Changes to the Mining Tax Act
Following the defeat of the Parti Québécois on April 7, 2014, taxpayers were left facing some uncertainty with respect to the fate of Bill 55, which sought to introduce the Parti Québécois’ reform to the mining tax regime, which was to apply to fiscal years beginning after December, 31, 2013. The Liberals, who had remained silent for more than a year with respect to their position on this reform, have now announced that they will adopt the Parti Québécois’ proposed amendments (that is, in essence, the minimum tax and new graduated tax rates).1
In addition to the above-mentioned reform, the government also proposes to implement certain changes that will play a role in the computation of the income of certain corporations for the purposes of the Mining Tax Act.
The Mining Tax Act will be amended such that, following the receipt of a written request, the Minister of the Energy and Natural Resources will henceforth have the power to allow for the value of the gemstones extracted from a mine to be established outside the mine site.
The government also proposes to amend the definition of the term "processing" in order to include hydrometallurgy (i.e., a process used in the processing of new mineral substances, such as rare earths), with the result that the value of the hydrometallurgy products will form part of the tax base for the purposes of the Mining Tax Act.
Corresponding changes are also made to the method used to calculate the processing allowance in order to account for the addition of hydrometallurgy activities to the definition of processing. These changes will allow operators to treat assets used for hydrometallurgy activities in the same manner as those used for smelting or refining, which are two activities that were already included in the definition of processing.
These changes will apply for fiscal years beginning after December 31, 2013.
Deferral of Changes to the Refundable Tax Credit for Resources Announced in the March 20, 2012 Budget Speech
In the March 20, 2012 Budget Speech, the government announced certain changes to the refundable tax credit regime for resources, which were to apply regarding eligible expenses incurred after December 31, 2013.
These changes were aimed at reducing the rates of the refundable tax credit for resources by ten percentage points where the eligible expenses were related to mining resources, oil and natural gas, and were incurred by a corporation not operating any mineral resource, oil or gas well, and by five percentage points otherwise, except regarding the rates applicable to eligible expenses relating to renewable energy and energy conservation, which would not be reduced. The government had announced that it would restore the five and ten percentage points, as applicable, to certain corporations in exchange for providing an equity stake to the province. Budget 2014-2015 provides that the implementation of the changes will be deferred pending the results of the commission that will be put in place to analyze Québec’s tax systems and assistance measures.
New Tax Incentives for SMEs
Reduced tax rate for manufacturing SMEs
In order to help the Canadian-controlled private corporations at least 25% of whose activities consist of manufacturing and processing activities (the "manufacturing SMEs"), the government announced that it will introduce a deduction of up to four percentage points from their actual reduced tax rate of 8% on their first $500,000 of annual income.2
The rate of such deduction will vary based on the proportion of a corporation’s activities that can be attributed to manufacturing and processing, such that corporations for which such proportion will be equal to or higher than 50% will be entitled to the maximum additional deduction.
The maximum additional deduction to which a manufacturing SME will be entitled will be two percentage points as of June 5, 2014 and will rise to four percentage points as of April 1, 2015. The additional deduction will be adjusted proportionately if the taxation year of a manufacturing SME includes June 4, 2014 or March 31, 2015.
Additional deduction for transportation costs of remote manufacturing SMEs
Budget 2014-2015 proposes to create an additional deduction for remote manufacturing SMEs in calculating their net income to reflect the higher transportation costs attributable to the distance of certain regions from Québec’s large urban centers. To be eligible, the manufacturing SME must be a Canadian-controlled private corporation whose paid-up capital is less than $15 million.
The additional deduction rate will apply for taxation years ending after June 4, 2014. The amount of this additional deduction may attain 6% of gross income for a given taxation year and depends on where the manufacturing activities of the corporation are carried out, the level of its manufacturing activities, the regional cap, the size of the corporation and its gross income for the taxation year. The additional deduction rate will be adjusted proportionately for a taxation year of a manufacturing SME that includes June 4, 2014.
Reduced contribution to the Health Services Fund to boost innovation in SMEs
Budget 2014-2015 proposes to temporarily reduce contributions that have to be made by employers to the Health Services Fund for full-time jobs created in the natural and applied sciences sector.
