done by a qualified shipyard.
This amendment will apply for a taxation year to the cost of work done by a qualified shipyard in relation to a Canadian vessel pursuant to a contract a taxpayer enters into with such shipyard after June 4, 2014, but before January 1, 2024.
REDUCTION OF TAX INCENTIVES: 20% REDUCTION IN RATES OF NUMEROUS TAX CREDITS
Considering the substantial efforts needed to offset the budgetary impasse, a 20% reduction in the tax rates to approximately 30 business refundable tax credits are proposed. Although the application date of the various measures differs depending on the applicable tax credit in question, generally the changes will apply either June 4, 2014 or June 5, 2014. The Québec Taxation Review Committee will be tasked with assessing the impact of such measures once enacted.
Below is a table from the Budget documents (Table A.27 of the Québec Budget Plan documents). The table sets forth the title of the relevant Quebec tax credit, current rates and proposed reduced rates of such tax credit, the relevant tax base upon which the tax credit is applied to and the contemplated financial savings of the reduction to the Government.
Click here to view table.
The 20% reduction in tax credit rates will also apply to the two additional deductions under Quebec’s flow-through share regime.
If exploration expenses are incurred in Quebec by a corporation that renounces such expenses to a Quebec resident individual who acquires a flow-through share of such corporation, the shareholder may claim a base deduction equal to 100% of the shareholder’s acquisition cost of the flow-through shares of the issuing corporation.
On top of such base deduction, an additional 25% deduction is available for Quebec-based exploration expenses. Furthermore, a supplementary 25% deduction may be claimed if the expenses incurred by the issuing corporation, from the proceeds obtained from the issuing of flow-through shares, are surface mining exploration or oil and gas exploration.
The reduction of two such additional rates will accordingly result in an individual shareholder being entitled to claim a deduction of 110% or 120%, as the case may be, for mining exploration expenses, or 120% for oil or gas exploration expenses incurred in Quebec by a corporation that are renounced in favour of the shareholder. These reductions will apply to flow-through shares issued after June 4, 2014 unless the shares were issued after June 4, 2014 either further to a subscription made no later than June 4, 2014 or pursuant to an interim prospectus receipt application or prospectus exemption application, as the case may be, made no later than June 4, 2014.
OTHER REDUCTION OF TAX INCENTIVES
Elimination of increase from 17.5% to 27.5% in rate of refundable tax credit for R&D salary in relation to biopharmaceutical activities
An eligible biopharmaceutical corporation may be entitled to receive a refundable tax credit for R&D salary equal to 27.5% of its eligible R&D expenditures for a given taxation year. If the eligible biopharmaceutical corporation is a Canadian-controlled corporation it can benefit from an increase in the credit rate of up to 37.5%.
To qualify as an eligible biopharmaceutical corporation, a corporation must obtain an initial certificate from Investissement Québec and an eligibility certificate from Investissement Québec regarding each taxation year for which it wishes to benefit from the increased rate of the refundable tax credit for R&D salary.
This tax credit rate increase from 17.5% to 27.5% for R&D salary will be eliminated as of June 4, 2014. Investissement Québec will accordingly not accept applications for an initial certificate submitted by a corporation as of June 4, 2014. Investissement Québec will also no longer issue an annual certificate for a taxation year of a corporation beginning June 5, 2015.
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, but the current increase will be reduced by 20%. The rate of the tax credit will therefore be reduced to 22%. In the case of a Canadian-controlled corporation, the rate increase will vary from 22% to 30%.
Refundable tax credit for development of e-business
The refundable tax credit for the development of e-business (EBTC) of 30% is granted to a qualified corporation that pays salaries to eligible employees carrying out an eligible activity. The amount of the tax credit may not exceed C$20,000 per employee annually.
Pursuant to Information Bulletin 2013-7 released on July 11, 2013, it was announced that EBTC would be extended for 10 years, i.e. until December 31, 2025 and that the annual cap of C$20,000 per employee would be raised to C$22,500 as of January 1, 2016.
The rate of the EBTC will be reduced to 24%. This change will apply to salaries incurred in respect of an eligible employee after June 4, 2014. The annual cap of C$20,000 per employee will be maintained and will not be raised to C$22,500 as of January 1, 2016.
Tax credit for investments relating to manufacturing and processing equipment
For a given taxation year, a qualified corporation that acquires qualified property may receive, in respect of eligible expenses it incurred, the tax credit for investments relating to manufacturing and processing equipment (TCI).
The base rate of the TCI is 5%. This rate may rise up to 40% where the qualified property is acquired for use mainly in certain remote Quebec regions. The base rate can also reach anywhere from 10% to 35%, depending on which Quebec regions the acquired qualified property is mainly used. The TCI can be deducted from income tax otherwise payable for such taxation year. The portion of the TCI regarding a taxation year that cannot be applied against income tax payable by the corporation for such taxation year may be refunded or carried over.
