The Quebec Minister of Finance, Mr. Carlos Leitão, delivered an update on Quebec's economic and financial situation on December 2, 2014.
This legal update presents a summary of the main tax measures announced by the minister on that date. It is important to note that these measures are pending passage by the National Assembly and, as such, do not yet have the force of law.
Measure for scientific research and experimental development
The legislation will be amended to reduce the tax assistance for expenditures related to scientific research and experimental development activities (R&D) and the tax credit for investments relating to manufacturing and processing equipment.
Generally, the tax legislation provides for various R&D tax credits with differing tax credit rates. The tax legislation will be amended to standardize the rates applicable to these tax credits. Specifically, the following tax credits (the rate for which is currently 28%) will now be subject to the rates applicable to the refundable tax credit for wages of employees who carry out R&D work in Quebec or subcontractors dealing at arm's length (R&D wages):
- the refundable tax credit for research contracts awarded to an eligible university entity, an eligible public research centre or an eligible research consortium (university R&D);
- the refundable tax credit for private partnership precompetitive research (precompetitive R&D); and
- the refundable tax credit for fees paid to an eligible research consortium (consortium R&D).
For each of these tax credits, the applicable rate will now be the same as the R&D salary tax credit, which is 14%, but which ranges from 14% to 30% in the case of a Canadian-controlled corporation.
These new measures will apply as follows:
- for the university R&D tax credit, to expenditures incurred after December 2, 2014, for a research contract entered into after that date;
- for the precompetitive research R&D tax credit, to expenditures incurred after December 2, 2014, for a partnership agreement entered into, renewed or extended after that date;
- for the consortium R&D tax credit, to expenses incurred by a taxpayer or partnership for a taxation year or fiscal period beginning after December 2, 2014.
The legislation will also be amended to institute minimum eligible expenditure thresholds for R&D tax credits and the tax credit for investments relating to manufacturing and processing equipment. Consequently, businesses will only be able to benefit from these tax credits for eligible expenditures exceeding a certain threshold.
For R&D tax credits, the minimum eligible expenditure thresholds will be:
- $50,000 for corporations with assets less than or equal to $50 million;
an amount that increases linearly between $50,000 and $225,000
for corporations with assets between
$50 million and $75 million;
- $225,000 for corporations with assets of $75 million or more.
For the tax credit for investments relating to manufacturing and processing equipment, the threshold will be $12,500 for eligible manufacturing and processing equipment.
Generally, these amendments will apply in respect of a taxation year or fiscal period beginning after December 2, 2014, for the thresholds applicable to R&D tax credits; the threshold applicable to the tax credit for manufacturing and processing equipment will apply in respect of qualified property acquired after December 2, 2014.
Measure to increase the temporary contribution relative to the compensation tax for financial institutions
On January 1, 2013, in view of the exemption of financial services under the Quebec Sales Tax (QST) system, the portion of the compensation tax for financial institutions that was attributable to the impact on public finances of granting input tax refunds (ITRs) to suppliers of financial services was eliminated. Specifically, since January 1, 2013, the compensation tax for financial institutions has not applied to paid-up capital and has consisted solely of the temporary contribution applicable to amounts paid as wages and to payable or taxable insurance premiums. Since January 1, 2013, the temporary contribution rates for financial institutions have been:
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%;
- for insurance premiums and amounts established in respect of an insurance fund, 0.3%.
The temporary contribution rates will be increased temporarily for the period from December 3, 2014, to March 31, 2017 and will 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, 4.48%;
- in the case of a savings and credit union, 3.52%;
- in the case of any other person, 1.44%.
- for insurance premiums and amounts established in respect of an insurance fund, 0.48%.
Measure to increase the tax on capital for insurance corporations
An insurance corporation carrying on business in Quebec is required to pay as tax on capital, for each period of 12 months, on every premium payable to the corporation or its agent with respect to its business in Quebec other than an annuity contract, a tax equal:
- in the case of insurance relating to the life, health or physical well-being of the insured, to 2% of the premium payable;
- in all other cases, to 3% of the premium payable.
