TAX NEWS - march 2010
Canada Tax: Quebec Tax Changes - Budget 2010
Titled "Choices for the Future," the budget confirms a deficit of $4.3 billion for fiscal 2009-10. According to the forecasts, the deficit will rise to $4.5 billion for fiscal 2010-11. The plan to restore fiscal balance is still on track for 2013-14.
To restore balance, he announced a reduction in program spending growth to 2.8% as of 2011-12, rather than the 3.2% forecast in March 2009.
Despite the substantial effort by the government to reduce spending, an increase in revenues is necessary to put public finances in order. Among other things, the budget includes the following measures:
- The introduction of a new health contribution to ensure funding for health institutions as of 1 July 2021
- An increase in the Quebec sales tax (QST) rate by one percentage point on 1 January 2022
- A temporary increase in the compensatory tax of financial institutions effective as of the day after the budget speech
The government also announced the creation of the Agence du revenu du Québec, which will take over from Revenu Québec as of 1 April 2011. The government hopes that this agency will be more efficient in the fight against tax evasion.
The budget plans no increases or decreases in personal or corporate income tax rates.
The budget provides for an in-depth revision of the mining duties regime.
The rate will be raised gradually to reach 16% by 1 January 2012, as follows:
2010 Up to the budget 2010 After the budget 2011 2012
Tax rates of the mining duties regime 12% 14% 15% 16%
Changes will be made to three of the allowances an operator may claim:
- The rate of the depreciation allowance will be reduced to better reflect the length of the useful life of property (30% rather than 100% for certain property acquired after the date of the budget).
- The processing allowance rates of 8% and 15% granted on assets used in processing will be reduced to 7% and 13%, respectively. The higher 23% and 30% rates of return regarding certain assets will be eliminated.
- The additional allowance for a northern mine will be replaced with an additional allowance for a mine located in northern Québec (i.e., the mid-north and the far north).
The budget provides for the creation of three separate cumulative accounts for exploration, mine development and mineral deposit evaluation expenses (rather than one single cumulative account). These three cumulative accounts will each give rise to a separate allowance. In addition, the amount an operator may deduct from his profit in relation to the exploration allowance will be limited to 10% if he is an operator other than an eligible operator (an eligible operator is an operator that does not operate, or is not associated with another entity that develops a mineral substance in reasonable commercial quantities).
The additional exploration allowance regarding exploration expenses incurred after the day of the budget will be eliminated.
The rate of the credit on duties refundable for losses will be increased gradually at the same pace as the mining duties rate to reach 16% on 1 January 2012. The credit on duties refundable for losses will be limited based on an operator's status (eligible or non-eligible). The credit on duties refundable for losses an operator may claim regarding its exploration expenses may reach 8% of such expenses.
The calculation method of an operator's annual profit will be changed by making use of a "mine-by-mine" approach.
Special rules will be established to facilitate the determination of the gross value of annual output of precious stones, namely diamonds.
The budget includes numerous transitional measures for fiscal years that straddle the date of the budget.
Replacement of the IFC regime with a refundable tax credit
Generally, all of the partial exemptions an international financial centre (IFC) operator currently enjoys regarding income tax, tax on capital and employer contributions to the Health Services Fund (HSF) will be replaced with a refundable tax credit. In addition, an IFC must henceforth have at least six eligible employees and be operated by an eligible corporation.
Accordingly, a corporation recognized as an IFC may, under certain conditions, claim a refundable tax credit representing 30% of eligible salary (not exceeding $66,667) incurred for the year for an eligible employee. The deduction an IFC employee other than a foreign specialist may claim will be progressively reduced until 2013, the last year for which this deduction will exist.
Rules similar to those currently stipulated for issuing qualification certificates will apply, with the necessary adaptations, to the credit for IFCs.
Operators of existing IFCs may elect, as of the day following the day of the budget speech, to receive this new refundable tax credit. Operators of existing IFCs that do not elect the new refundable tax credit may continue to be covered by the existing regime until 31 December 2021 where the operator is a corporation, or until 31 December 2021 where the operator is a partnership. Transitional rules will be introduced in this regard.
Increase in the capital cost allowance rate applicable to trucks and tractors designed for hauling freight and introduction of an additional deduction
The capital cost allowance rate applicable to trucks or tractors designed for hauling freight will be raised from 40% to 60% where such assets are new at the time of acquisition and are acquired after the day of the budget speech. An additional deduction of 85% of the amount deducted will be allowed for trucks and tractors fuelled by liquefied natural gas and acquired after the day of the budget speech but before 1 January 2016.
Extension of the refundable tax credit for the construction and major repair of public access roads and bridges in forest areas
The refundable tax credit for the construction and major repair of public access roads and bridges in forest areas will be extended until 31 March 2013. The rate of the tax credit will be 80% and 70% for expenses incurred in calendar years 2011 and 2012, respectively, and 60% for expenses incurred from 1 January to 31 March 2013.
Tax credit for R&D salaries
The tax legislation will be amended so that a research subject who participates in a clinical trial carried out by another person is deemed to carry out work for the purposes of the tax credit for R&D salaries. This amendment renders the indemnity paid to a research subject eligible for the tax credit for R&D salaries. Moreover, such indemnity will be excluded from the application of the rules of second-level subcontracting.