A qualified property, for the purposes of the TCI, is a property included in Classes 29, 43, 50 or 52 of Schedule B of the Regulation respecting the Taxation Act that is used mainly for making or processing articles intended for sale or lease of a property acquired after March 20, 2012 for use mainly in the course of ore smelting, refining or hydrometallurgy activities, other than ore from a gold or silver mine, extracted from a mineral resource located in Canada. The property must have been acquired before January 1, 2018 and, prior to its acquisition, it must not have been used for any purpose.
It was announced in Information Bulletin 2013-10 that an additional increase of up to 10% would be added to the rate of the TCI applicable to a qualified corporation, for a taxation year, regarding expenses eligible for the additional increase, i.e. the eligible expenses incurred by the corporation while its activities are mainly manufacturing or processing.
Generally, effective for eligible expenses incurred after June 4, 2014, the Budget proposes to eliminate the 10% rate increase announced in Information Bulletin 2013-10, as well as reduce by 20% the TCI base rate of 5% and the increases to such rate mentioned above.
Elimination of refundable tax credit relating to buildings used in the course of manufacturing or processing activities by a Quebec manufacturing SME
The refundable tax credit relating to expenditures related to the acquisition of, or additions to, buildings used in the course of manufacturing or processing activities by a Quebec manufacturing small and medium-sized enterprise (TCB) was introduced on October 7, 2013. The TCB refundable tax credit could reach 50%, depending on where the building is located and the paid-up capital of the qualified corporation for the taxation year.
The TCB tax credit will be eliminated as of June 5, 2014. Consequently, expenditures relating to a building incurred after June 4, 2014 will not give rise to the TCB.
Refundable tax credit for integration of information technologies in manufacturing SMEs
Pursuant to Information Bulletin 2013-10 dated October 7, 2013, a new temporary refundable tax credit was introduced to support Quebec manufacturing SMEs that wanted to invest in technology and integrate information technologies (IT) in their business processes.
The IT refundable tax credit provides that a qualified corporation may claim the credit regarding its expenditures relating to the supply of a qualified management software package. The IT credit is equal to 25% of the expenses relating to a qualified IT integration contract for which Investissement Québec has issued a certificate. The total amount of the IT credit regarding one or more qualified IT integration contracts, as the case may be, is limited to C$62,500.
Starting June 4, 2014 and until further notice, Investissement Québec will not accept applications for an IT integration contract certificate submitted by a corporation as the IT refundable tax credit is under review.
In recent years, Quebec’s fiscal authorities have been confronted with circumstances where employers have challenged the tax assessment of the payroll on which contributions to various Quebec programs is calculated. These programs include employer contributions to the Health Services Fund and the Québec Pension Plan. Quebec employers have generally not included in their payroll the value of benefits conferred by a parent company on the employers’ Quebec employees. Since the parent company may not itself have been required to contribute to Quebec programs, the Government was unable to collect payroll taxes in respect of the taxable benefits received by a Quebec employee from a person not subject to Quebec contributions. The amount of these benefits could be substantial given that they were often linked to the value of “in-the money” stock options. The lost revenue could be substantial since the amount of the benefit is linked to the employer contribution bases forming part of the Health Services Fund, which can represent 4.26% of the employer’s payroll contributions.
In the interests of fairness and neutrality and to avoid any erosion in the base of salary-based contributions, a change is proposed to be made to the base wages, as defined in the Taxation Act for the purposes of the compensatory tax required of financial institutions, which is used as the point of departure in determining the contributions required under the Act respecting the Québec Pension Plan, the Act respecting the Régie de l’assurance maladie du Québec, the Act respecting labour standards, the Act respecting industrial accidents and occupational diseases, and the Act to promote workforce skills development and recognition. As such, the definition of “base wages” will be modified to include any amount paid, allocated, granted or awarded to the employee because of, or in the course of his or her office or employment by a person not at arm’s length with the given employer, unless such amount was excluded from the employee’s base wages if it were paid, allocated, granted or awarded by the employer.
The application of this amendment will be declaratory. However, it will not apply to cases pending on June 4, 2014, and notices of objection served to the Minister no later than 4 p.m. on June 4, 2014, where the reason for the objection is that an amount has been paid, allocated, granted or awarded to an employee by a person not at an arm’s length with the employee’s employer rather than the employee.
The Budget confirms that the Government is determined to step up the battle against tax evasion and unreported work. In particular, the Budget announces initiatives at further improving tax auditing in the construction section, ensuring sales recording modules in bars and resto-bars and expediting penal case management. The Government expects that such initiatives will augment tax revenues by more than C$100 million a year as of 2014-15.
MEASURES RELATING TO FEDERAL TAX LEGISLATION AND REGULATIONS
Harmonization with certain measures of 2014 federal budget
On February 11, 2014, Canada’s Minister of Finance presented the federal government’s budget for 2014. See our previous Blakes Bulletin: 2014 Federal Budget – Selected Tax Measures for more details. Along with the budget, the Minister of Finance tabled, in the House of Commons, supplementary information as well as notices of ways and means motions and draft amendments to various regulations to amend, among others, the income tax system and the goods and services tax and harmonized sales tax (GST/HST) system.