The reduction will be available to qualifying employers until 2020 for the increase in payroll that can be attributed to the hiring of new specialized employees in the above sector. This reduction will completely eliminate the contribution payable in respect of such new specialized employees to the Health Services Fund if an employer’s total payroll does not exceed $1 million. By contrast, only a partial reduction will be afforded to employers whose total payroll is between $1 million and $5 million.
Introduction of Incentives to Foster the Marine Industry
Budget 2014-2015 proposes to add two new fiscal measures to stimulate Québec’s shipyards. The first of these measures will enable Québec’s shipowners to implement a tax-free reserve to grant the execution of construction, renovation and maintenance work on vessels of their fleet to a Québec shipyard. Under the second measure, Québec shipowners that grant work to a Québec shipyard will be entitled to claim an additional 50% deduction for the depreciation of a vessel.
Reduction of Certain Tax-Assistance Measures
As one of the steps taken to eliminate Québec’s budgetary deficit, the government announced a 20% reduction of certain tax-assistance measures intended for businesses.
Reduction of tax benefits relating to flow-through shares
A reduction of 20% will be applied to the special deductions allowed under the flow-through share regime. More specifically, this reduction will apply to the additional deduction for mining exploration expenses incurred in Québec and to the special deduction in respect of surface expenses or oil or gas exploration expenses incurred in Québec.
The rate for these deductions, which was formerly 25% each, will now each be decreased to 10%, such that the combined deduction will range from 110% to 120% (rather than from 125% to 150%).
The deduction for certain issue expenses incurred by a corporation (which is limited to the lesser of the issue expenses incurred by the issuer or 15% of the proceeds of the issue of the flow-through shares) will also be targeted by the 20% reduction such that the limit set at 15% of the proceeds of the issue of the flow-through shares will now be reduced to 12%.
These amendments will generally apply to flow-through shares issued after June 4, 2014, except for flow-through shares issued either pursuant to a placement made no later than June 4, 2014 or pursuant to an interim prospectus receipt application or a prospectus exemption application, as applicable, made no later than June 4, 2014.
Measures concerning scientific research and experimental development
Budget 2014-2015 proposes to reduce the rate of the refundable tax credits concerning scientific research and experimental development (R&D) by 20%.
More specifically, (i) the rate of the "R&D salary" tax credit will be reduced to 14% (as opposed to 17.5%) and (ii) the rate of the "R&D university" tax credit, the tax credit concerning precompetitive research carried out in private partnership and the tax credit concerning contributions paid to an eligible research consortium will all be reduced to 28% (as opposed to 35%).
Further, under the current tax legislation, Canadian-controlled private corporations may benefit from a rate varying from 17.5% to 37.5% for the R&D salary tax credit, depending on the amount of their assets. Budget 2014-2015 proposes to reduce this rate so it would range from 14% to 30%.
The increase from 17.5% to 27.5% (and up to 37.5% for Canadian-controlled corporations) in the rate of the refundable tax credit for R&D salary in relation to biopharmaceutical activities will also be eliminated. However, a corporation that was previously granted the status of eligible biopharmaceutical corporation by Investissement Québec 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 at a maximum rate of 22% (and up to 30% for Canadian-controlled corporations).
Reduction of 21 refundable tax credits
The remaining assistance programs that will be affected by the government’s 20% cut are as follows:
- 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 Québec;
- Refundable tax credit for job creation in Gaspésie and certain maritime regions of Québec in the fields of marine biotechnology, mariculture and marine products processing;
- Refundable tax credit for resources;
- Refundable tax credit for international financial centres (IFCs);
- 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 Québec manufacturing companies;
- Refundable tax credit to foster the modernization of the tourism accommodation offering;
- Refundable tax credit for Québec 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;
- Tax credit for the production of multimedia environments or events staged outside Québec;
- Refundable tax credit for on-the-job training periods;
- Refundable tax credit for manpower training in the manufacturing, forest and mining sectors.
The coming into force of the proposed changes to the above-mentioned assistance programs varies from one to the other.