On March 26, 2015, the Quebec government (Government) unveiled the 2015-16 budget (Budget). After six years of deficits and further to a significant reduction of Government expenses, Quebec is anticipating returning to a balanced budget for 2015-16 and for the future. The balanced budget comes without raising any income taxes, sales taxes or fees. The Budget appears to be designed to steadily ease the Quebec tax burden. The balanced budget is, however, based on certain important assumptions, including an economic growth of 1.5% in 2014 and 2% in 2015, and an escalation of Quebec exports fuelled by a strong U.S. economy and a depreciation of the Canadian dollar.
In the Quebec budget of June 4, 2014 (see our Blakes Bulletin: Government of Québec 2014-15 Budget – Public Financial Discipline Imposed: Impact on Businesses), the Government announced the creation of the Québec Taxation Review Committee (Committee). The Committee's mandate was to make recommendations on how to increase the effectiveness, fairness and competitiveness of Quebec's tax regime with an emphasis on examining Quebec's corporate taxation system to reduce tax expenditures relating to businesses and propose ways to better support economic growth. The Committee released its report entitled Focusing on Québec's Future on March 19, 2015,and made 71 recommendations pertaining to both the corporate and personal tax systems. The Government received the report favourably. The Budget introduces a number of measures which follow, in whole or in part, 28 of such recommendations. The Government intends on analyzing the other 41 recommendations, as well as creating a task force to commence discussions with the federal government and other provincial governments in respect of 18 of such recommendations. The task force's mandate will include initiating a dialogue with the federal government in respect of the taxation of capital gains, collection of sales taxes and corporate income tax on Internet transactions made by suppliers in foreign countries and the use of trusts to shift the tax base outside Quebec.
Below we highlight certain key corporate fiscal measures announced in the Budget that may be of interest to businesses and employers, some of which stem from the Committee's report such as the gradual reduction of the corporate income tax rate to 11.5% from 11.9%.
CORPORATE RATE MEASURES
Corporate Income Tax
- The general corporate tax rate is currently 11.9%. The Budget proposes to lower the rate to 11.8% in 2017, 11.7% in 2018, 11.6% in 2019, and finally 11.5% in 2020. This 0.4% reduction over four years will bring Quebec's corporate tax rate in line with Ontario's corporate tax rate.
- Eligibility for the small business deduction (SBD) will be redefined, resulting in a reduction of the businesses that can claim the SBD. In its current form, the SBD allows certain small and medium-sized manufacturing businesses (SMBs) to benefit from a corporate tax rate reduction of 3.9% up to a maximum of C$500,000 of annual income from an eligible business, thus reducing the applicable taxation rate to 8% on this portion of income. For taxation years beginning after December 31, 2016, the SBD of 3.9% will be refocused such that only SMBs that either (1) employ more than three full-time employees throughout the year or (2) qualify as a corporation in the primary and manufacturing sectors, will be entitled to the SBD. Consequently, businesses other than those operating in the primary and manufacturing sectors will need to satisfy additional criteria in order to ensure eligibility for the SBD.
Health Services Fund Contribution Rate
A Quebec employer's contribution to the Health Services Fund, generally situated between 2.7% and 4.26% of the total payroll, will be modified for SMBs. The contribution rate of employers in the service and construction sectors, for which the total payroll is equal or inferior to C$1-million, will gradually be reduced over a period of three years starting in 2017, to 2.25% from 2.7%.
During this period, the rate of 2.7% will be reduced to 2.55%, 2.40% and 2.25% for the years 2017, 2018, and 2019 respectively. Employers with a total payroll varying between C$1-million and C$5-million will benefit from a gradual reduction in their contribution rate as well.
TAX CREDIT RATE MEASURES
Tax Credit for Investments Relating to Manufacturing and Processing
The Government is proposing to modify the tax credit for investment related to manufacturing and processing equipment. The maximum of the investment tax credit, depending on the zone in which it is used, will be reduced by 8% for each zone. Thus, for eligible expenses incurred after 2016, the credit will only be available for property used in zones that are (1) remote; (2) in the eastern part of the Bas-Saint-Laurent administrative region; and (3) intermediate zones. Furthermore, the definition of the expression "qualified property" will be changed to allow property to be considered as qualified property in some cases if acquired before January 1, 2023.
Refundable Tax Credit for Development of E-Business and Addition of Non-Refundable Tax Credit
The refundable tax credit for the development of e-business (TCEB) 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. Currently, the TCEB eligibility period is set to end on December 31, 2025. The Budget proposes to eliminate this end date.
