The Parti Québécois minority government tabled a 2013-2014 fall budget (Budget) on November 20, 2012, instead of the traditional spring budget. Nicolas Marceau, Minister of Finance and the Economy, told the National Assembly that the deficit objective of C$1.5-billion set for 2012-2013 will be maintained. However, the government has proposed amendments to the Balanced Budget Act in order to exclude from the deficit equation the impact of the C$1.8-billion non-recurring writeoff attributable to the government’s decision not to refurbish the Gentilly‑2 nuclear power plant, as announced by the previous Liberal government. The minority government has also confirmed that it is on course to achieve a fiscal balance in 2013-2014 and has proposed to maintain such balance in the years going forward. The Finance Minister has suggested a plan for his risky decision that includes rigorous spending controls, additional revenue efforts and improved infrastructure spending management.
In this challenging environment, the minority government has proposed certain measures affecting individuals. Some of them benefit the less fortunate, while others are aimed at increasing government revenues. The latter in particular affects individuals, taking the form of a tax hike on alcohol and tobacco, replacement of the uniform health tax with a progressive health contribution based on income, or the introduction of a fourth bracket to the personal income tax table. The new bracket will bring the combined marginal tax rate in Quebec on the portion of taxable income exceeding C$132,406 to 49.965% effective 2013. Also starting in fiscal 2013, the provincial tax rate of inter vivos trusts will increase from 24% to 25.75% and from 5.3% to 7.05% for inter vivos trusts not resident in Canada on income from the rental of immovable property located in Quebec and used mainly as a source of rental income. Lastly, the increase in the maximum marginal tax rate will result in various related changes to other rates used for tax purposes.
The Budget also contains measures that may affect businesses, but to a lesser extent if one sets aside the government’s intention to continue to maintain and support measures to counter what it calls “tax evasion”.
What remains to be seen is the opposition parties’ reaction when voting on adopting the Budget. In fact, the opposition to the adoption of the Budget, as stated by certain elected representatives in the hours after the Budget was tabled, may not materialize and the minority government, which has been in power for less than 100 days, may be safe for now.
The following are some of the measures affecting businesses.
I – Stimulating businesses’ investment
Stimulating short-term investment with a tax holiday for large businesses
In order to replace the tax holiday for major investment projects, a measure announced in 2000, but subject to a moratorium since 2003, the Budget announces the implementation of a tax holiday for certain corporations. The corporations concerned must carry out, either directly or through a partnership, large investment projects in certain activity sectors and incur capital expenditures of no less than C$300-million over a maximum of 48 months, save and except expenditures relating to the purchase or use of land and those relating to the acquisition of a business already being operated in Quebec (Eligible Expenditures). With the express consent of the Minister of Finance and the Economy, a transferee to whom the carrying out of a large investment project is transferred may continue to benefit from the tax holiday under certain conditions. The value of the tax holiday must not exceed 15% of the total Eligible Expenditures.
The activity sectors of the North American Industry Classification System (NAICS) covered by this tax holiday are (i) manufacturing (NAICS codes 31‑33), (ii) data processing, hosting and related services (NAICS code 518), (iii) wholesale trade (NAICS code 41) and (iv) warehousing and storage (NAICS code 4931) (Eligible Activities).
In addition to the income from its Eligible Activities being completely deductible from the corporation’s income for a period of 10 years (Holiday Period), the eligible portion of wages paid to the corporation’s or partnership’s employees that is attributable to such activities will also be exempt, for the Holiday Period, from the contribution to the Health Services Fund (HSF) (2.7% to 4.3%, if applicable) normally to be paid by the employer.
A corporation or partnership must apply for an initial certificate for the investment project within 36 months from November 20, 2012, and must meet certain requirements, including obtaining annual certificates and keeping separate books for the duration of the Holiday Period.
The Holiday Period starts on (i) the date on which the operation of the separate business relating to the investment project starts, or (ii) the date when the C$300-million threshold of investment expenditures attributable to the carrying out of the investment project is achieved, whichever comes last; however, the Holiday Period cannot start after the day following the end of the 48-month period that begins on the date on which the initial certificate is issued.
