Canada: Quebec’s Budget Calls for Increased Taxpayer Participation

Quebec's Budget Calls for Increased Taxpayer Participation

On March 30, 2010, the Quebec Finance Minister, Raymond Bachand, tabled Quebec's 2010-2011 budget in the National Assembly (Budget). The Budget sets out important measures that will increase provincial revenue or affect existing measures and programs. The Quebec government is maintaining its audacious goal of balancing the budget by fiscal year 2013‑2014.

It therefore comes as no surprise that individuals are affected by various measures, including the introduction of a health contribution of C$25 per adult beginning on July 1, 2010, C$100 per adult beginning in 2011 and C$200 per adult beginning in 2012. Also, the Quebec sales tax (7.5%), which is already slated to increase by 1% on January 1, 2011, will be increased by another percentage point on January 1, 2012. The fuel tax will also be raised in order to upgrade the road network and public transit services. The introduction of the health contribution is no doubt the most surprising measure in the Budget. It is a first for the province, which has preferred to use progressive rates to finance its health system in the past.

Businesses are also affected. The Quebec Finance Minister justifies some of the measures by the need to balance the books whereas other measures reflect the wish to create a fairer tax system.

This bulletin summarizes a few of the more noteworthy measures affecting businesses. As the Liberal government is in the majority, we can expect the measures contained in the Budget to be enacted shortly.

Major changes to the mining duties regime

At a time when environmental protection and the careful management of Quebec's non-renewable natural resources are the subject of endless debate, the Budget contains measures that will allow the province to charge fees that more accurately reflect the degree to which non-renewable resources belonging to the public domain are being used. Among other things, the Budget provides that mining duties payable to the government will increase gradually from the current 12% of an operator's annual profit to 16% by January 1, 2012.

The way annual profit is calculated will be substantially changed so that a taxpayer operating several mines will no longer be able to calculate its annual profit on a consolidated basis. The Budget also proposes various measures limiting both the amount of various costs and allocations available when calculating the annual profit and the credit of duties refundable for losses, even though it is provided that the annual rate of this credit will gradually increase to 16%, at the same rate as the increase in the mining duties rate.

Temporary increase in compensatory tax on financial institutions

The compensatory tax is unique to the province of Quebec. It is designed to recover amounts refunded to financial institutions under the Act respecting the Québec sales tax. This tax is generally calculated based on paid-up capital, salaries paid and insurance premiums.

In order to collect additional revenue to help it achieve a balanced budget, the government is targeting institutions subject to the compensatory tax and is proposing a temporary increase in the tax rate for salaries paid and that are applicable to insurance premiums:

The rate increases that the government expects to recover, close to C$500-million over four years, will apply to taxation years ending after March 30, 2010, and beginning before April 1, 2014.

International Financial Centres (IFC) program replaced

Corporations and partnerships established in the metropolitan community of Montréal whose activities exclusively involve eligible international financial transactions, along with some of their employees, receive preferential tax treatment. In particular, an IFC operator benefits from an exemption of 75% of the income tax, tax on capital and the employer contribution to the Health Services Fund. Eligible IFC employees are entitled to an additional deduction in calculating their taxable income equal to 37.5% of their income from the IFC, up to a deduction of C$50,000 on an annual basis.

The Budget provides for the replacement of all the partial exemptions currently available to IFC operators and their eligible employees, with the exception of a foreign specialist. The program that will henceforth apply to IFCs is similar in many respects to the measures applicable to the other refundable tax credits offered by Quebec. The government is justifying this change by a major transformation in how the industry operates and, in particular, the increasing role of information technology in an IFC's business. The new measures will no doubt allow the province to further target the IFC program to the use of eligible employees in the IFC. This is an important change for the financial services industry.

Under the new program, an IFC will be required to obtain an annual qualification certificate from the Quebec Finance Minister and constitute an eligible corporation with at least six eligible employees. If it qualifies, an IFC may claim a refundable tax credit equivalent to 30% of the eligible salary paid to each eligible employee, up to a maximum of C$20,000 per year each. The new measures will contain details about the eligibility of an IFC, activities, employees and salaries under the new program.