The Budget confirms that Quebec's tax legislation and regulations will be amended to incorporate certain measures announced in the 2014 federal budget after the assent of any federal statute or the adoption of any federal regulations implementing the retained measures, taking into account technical amendments that may be made prior to such assent or adoption. The changes will apply on the same dates as those for the purposes of the federal measures with which they are harmonized.
Measures retained relating to income tax
Quebec’s tax legislation and regulations will be amended to incorporate, with adaptations on the basis of their general principles, measures relating to the:
- Addition of certain expenses eligible for the tax credit for medical expenses
- Introduction of a tax credit for volunteers participating in search and rescue activities
- Property used in the course of carrying on a farming business and a fishing business
- Tax deferral granted to certain farmers located in regions hit by drought, flooding or excessive moisture
- Inclusion of certain income attributed to a minor by a partnership or a trust for the purposes of calculating tax on split income
- Elimination of graduated rate taxation for certain trusts and estates
- Elimination of the 60-month exemption from the residency presumption rules that apply to non-resident trusts and from certain other related rules
- Extension from five to 10 years of the deferral period of gifts of ecosensitive land made by an individual
- Donations in the context of death
- Donations of cultural property acquired under a gifting arrangement that is a tax shelter
- Registration of organizations or associations that receive gifts from foreign states that support terrorism
- Change to the anti-avoidance rule concerning captive insurance corporations
- Addition of new eligibility conditions to the exception relating to offshore regulated financial institutions
- Change to the anti-avoidance rule currently contained in the thin capitalization rules
- Increase in the thresholds determining how frequently employers must remit withholdings at source
- Changes concerning the accelerated capital cost allowance for clean energy generation equipment to include water-current energy equipment and gasification equipment
The measures relating to the inclusion of income paid to an amateur athlete trust for the purpose of determining the maximum amount deductible on account of registered retirement savings plans and the cap on transfers of pension benefits to registered retirement savings plans where the amount of accumulated benefits has been reduced in particular because of the under-funding of the registered pension plan will also be retained for the purposes of Quebec’s tax system.
Measures not retained relating to income tax
Some measures have not been retained because they do not correspond to the features of Quebec’s tax system or because Quebec’s tax system is satisfactory or has no corresponding provisions. These measures regard the:
- Increase in the maximum amount of expenditures eligible for the adoption expense tax credit
- Extension of the mineral exploration tax credit for flow-through share investors
- Automatic determination of the GST/HST credit
- Consequential amendments arising from the elimination of graduated rate taxation for certain trusts and estates
- Extension from five to 10 years of the deferral period of gifts of ecosensitive land made by a corporation
- Addition of a specific anti-avoidance rule concerning tax withholding on interest payments
Measures relating to GST/HST
Changes will be made to the Quebec sales tax (QST) system to incorporate, with adaptations on the basis of its general principles, the federal measures relating to the GST/HST election for a closely related person and those seeking to strengthen compliance with GST/HST registration.
In Information Bulletin 2014-4 of February 12, 2014, it was announced that the QST system will be harmonized with certain changes to the GST/HST system proposed in the federal budget tabled on February 11, 2014. These harmonization decisions concern the federal measures to improve the application of the GST/HST in the health-care sector.
Tax treatment of awards paid under Offshore Tax Informant Program
The Canada Revenue Agency launched the Offshore Tax Informant Program on January 15, 2014. This program offers financial awards to individuals who supply information on major cases of international tax non-compliance resulting in the recovery of a substantial amount of tax owing. Various amendments to the federal tax legislation and regulations were in Bill C-31, entitled Economic Action Plan 2014 Act, No. 1, which was tabled in the House of Commons on March 28, 2014.
Quebec’s tax legislation and regulations will be amended to incorporate, with adaptations based on their general principles, the federal amendments relating to the tax treatment applicable to awards paid under the Offshore Tax Informant Program or a similar program that are stipulated in sections 2, 3, 23 and 32 of Bill C-31. The amount of the tax withholding at source in respect of an award paid under the Offshore Tax Informant Program or a similar program will be equal to 20% of the amount paid. Such amendments to Quebec’s tax system will apply on the same dates as they do in the federal tax system.
Harmonization with certain technical measures made public on April 8, 2014
On April 8, 2014, the Department of Finance Canada made public draft legislative and regulatory proposals making technical changes to the income tax system and the 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 proposals to that effect were previously made public on July 18, 2005.
These measures will not be retained because Quebec’s tax system has its own features regarding the tax incentives granted in relation to a film or television production and regarding the communication of information.
Measures relating to GST/HST
In accordance with the principle of general harmonization of the 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 federal measures:
- Making technical changes to the provisions concerning real property to ensure consistent treatment of different types of housing and see that the special valuation rule for subsidized housing applies as it should within the framework of the rules on the place of supply as 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 long-standing 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
The harmonization measures retained in Quebec’s tax system will be adopted only after the assent of any law or the adoption of any regulation stemming from the federal news release, taking into account the technical changes that may be made prior to such assent or adoption. They will apply on the same dates as those retained for the purposes of the federal measures with which they harmonize, except for the measures applicable before July 1, 1992 or since July 1, 2010 that, for the purposes of the QST system, will take effect on July 1, 1992 and January 1, 2013 respectively.