The Budget also proposes to exclude wages related to certain contracts entered into between the employer and a government entity from employees' qualified wages for the purposes of the TCEB. This amendment will generally apply to wages incurred after September 30, 2015.
A new non-refundable tax credit of 6% will also be introduced for qualified corporations carrying on e-business development activities on top of the existing TCEB of 24%. The unused portion of the new non-refundable tax credit may generally be carried back three taxation years or forward for 20 taxation years. These amendments will apply with respect to wages of an eligible employee incurred after March 26, 2015.
Tax Credits for Multimedia Titles and Cultural Industry
The rates of certain non-refundable tax credits will be increased such that they are restored to the rates in effect prior to the June 4, 2014 Quebec budget. The credits affected by this measure are:
- Refundable tax credit for sound recording production
- Refundable tax credit for film dubbing
- Refundable tax credit for book publishing.
In addition to increasing the applicable tax credit rate, the Government has also proposed some changes to the rules applicable to the following tax credits:
- Refundable tax credits for the production of multimedia titles
- Refundable tax credit for Quebec film and television production
- Refundable tax credit for the production of performances
- Tax credit for the production of multimedia environments or events staged outside Quebec.
Refundable Tax Credit for International Financial Centres and Addition of Non-Refundable Tax Credit
The refundable tax credit for international financial centres was introduced as an incentive for businesses specializing in international financial transactions to establish themselves and carry on business in the urban agglomeration of Montréal.
A qualified corporation that is recognized as an international financial centre (IFC) by the Quebec Minister of Finance may be entitled to claim a refundable tax credit equal to 24% of qualified wages incurred in a year in respect of eligible employees up to a maximum of C$16,000 per year per eligible employee. Foreign specialists working for an IFC operated by a qualified corporation may also benefit from a tax holiday on their taxable income for a period of up to five years.
Significant changes to the refundable tax credit for IFCs were announced as part of the Budget, namely the replacement of the refundable tax credit by a non-refundable tax credit, with the exception of credits related to certain back office activities that qualify as "qualified international financial transactions" (QIFT), which will remain refundable.
Refundable Tax Credit for IFCs with Respect to Back Office Activities
The refundable tax credit for IFCs will be maintained for back office activities. As a result, the Minister of Finance will continue to issue qualification certificates and annual certificates in respect of back room activities that qualify as QIFTs to IFCs that meet the particular certification requirements. In addition, the qualification certificate and annual certificate in respect of an employee may be issued if such employee devotes at least 75% of its time to carrying out back room activities that are QIFTs.
The amendments will apply to a taxation year of a corporation beginning after March 26, 2015. A corporation and an employee that hold a certificate for the purpose of the refundable tax credit for IFCs that was issued before the date the amendment is applicable will be able to keep such certificate. However, any qualification certificate or annual certificate issued after the date on which the amendments take effect will indicate that such certificate is limited to back office activities that qualify as QIFTs for the purpose of the refundable tax credit for IFCs.
Replacement of Refundable Tax Credit for IFCs by Non-Refundable Tax Credit for Activities Other than Back Room Activities
A qualified corporation that carries on activities that all qualify as QIFTs (except for those that consist of back office activities qualifying as QIFTs) will be entitled to claim a new, non-refundable tax credit representing 24% of the qualified wages incurred by the corporation for the year in respect of its eligible employees.
All of the conditions that apply to the refundable tax credit for IFCs will now apply to the non-refundable tax credit with the necessary adaptations, including the time periods for claiming the tax credit. Additionally, the maximum amount of the non-refundable tax credit for IFCs will be C$16,000 per employee per year. The unused portion of the tax credit in a given taxation year may be carried back three taxation years and carried forward 20 taxation years.
A corporation and an employee that hold a certificate for the purpose of the refundable tax credit for IFCs that was issued before the date the amendment is applicable will be able to keep such certificate for the purposes of the new, non-refundable tax credit. Any qualification certificate or annual certificate issued after the date on which the amendments take effect will indicate that such certificate is limited to the application of the new, non-refundable tax credits for IFCs. A foreign specialist should be able to continue to claim a tax holiday where applicable.
These amendments will apply to a qualified corporation's taxation year beginning March 26, 2015.