Various transitory rules will give current IFC operators the choice of benefiting from the new credit immediately or continuing under the current IFC program until December 31, 2012, and December 31, 2013, depending on whether the operator is a corporation or a partnership, respectively. Regardless of the IFC's choice as to the form of tax assistance it wishes to receive, current IFC employees may continue to claim a deduction in calculating their taxable income. However, that deduction will gradually be reduced until December 31, 2013, and disappear completely as of January 1, 2014. The tax measure for foreign specialists working for an IFC still applies.

Introduction of water royalty

Although initially it will have a limited impact on the province's finances, the Quebec government is introducing a royalty on water use. A two-tiered water royalty will be introduced as of January 1, 2011. The royalty will target businesses in the industrial and commercial sectors drawing 75 m³ of water or more per day either directly or from water mains. It will not apply to the residential, institutional or farm sectors.

The royalty will apply two rates that depend on the use of the resource. A rate of $0.0025/m³ will apply to industries using water in their production processes and a rate of $0.07/m³ will apply for those using water as a component of their products.

Corrective measures – Refundable tax credit for e-business development

Quebec tax legislation currently provides for a refundable tax credit for eligible corporations that run a business involving activities in the information technology sector. This tax credit corresponds to 30% of eligible salaries that an eligible corporation pays after March 13, 2008, and before January 1, 2016, to carry out eligible activities related to the development of e-business. The amount of tax credit an eligible corporation can receive for a given tax year may not exceed C$20,000 per eligible employee.

Measures were announced to ease the eligibility requirements for the credit for business start-ups and corporations involved in a transfer of activities from another entity. Provided certain conditions are met, a start-up corporation may be eligible for the credit for a portion of a taxation year, as soon the eligibility criteria are met. Similarly, the transfer of activities during a year from one entity to another may allow a corporation involved in such a transfer to qualify as an eligible corporation only for a portion of a taxation year.

These adjustments will apply to salaries incurred by an eligible corporation and paid to eligible employees between March 13, 2008, and January 1, 2016.

Research and development tax measures

Quebec's tax legislation includes various types of refundable tax credits related to scientific research and experimental development (R&D). The Budget announces several measures to make it easier to calculate the refundable tax credit for R&D salaries. The proposed tax credit for R&D salaries will (i) deem a research subject participating in clinical trials to carry out work for the purposes of the credit and (ii) harmonize the treatment of the indemnity paid to a research subject regardless whether a subcontractor is at arm's length with the taxpayer benefiting from the R&D salaries credit or whether the research subject is an employee of the subcontractor.

These proposed measures were desirable and take account of the business reality involving clinical trials. They will apply to expenditures incurred for a taxation year for which the Minister of Revenue of Quebec may, on March 30, 2010, determine or redetermine the refundable tax credit for R&D salaries, for such year, and make an assessment or a new assessment or establish a supplementary assessment in relation to such tax credit.

Administrative measures

Facilitate the Obtaining of Refundable Tax Credits

The principal measures announced in the Budget involving tax administration include a measure to harmonize all refundable tax credits relating to businesses. It is not unusual for a taxpayer to claim a refundable tax credit offered by Quebec tax legislation and be denied the credit following a review by the Ministère du Revenu du Québec. In most cases, as the deadline has passed, the taxpayer is barred from claiming another credit that would have been applicable were it not for the credit initially claimed by the taxpayer. Quebec law is already quite flexible in this respect but only for tax credits for R&D. Under certain conditions, the taxpayer can claim an alternative tax credit for R&D to replace the credit initially claimed.

The tax legislation will be changed so that an expense incurred by a taxpayer regarding which the taxpayer filed a prescribed form for the application of a refundable tax credit on time may be declared by the taxpayer for the same taxation year on a prescribed form, after the deadline, for the application of another refundable tax credit he claims to replace the one he initially applied for.