Even though the mining, quarrying and oil and gas extraction sectors (NAICS code 21) are ideal for large investment projects, the activities carried out in these sectors are not Eligible Activities for the purposes of the Tax Holiday. Moreover, mineral substance processing activities, which could otherwise be included in the manufacturing sector under NAICS code 31‑33, are excluded from the Eligible Activities relating to a large investment project.
The Budget mentioned that such processing activities “include”:
- mineral substance processing activities, including any mineral substance concentration and pelletization (hardening) activities for the purpose of making handling and transportation easier; and
- smelting or refining activities (primary processing) of ore from a gold or silver mine.
This exception creates a certain amount of confusion in that it includes a non-exhaustive list of activities while providing specifics in particular on the metals, i.e., gold and silver. One therefore rightfully wonders whether primary processing activities of a mineral substance from a copper or iron mine for example are also excluded.
Improvement of tax credit for investments relating to manufacturing and processing equipment
In the 2012‑2013 budget, the tax credit for investments relating to new manufacturing and processing equipment (Qualified Property), which varies between 5% and 40% (depending on where the qualified property is used, the paid-up capital of the corporation calculated on a consolidated basis and the cumulative cap of C$75‑million of eligible expenses), was extended to certain property used both entirely in Quebec and mainly for primary metal processing (including smelting, refining or hydrometallurgy activities) of certain Canadian or foreign ores, other than ore from a gold or silver mine.
Generally, these changes applied to Qualified Property acquired after March 20, 2012, but before January 1, 2018. Similar to Qualified Property used for primary metal processing activities, other qualified property acquired before January 1, 2018, rather than January 1, 2016, may qualify for the tax credit for investments relating to manufacturing and processing equipment.
The Budget also includes slightly higher tax credit rates:
- First, a qualified corporation that acquires Qualified Property for use mainly in the La Matapédia, La Mitis or Matane RCMs, will have its tax credit increased from 5% to 35% of its eligible expenses with respect to Qualified Property.
- Second, a qualified corporation that acquires Qualified Property for use mainly in the Saguenay-Lac-Saint‑Jean and the Mauricie administrative regions, and the Antoine‑Labelle, Kamouraska, La Vallée-de-la-Gatineau, Les Basques, Pontiac, Rimouski-Neigette, Rivière-du- Loup and Témiscouata RCMs, will have its tax credit increased from 5% to 25% of its eligible expenses with respect to Qualified Property.
Generally, this rate increase will apply only to eligible expenses incurred with respect to Qualified property acquired after November 20, 2012 by a corporation that does not receive any of the three tax credits for processing in the resource regions, i.e., (i) the tax credit for processing activities in the resource regions, (ii) the tax credit for the Aluminium Valley, or (iii) the tax credit for the Gaspésie and certain maritime regions of Quebec.
Increase in refundable tax credit for biopharmaceutical SR&ED
The basic refundable tax credit rate of 17.50% for certain scientific research and experimental development work (SR&ED Credit) carried out in the Province of Quebec is temporarily increased to 27.50% for eligible biopharmaceutical corporations. To benefit from such increase, the biopharmaceutical corporation has to obtain an initial certificate from Investissement Québec after demonstrating that the eligible activities the biopharmaceutical corporation carries out or will carry out are related to human health; the corporation shall also have to obtain a yearly eligibility certificate.
To obtain an eligibility certificate for a given year, a biopharmaceutical corporation will have to show that the eligible activities related to human health accounted for at least 75% of the activities it carried out throughout the year in question.
Generally, this 10% increase in the SR&ED Credit will apply to eligible expenditures incurred and work carried out after November 20, 2012, but before January 1, 2018.
II – Additional contributions by financial institutions
The complete harmonization of the Quebec sales tax with the goods and services tax includes the partial phasing out of the compensation tax payable by financial institutions during the period from 2013 to 2019.
Under the Budget, the contribution by financial institutions to public finances is increased by raising the rates applicable to the two components of the contribution until 2019.