Refundable Tax Credit for Integration of Information Technologies (IT) in Manufacturing Small and Medium-Sized Manufacturing Businesses
Introduced in October 2013 as a temporary credit to support SMBs wanting to invest in integrating IT into their businesses, the refundable tax credit for the integration of IT in manufacturing SMBs allows SMBs to claim a refundable tax credit for expenditures related to a "qualified management software package" that are incurred before January 1, 2018. The tax credit is equal to 25% of expenditures related to "qualified IT integration contract" for which Investissement Québec has issued a certificate, although the total maximum amount that corporation may claim in respect of this credit is C$62,500. As part of the 2014-15 Budget, it was announced that applications for certificates in respect of an IT integration contract would no longer be accepted as of June 4, 2014.
Pursuant to the Budget, Investissement Québec will be allowed to accept applications for a certificate that are submitted after March 26, 2015, but before January 1, 2020.
In order to harmonize with the measures announced as part of the 2014-15 Budget, the maximum tax credit will be reduced to 20% from 25%. The 20% rate applies to a corporation with a paid-up capital that does not exceed C$15-million and decreases linearly to a rate of zero for a corporation with a paid-up capital of C$20-million. As a result of the rate reduction, the total maximum tax credit that may be claimed will be limited to C$50,000.
Furthermore, this credit will now extend to corporations in the primary sector with more than 50% of its activities consisting of manufacturing or processing activities or activities in the primary sector.
These amendments will apply to eligible expenditures incurred after March 26, 2015, but before January 1, 2020, in respect of an IT integration contract the negotiation of which begins after March 26, 2015, but before January 1, 2020, and for which a qualification certificate has been issued.
TAX REGIME INTEGRITY MEASURES
General Integrity Rule to Ensure Tax Assistance Measures to Counteract Certain Trust and Partnership Structures
The Budget proposes to introduce a general integrity rule aimed at protecting tax assistance measures, such as refundable and non-refundable tax credits, targeting specific businesses and activities. Various integrity rules—such as the financial size of a corporation—currently exist to limit a taxpayer's eligibility for tax assistance.
Presumption Relative to Tax Attributes of Trust or Partnership
The Budget proposes amendments that target legal structures involving the interposition of a trust or partnership that ostensibly prevent existing integrity rules pertaining to tax assistance measures from achieving their objective. The proposals include deeming the tax attributes of a trust or partnership, at a particular time, to be tax attributes of a corporation when the tax assistance measures call into play contain notions such as "control of a corporation," "persons not dealing at arm's length," "associated corporation" or "corporation exempt from tax."
The amendments will apply to an individual's or corporation's taxation year ending after March 26, 2015.
The interposition of a partnership is not treated in the same way as a corporation for purposes of several refundable tax credits notwithstanding that applicable activities can be carried on through the intermediary of a partnership rather than by a corporation. The Budget proposes amendments that will entitle a partnership to qualify for refundable tax credits only if it would be entitled to the credit if it were a corporation. Furthermore, the level of tax assistance will be calculated by considering the partnership's attributes to be those of a qualified corporation.
The amendments will apply to an individual's or a corporation's taxation year beginning after March 26, 2015 that includes the end of a fiscal period of a partnership to which these amendments apply.
Compulsory Disclosure Requirement Mechanism
On October 15, 2009, a number of measures to combat aggressive tax planning (ATP) transactions were announced. A compulsory disclosure mechanism was part of such measures and essentially targets two types of transactions: a transaction in respect of which an adviser requires confidentiality from a client or remuneration is conditional upon the occurrence of certain events (Conditional Remuneration). In relation to a transaction involving Conditional Remuneration, if an adviser's remuneration (1) is conditional upon or determined on the basis of a taxpayer obtaining tax benefit; (2) may be refunded to the taxpayer if the benefit sought from the transaction does not materialize; or (3) is earned only after the expiry of the prescription period that applies to the taxation year or years in which the transaction takes place, the transaction needs to be disclosed to Revenu Québec.
The Budget proposes to broaden the scope of the existing obligation requiring mandatory disclosure. In particular, in the context of applications for refundable tax credits, a transaction involving Conditional Remuneration aimed at obtaining a refundable tax credit that will result in a tax benefit of C$25,000 or more for a taxpayer seeking to obtain the credit will now need to be disclosed to Revenu Québec.
In addition, if a transaction involves "contractual coverage," the obligation to disclose will also apply where a taxpayer, or partnership of which the taxpayer is a member, results, directly or indirectly, for a taxation year or fiscal period, either in a tax benefit of C$25,000 or more for the taxpayer, or in an impact on the income of the taxpayer or partnership, of C$100,000 or more. The Budget defines contractual coverage as meaning insurance, except professional liability-type insurance, or any kind of coverage, including an indemnity, compensation or a guarantee that would serve to (1) protect the taxpayer from any failure of the transaction to produce a tax benefit; (2) pay or refund any amount (expense, cost, tax, interest, penalty or similar amount) that may be incurred by the taxpayer in a dispute with a tax authority in Canada or elsewhere relate to a tax benefit that may stem from the transaction; or (3) help or represent a taxpayer, protect the taxpayer's rights or otherwise assist the taxpayer in a dispute with a tax authority in Canada or elsewhere relative to a tax benefit that may stem from the transaction.