Moreover, an insurance corporation carrying on business in Quebec is required to pay as tax on capital, for each taxation year, a tax equal to 2% on every taxable premium paid to the corporation or its agent in the year as part of an uninsured employee benefit plan (UEBP) respecting a person who is resident in Quebec at the time of the payment.
The 2% tax on capital rate that an insurance corporation is required to pay on every premium payable to the corporation or its agent relating to the life, health or physical well-being of the insured or that the insurance corporation is required to pay on a taxable premium paid to the corporation or its agent as part of a UEBP will be increased to 3%. The 3% rate will apply to a 12-month period or a taxation year, as applicable, ending after December 2, 2014, and, where the 12-month period or the taxation year straddles that day, the new rate will apply proportionately to the number of days in the 12-month period or taxation year following that day.
Reduction of the conversion rate for tax credit for union, professional or other dues
An individual who pays eligible dues or an eligible contribution to a recognized professional association, a union or a similar group, depending on whether the individual is an employee or a self-employed worker, may generally claim a non-refundable tax credit equal to 20% of the total of the amounts so paid that are related to, as applicable, the office or employment held by the individual or the business carried on by the individual. The minister of finance announced that the rate at which eligible dues or contributions are converted to a tax credit will be reduced from 20% to 10% as of the 2015 taxation year. According to the minister's estimates, this measure will generate a total of $224 million in additional revenue for the government for financial years 2015-2016 and 2016-2017.
Reduction of the Health Services Fund contribution rate for SMEs in the primary and manufacturing sectors
To assist small and medium-sized enterprises (SMEs) in industrial sectors, the Health Services Fund contribution rate for SMEs in the primary and manufacturing sectors will be reduced as of 2015. Specifically, eligible employers whose total payroll is equal to or less than $1 million will see the applicable rate decrease from 2.7% to 1.6%. Eligible employers whose total payroll is between $1 million and $5 million will be subject to a rate ranging from 1.6% to 4.26%. The industrial sectors contemplated by this tax measures are those in the primary and manufacturing sectors, namely the agriculture, forestry, fishing and hunting, mining, quarrying, oil and gas extraction or manufacturing sectors that are grouped under codes 11, 21 or 31 to 33 of the North American Industry Classification System (NAICS). The new rate scale will apply to any employer in these sectors whose total payroll for the year is less than $5 million, where over 50% of the employer's total payroll for the year is attributable to activities in the sectors contemplated by this new tax measure ("eligible specified employer").
Moreover, to bolster Quebec SMEs' capacity to innovate, a temporary reduction in the contribution to the Health Services Fund was implemented, following the June 4, 2014, budget, for full-time jobs created in the natural and applied sciences sector. Briefly, this reduction, applicable until 2020, is granted in respect of the increase in payroll attributable to the hiring of specialized employees by an employer whose total payroll is less than $5 million.
To take into account the decrease from 2.7% to 1.6% as of 2015 in the Health Services Fund contribution rate of an eligible specified employer whose total payroll for a year is $1 million or less, the law will be amended to stipulate that, for the purposes of calculating, for a year subsequent to 2014, the temporary reduction in the Health Services Fund contribution of an employer whose total payroll is $1 million or less, the rate of reduction will be equal to 1.6% in the case of eligible specified employers and 2.7% in other cases.
Increase in the additional deduction for transportation costs of remote manufacturing SMEs
To reflect the higher transportation costs of manufacturing SMEs located far from large urban centres, the June 4, 2014, budget introduced an additional deduction in the calculation of income for income tax purposes corresponding to:
- 2% of gross income, with a cap of $100,000 per corporation, for manufacturing SMEs located in the intermediate zone;1
- 4% of gross income, with a cap of $250,000 per corporation, for manufacturing SMEs located in the remote zone;2
- 6% of gross income, with no cap per corporation, for manufacturing SMEs located in the special remote zone.3
To provide additional assistance to all manufacturing SMEs, certain parameters used to determine the amount of the additional deduction a corporation may claim (2%, 4% or 6%) will be reviewed, and the additional deduction will apply to all regions of Quebec. As part of this increase, an integrity rule for sharing regional limits will be added. The aforementioned rates will therefore be raised by one percentage point, with the result that rates of 3%, 5% and 7% will apply to the "intermediate zone," the "remote zone" and the "special remote zone" respectively, and a rate of 1% will apply to the "central zones," which consist of the city of Gatineau and the Montréal and Quebec City census metropolitan areas. These changes will apply to a manufacturing SME's taxation year that begins after December 31, 2014.
