In a Tax Law Update released a few weeks ago, we outlined the Canada-Quebec Comprehensive Integrated Tax Coordination Agreement, which had just been signed by the two levels of government. That Agreement generally confirmed the measures contemplated in the September 30, 2011 Memorandum of Agreement, which had set the stage for the QST harmonization. Some issues, though, remained to be clarified: the Québec Ministry of Finance has now addressed some of those issues in the recently published Information Bulletin 2012-4 (the "Bulletin"), while also confirming previous announcements.
Tax Base, Tax Rate and Transitional Rules
The changes to the tax base and rate used for calculating QST were announced some time ago: as of January 1, 2013, QST will be calculated based on a consideration excluding GST and the applicable rate will be raised from 9.5% to 9.975%, measures which effectively cancel each other out economically. The Bulletin additionally further clarifies certain transitional rules that will determine whether the 9.975% rate is applicable or not. In a nutshell, the new rules will apply to taxable supplies on which consideration becomes due as of January 1, 2013, and rules currently in effect will be used to determine when consideration becomes payable. The Bulletin also identifies special rules for cases where the payment of tax and issuance of an invoice straddle the first day of 2013. We do not expect these changes to cause much difficulty in practice, since, as mentioned earlier, they will have no net economic consequences for either the government or the taxpayers in the vast majority of supplies.
Exemption of Financial Services
As we discussed in the first of our series of Tax Law Updates on QST harmonization, the supply of financial services for QST purposes will switch from a zero-rated regime to a fully exempt one, bringing QST in line with the existing federal GST rule. This will have a major impact for many financial institutions, since they will lose their right to receive input tax refunds ("ITRs") for QST paid on their inputs relating to the supply of exempt financial services, since a business involving the making of exempt supplies will no longer be considered to be a commercial activity for QST purposes.
It is worth noting that the change to a fully exempt regime for financial services means that all the federal system's rules specifically designed for financial institutions will simply be imported into the Act respecting the Québec sales tax. As mentioned in the Bulletin, these include:
- special rules for the purposes of calculating ITRs;
- the relief rule for transactions within a closely related group including a listed financial institution;
- the special attribution method ("SAM") applicable to selected listed financial institutions;
- specific rules for imported supplies of services and incorporeal movable properties; and
- rules for registration and the filing of returns and information.
In parallel to this important measure, the Bulletin also lists additional related rule changes. First, transitional rules will be put in place to ease the change to exempt supplies. In particular, because financial services will become exempt, the "change of use" rules would normally be triggered for capital property used in rendering such exempt services, leading to potentially costly recovery of ITRs. Transitional rules will generally ensure that no such adverse consequences arise. For example, a registrant that uses movable property (with a value of $50,000 or less only in the case of a registrant financial institution) as capital property primarily in the course of commercial activities, and that (because the supply of exempt financial services is no longer considered as a commercial activity) begins to use such property primarily for other purposes on January 1, 2013, will be deemed to have made a supply of such property for nil consideration immediately before the new rules take effect. The registrant will also be deemed to have reacquired the property for use other than as capital property. Because of the effect of such deeming rules, the registrant avoids the impact of the potential ITR recovery on the one hand but is also precluded from claiming another ITR in the future in the event there is an increase in commercial use (i.e. property is no longer considered as a capital property). In short, although Québec is willing to ensure a proper transition, the ministère des Finances does not want to duplicate ITRs on the same property. Similar deeming provisions will apply to movables of a registrant financial institution (exceeding $50,000 in value) and immovables. Again, such particular rules are not only designed to eliminate the impact of the potential ITR recovery but also to preclude the registrant from claiming duplicate ITR on the same property in the future.
Second, the Bulletin addresses issues related to registration. Current differences in the taxation of financial services under the Québec and federal systems have led to certain discrepancies. Suppliers of financial services in Québec are usually registered for QST purposes in order to claim ITRs while they are not registered under the GST regime because they are not engaged in a commercial activity. To conform to the new rules, financial services suppliers that are registered for QST purposes, but that are not engaged in a commercial activity under the GST regime, will have to deregister for QST purposes as of January 1, 2013. However, this deregistration will not lead to ITR recovery.
In addition, because of the adoption of the SAM rules, listed financial institutions may have to register for QST purposes as of January 1, 2013 because they may then be deemed to have a permanent establishment in Québec under the new rules.
The Bulletin announces a single 33% rate to replace existing graduated rates for the QST rebate for registered pension plans. An increase in employer contributions is foreseeable to compensate for the non-recoverable QST and the additional costs this will entail for pension plans.
The Bulletin also clarifies the position taken by Québec regarding the repeal of the compensation tax on financial institutions. Such compensation tax was adopted to partly compensate Québec for the QST refunds that financial institutions are currently receiving. The ministère des Finances indicates that the additional temporary rate increase on the compensation tax already announced in the 2010-2011 Budget will continue to apply for the period ending March 31, 2014. Consequently, the compensation tax will be fully eliminated only for taxation years beginning on or after April 1, 2014. Québec justifies this decision by saying that the temporary rate increase announced in the 2010-2011 Budget was part of a plan to return to budget balance and was not attributable to the impact of granting ITRs to financial institutions. In any event, this means that, as of January 1, 2013, financial institutions will still have to pay the compensation tax (although based on reduced rates and a smaller tax basis) while not being in a position to claim ITRs.
Rebates of Taxes paid by Governments
Currently, the federal government and certain of its agencies are exempt from payment of the QST. The Québec government and certain of its agencies are also currently exempt from payment of the GST/HST and the QST.
As of April 1 2013, such entities will have to pay GST/HST and QST on their acquisitions of taxable properties and services. They will, however, be in a position to recover such taxes by submitting a rebate claim to the appropriate tax authorities.
Supply before Customs Clearance
Another harmonization change that should be greatly welcomed by tax practitioners is the adoption for QST purposes of the existing deeming rule in the GST system providing that goods imported into Canada, and that are sold and delivered by GST registrants before customs clearance, are made outside Canada and not subject to GST. This will put an end to Revenu Québec assessing unwary QST registrants who have made sales in Québec in similar circumstances where the terms were, as an example, Delivered Duty Unpaid or Delivered Ex Ship.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.