The amendments will apply to transactions carried out as of March 26, 2015. However, the amendments will not apply to a transaction carried out as part of a series of transactions that began before March 26, 2015, and are completed before July 1, 2015.
12-Month Period to Apply for Refundable Tax Credit
Generally, applications for refundable tax credits for businesses must be submitted to Revenu Québec no later than 12 months after the filing due date for a given taxation year to which the refundable tax credit applies. Eligibility for certain refundable tax credits hinges on first receiving a certificate from a sectoral body other than Revenu Québec. Certain exceptions provide taxpayers with the possibility of applying for a refundable tax credit after the 12-month period to take into account that it may take longer for the sectoral body to examine applications for certificates.
The Budget proposes amendments, generally effective after March 26, 2015, to harmonize extended time limits and related rules under the Quebec Taxation Act and the legislation governing the sectoral body.
Quebec's tax legislation will be modified to integrate certain modifications announced by the federal government in a news release on March 1, 2015, related to the qualification as Canadian exploration expenses certain costs incurred for environmental evaluations and community consultations. These modifications will be applicable on the same date as that of the application of the federal modifications with which they are harmonized.
Quebec Sales Tax and Large Businesses
Pursuant to the Comprehensive Integrated Tax Coordination Agreement between the Government of Canada and the Government with respect to sales tax harmonization, the Government was supposed to gradually eliminate restrictions applicable to the input tax refunds (ITRs) for large businesses in equal annual proportions over a period of three years, beginning—at the latest—on January 1, 2018. The Government confirms that this measure will be put in place.
Therefore, the Quebec sales tax regime will be modified so as to permit large businesses to request an ITR for property and services currently captured by the restrictions (in particular, gasoline, electricity, telecommunications, food, beverages and entertainment, the deductibility of which is limited pursuant to Quebec tax law) to a rate of 25% in 2018, 50% in 2019, 75% in 2020 and finally 100% as of 2021.
Transfer of Family Businesses
The tax regime currently does not favour transfers of businesses between members of the same family. Pursuant to existing tax rules, for purposes of claiming the capital gains exemption, there are situations where the transfer of shares by an individual of an eligible corporation to a corporation with which the individual is not dealing at arm's length is less advantageous than if the shares were disposed of by the individual to a third party. In the case of a sale of shares of an eligible corporation to a third party, an individual may be able to claim capital gains exemption, whereas if the shares are sold to a non-arm's length corporation, a deemed dividend may result instead.
The Budget proposes, in certain cases, to allow the capital gains exemption in the context of a sale of qualified shares of an eligible corporation to a corporation with which the particular individual is not dealing at arm's length. This measure is targeted at qualified shares in the primary and manufacturing sectors issued by a corporation in those sectors. It must also be a transfer of a qualified family business. The measure will apply to the disposal of qualified shares carried out after 2016.
It is noteworthy that the proposed measure is a solely provincial initiative. It will be interesting to know whether the federal government will be open to making similar changes to Canadian tax rules considering the distortions that a Quebec taxpayer qualifying for this proposed Quebec capital gains exemption could face if the federal government does not follow Quebec's lead in this regard.
Employer Contribution to Expenses Related to Workforce Training
Pursuant to the Act to promote workforce skills development and recognition, all employers whose total payroll in a calendar year exceeds C$1 million are required to devote an amount representing 1% of the total payroll to eligible training expenditures.
The Budget proposes a lightening of the burden on SMBs. As of 2015, only employers whose total payroll for a year exceeds C$2 million will be required to participate for a given year in the development of workplace skills.
Fight Against Tax Evasion
The Government seized the opportunity to once again provide an update, results and its policy directions with respect to the fight against tax evasion. The Budget confirms that the Government allowed a tax recovery of C$3.6 billion for the 2014-15 financial year. The Government anticipates a similar tax recovery for the 2015-16 financial year.
In addition, the Budget sets forth new initiatives in the fight against tax evasion, namely:
- An agreement on the sharing of revenue from tax assessments related to criminal activity
- Additional initiatives in the construction sector
- Provisions to counteract planning on the interposition of a trust or partnership.
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.