This amendment will apply to a claim or a new claim regarding a refundable tax credit made after March 30, 2010.

Agence du Revenu du Québec and Aggressive Tax Planning

The Quebec government is continuing its fight against aggressive tax-planning schemes, generally described as an operation that complies with the letter of the law but betrays its spirit. Last October, the Ministère des Finances du Québec introduced stricter oversight measures regarding this type of planning. Quebec was the first in Canada to introduce such measures. The federal government followed suit to a lesser extent in its recent budget. Please see our March 2010 Blakes Bulletin on Tax: 2010 Federal Budget concerning the most recent federal budget.

To be even more efficient, the Ministère des Finances du Québec announced the creation of the Agence du revenu du Québec. The agency will take over from Revenu Québec on April 1, 2011. Additional sums will also be devoted to the fight against tax evasion and the collection of all government revenues. The main sectors targeted by the tax evasion initiatives will be unreported work in the construction industry, the restaurant industry and economic and financial crime. Through these measures, the government expects to bring in close to C$1.2-billion over four years, including at least C$120-million during this fiscal year.

According to the Ministère des Finances du Québec, the creation of the agency, in addition to being a standalone, accountable entity responsible for collecting all government revenues, will give the government revenue collection agency more autonomy, improve delivery of services to the public and ensure rigorous accountability by systematically assessing results and measuring performance.

Prison Sentences and Tax Evasion

To further dissuade defrauders, the Budget announced that the maximum prison term for serious tax offences, including tax evasion, will be raised from two to five years less a day. The government is therefore elevating major tax offences to the same level as major economic crime. The measure will come into force on the date the bill introducing the new measure is enacted.

Harmonization with certain measures relating to latest federal Department of Finance budget

As expected, the Budget announced the harmonization of Quebec legislation with several measures announced by the federal Finance Minister in the federal budget presented on March 4, 2010. However, the Ministère des Finances du Québec will announce its position regarding a few important measures announced in the latest federal budget at a later date.

The measures that will be harmonized include:

  • the addition of a requirement to be entitled to the deduction for employee stock options (BR 18 to BR 21)
  • the changes made to the definition of "taxable Canadian property" and the correlative adjustments (BR 38 to BR 40)
  • the withdrawal of the election to defer taxation of a benefit arising from the exercise of a stock option granted to an employee of a corporation, other than a Canadian-controlled private corporation (CCPC), or a mutual fund trust and the obligation to withhold tax at source (BR 25 to BR 28)
  • the temporary relief allowed individuals who elected to defer taxation of a benefit arising from the exercise of a stock option granted to an employee of a corporation, other than a CCPC, or a mutual fund trust (BR 29 a) to c), BR 30 and BR 31), subject to specific features
  • the changes made to the definition of "principalbusiness corporation" applicable as part of the flowthrough share system (BR 34)
  • the changes made to the acquisition of control rules upon the conversion of a specified investment flowthrough entity to a corporation (BR 35 to BR 37)
  • the changes made to foreign tax (BR 42 to BR 44)
  • the changes concerning the accelerated capital cost allowance on account of clean energy generation
  • the changes to specified leasing property rules.

These measures will only be adopted following the assent given to any federal legislation and/or adoption of any federal regulation giving effect to the measures. These measures will apply on the same dates as those retained for the purposes of the federal measures.

The Ministère des Finances du Québec, however, remains cautious and will only announce at a later date whether it intends to harmonize with the following measures: proposed changes relating to foreign investment entities and non-resident trusts; possible changes to the tax rules for corporate groups; and the creation of federal credit co-operatives.

A few measures announced during the latest federal budget will not be retained, including those relating to information reporting of tax avoidance transactions (since Quebec's tax regime is sufficient in this regard) and the mineral exploration tax credit (since the features of Quebec's tax regime are different in this regard).

For further information on the measures proposed by the federal government in its most recent budget, please see the previously mentioned March 2010 Blakes Bulletin on Tax.

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.

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