Temporary increase in the refundable tax credit for Quebec film and television production
In general, the refundable tax credit for Quebec film and television production (the "basic tax credit") is equal to 36% or 28% of the qualified labour expenditure incurred by a qualified corporation to produce a Quebec film. However, the labour expenditure giving rise to the tax credit may not exceed 50% of the film's production costs. The 36% rate applies to the qualified labour expenditure related to the production of certain feature-length, medium or short films, certain broadcasts intended for young people and certain documentaries, provided they are in French; it also applies in the case of giant-screen films, regardless of the language. The 28% rate applies to the other categories of eligible films. Lastly, certain increases are available to qualified corporations and are calculated on the qualified expenditure related to the carrying out of computer animation and special effects, the qualified expenditure related to services provided in Quebec, outside the Montréal area, or the qualified labour expenditure respecting a production that does not receive financial assistance from a public body.
Moreover, while waiting to receive payment of tax assistance, qualified corporations generally receive interim funding from the Société de développement des entreprises culturelles (SODEC) or a financial institution, occasioning additional costs for them. Consequently, the tax legislation will be amended to take these additional costs into account in the calculation of the basic tax credit. Accordingly, the basic tax credit, at the rate of 36% or 28%, will be calculated on an "increased expenditure" equal to the aggregate of the amount of the qualified labour expenditure and an amount equal to 2% of the amount of the qualified labour expenditure.
These changes will apply regarding a film or television production for which an application for an advance ruling, or an application for a certificate, if an application for an advance ruling was not filed earlier, is submitted to SODEC after December 2, 2014, and before January 1, 2017.
Application of the general tax rate for insurance premiums to all automobile insurance premiums
The general tax rate on insurance premiums is 9%. An exception is made in the case of premiums payable under an automobile insurance policy covering essentially material damages, which are taxed at a reduced rate of 5%. This reduction applicable to an automobile insurance policy will be abolished as of January 1, 2015. As a result, the 9% rate will apply to all automobile insurance premiums paid after December 31, 2014. According to the minister's estimates, this measure will generate a total of $305 million in additional revenue for the government for the 2014-2015, 2015-2016 and 2016-2017 financial years.
1 Capitale-Nationale, except for the municipalities included in the Quebec City metropolitan census region (MCR) and the Charlevoix-Est RCM; Chaudière-Appalaches, except for the municipalities included in the Quebec City MCR; Lanaudière, except for the municipalities included in the Montréal MCR; Laurentides, except for the municipalities included in the Montréal MCR; Montérégie, except for the municipalities included in the Montréal MCR; Centre du Québec; the western portion of Estrie, including the Ville de Sherbrooke and the Memphrémagog, Val-Saint- François, des Sources and Coaticook RCMs; the southern portion of Mauricie, including the cities of Trois-Rivières and Shawinigan as well as the Chenaux and Maskinongé RCMs; Papineau RCM (Outaouais).
2. Bas-Saint-Laurent; Saguenay–Lac-Saint-Jean; Abitibi- Témiscamingue; Côte-Nord, except for the municipality of L'Île-d'Anticosti and the Golfe-du-Saint- Laurent RCM; Nord-du-Québec, excluding the Kativik Regional Government; Gaspésie, including the Avignon, Bonaventure, Côte-de-Gaspé, La Haute-Gaspésie and Rocher-Percé RCMs; the eastern portion of Estrie, including the Granit and Haut-Saint-François RCMs; Antoine-Labelle RCM (Laurentides); La Tuque urban agglomeration and Mékinac RCM (Mauricie); Pontiac and La Vallée-de-la-Gatineau RCMs (Outaouais); Charlevoix-Est RCM (Capitale-Nationale).
3. Municipality of L'Île-d'Anticosti (Côte-Nord); Îles-de-la-Madeleine urban agglomeration; Golfe-du-Saint-Laurent RCM (Côte-Nord); Kativik Regional Government (Nord-du-Québec).
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