For the period from January 1, 2013 to March 31, 2019, the temporary contribution rates of the compensation tax on financial institutions will therefore be as follows:
for amounts paid as wages:
- in the case of a bank, a loan corporation, a trust corporation or a corporation trading in securities, 2.8%,
- in the case of a savings and credit union, 2.2%,
- in the case of any other person, 0.9%; and
- for insurance premiums and amounts established regarding insurance funds, 0.3%.
III – Inter vivos trusts targeted again
The noose tightens for most inter vivos trusts in Quebec. In accordance with the Quebec Taxation Act, a trust that is resident in Quebec does not have to file a tax return for a taxation year if, for such year, the trust has no tax payable; it did not allocate income to an individual residing in Quebec or to a corporation having an establishment in Quebec; it did not realize a taxable capital gain or dispose of capital property. Such trusts also do not have to file an information return.
Since the 2012‑2013 budget tabled by the previous government, inter vivos trusts that are not resident in Canada and derive income from the rental of immovable property located in Quebec must file a tax return in Quebec. The Budget further increases the number of circumstances where inter vivos trusts have to file a return in Quebec.
Filing a tax return
Trusts, other than excluded trusts, that are liable for Quebec tax and meet one of the following conditions are required to file an income tax return for the relevant year:
- an amount allocated to a beneficiary (regardless of his or her place of residence) is deducted in calculating its income for the taxation year;
- in the case of a trust that is resident in Quebec on the last day of the year, it owns property, at any time during the year, the total cost of which exceeds C$250,000;
- in the case of a trust that is not resident in Quebec on the last day of the year, it owns property, at any time during the year, that it uses in carrying on a business in Quebec the total cost of which exceeds C$250,000.
The allocation of income to a beneficiary shall be designated as any of the following:
- an amount then payable to a beneficiary;
- an amount included in the calculation of a beneficiary’s income because it was paid during the year by the trust from its own income for outlays, maintenance or taxes for property that must be maintained for use by the beneficiary; and
- an amount of accumulated income allocated to a preferred beneficiary.
Excluded trusts include certain testamentary trusts, successions, unit trusts, segregated fund trusts of insurers, mutual fund trusts, specified investment flowthrough trusts, and tax-exempt trusts.
Filing an information return
The Budget proposals go even further. A trust, other than an excluded trust (as defined above), that is resident in Canada, but outside Quebec, and that, at any time during the year, owns immovable property located in Quebec that is used mainly to derive rental income (or a member of a partnership that owns such immovable property), will be required to file, for the relevant year, an information return with Revenu Québec. The return must be filed within 90 days from the end of the trust taxation year using the prescribed form.
Both the requirement to file a tax return and the requirement to file an information return will apply to trust taxation years commencing after November 20, 2012.
IV – Refundable tax credits now taxable
Generally, the Taxation Act (Quebec) provides that, when calculating their income from a business or property for a taxation year, taxpayers must include the amount of any government assistance received during the year. Quebec refundable tax credits are not always considered government assistance.
The Budget proposes stricter rules and provides that in the future all Quebec refundable tax credits must be included when calculating a beneficiary’s income. More specifically, the following refundable tax credits will also be considered government assistance:
- scientific research and experimental development work;
- university research and research carried out by a public research centre or a research
- fees and dues paid to a research consortium;
- private partnership pre-competitive research;
- on-the-job training;
- construction or conversion of vessels.
This amendment will apply to refundable tax credits received after November 20, 2012 and relating to expenditures incurred for a taxation year commencing after that date.
V – The fight against tax evasion is maintained and revised
Revenu Québec takes forceful action to fight tax evasion. From 2006-2007 to 2008-2009, tax recovery rose by C$270-million, an average annual growth of 6.6%. From 2009-2010 to 2011-2012, the increase was C$935-million, an average annual growth of 18.2%. For the 2011-2012 fiscal year, all of Revenu Québec’s tax inspection activities led to the recovery of C$3.3-billion. In 2012-2013, preliminary figures for the period from April 1 to September 30, 2012, indicate that Revenu Québec will achieve its target of C$3.4- billion for the year.
In light of the results obtained, the Budget contains new initiatives to fight tax evasion. More specifically, Revenu Québec will ensure faster detection of non-filers and expand the use of sales recording modules to activity sectors other than the restaurant industry.