In the case of a taxpayer who has R&D work carried out on his behalf by a corporation or partnership, the rules applicable to second-level subcontracting will be amended so that work carried out by a person who is not an employee of the corporation or partnership but is a shareholder or member, as the case may be, may also be considered for application of the credit for R&D salaries.
These amendments apply to taxation years that are not statute barred.
Tax credit for technology adaptation services
An expenditure incurred after 30 March 2022 that is eligible for one of the R&D credits will not be eligible for the tax credit for technology adaptation services.
Easing regarding the 12-month period for claiming a tax credit
A taxpayer who has claimed a credit in relation to an expenditure with respect to a taxation year by filing a prescribed form no later than 12 months after his applicable filing deadline for the year may claim, after such period, another tax credit in relation to such expenditures to replace the first credit claimed. Ministerial discretion will apply in certain cases. This amendment applies to a claim or a new claim made after 30 March 2010.
In the event where the replacement tax credit claimed is the tax credit for university R&D, an application for an advance ruling may be made after the current three-year deadline if the Minister considers that the reasons given by the taxpayer justify the admissibility of the application.
Temporary increase in the compensatory tax on financial institutions
This compensatory tax is set on the basis of three tax bases, namely paid-up capital, salaries paid and insurance premiums (including amounts established regarding insurance funds). More specifically, the rates applicable to financial institutions will be increased as follows:
Current rate Proposed rate
Salaries paid by a bank, loan company, trust company or securities trading company 2.0% 3.9%
Salaries paid by a savings and credit union 2.5% 3.8%
Salaries paid by any other person 1.0% 1.5%
Insurance premiums and amounts established regarding insurance funds 0.35% 0.55%
The rate increases will apply regarding taxation years ending after the day of the budget speech and beginning before 1 April 2014. In the case of a taxation year that straddles either of these dates, transition rules will apply.
Credits for the production of multimedia titles
Multimedia title production corporations are turning to the production of other products such as digital animation films that, while they may be closely tied to the eligible multimedia titles, are not included in them. To make these other products eligible for the credit for the production of multimedia titles, a new type of eligible title will be introduced (i.e., the eligible related title).
The eligibility period for production work following the completion of a final version will be extended from 24 months to 36 months. The activities relating to system architecture will become eligible.
These changes apply to a certification application filed with Investissement Québec after 30 March 2010.
Introduction of a water royalty
The residential, institutional or farm sectors will not be impacted by this royalty. The royalty will apply to rates that depend on the use of the resource. Accordingly, the rate will be $0.0025/m³ for businesses using water in their production processes and $0.07/m³ for those using water as a component of their products.
Longer prison sentence for tax evasion
The maximum sentence for certain major tax offences stipulated by the Act respecting the ministère du Revenu will change from a fine and imprisonment for a term not exceeding two years to a fine and imprisonment of up to five years less one day. This measure will come into force on the date the bill giving effect thereto is assented to.
Introduction of a health contribution
A health contribution will be introduced as of 1 July 2010. The amount of the contribution will be $25 per adult for 2010, $100 per adult for 2011 and $200 per adult as of 2012. Adults whose family income is equal to or less than the exemption threshold applicable to them will be exempt.
Adjustment to the limit relating to the deductibility of investment expenses
It is proposed that Quebec's tax legislation will be amended so that the notion of investment expenses, for the purposes of the limit on the deductibility of investment expenses, no longer includes an amount of bad debt deducted by an individual in calculating his property income for the year.
This change will apply regarding an amount of bad debt deducted in the calculation of an individual's income for taxation year 2009 and subsequent years.
Quebec sales tax (QST)
Increase in the Quebec sales tax (QST)
The QST rate will rise one percentage point effective 1 January 2012. This increase is in addition to that announced in March 2009. As a result, the QST rate will increase to 8.5% as of 1 January 2022 and to 9.5% as of 1 January 2012. The budget provides for transitional measures and consequential amendments with respect to the application of this increase.
QST rebate regarding a new residential unit
The rate of the Quebec sales tax (QST) rebate on a new residential unit will increase from 36% to 50%, and the threshold value of a new residential unit at which no rebate is granted will be raised from $225,000 to $300,000. Accordingly, the maximum potential rebate will be $8,772.
The fuel tax rates of 15.2 cents per litre of gasoline and 16.2 cents per litre of diesel fuel will be raised 1 cent per litre on 1 April each year until fiscal year 2013-14, reaching 19.2 cents and 20.2 cents per litre, respectively.
Harmonization with the federal budget
Amendments will be made in Quebec for harmonization purposes with most of the federal measures announced in the 4 March 2022 budget, subject to the special features of the Quebec tax system. The main measures retained include:
- The new rules applicable to stock options
- The changes made to the acquisition of control rules upon conversion of a specified investment flow-through entity into a corporation
- The changes made to the definition of "taxable Canadian property"
Certain federal measures were not retained because the Quebec tax system has no corresponding provisions or adequately addresses them.
The Ministère des Finances du Québec will announce its position at a later date on the proposed changes with respect to: [i] foreign investment entities and non-resident trusts; [ii] potential changes to the tax rules for corporate groups, such as establishing an official system of loss transfers or filing consolidated returns; and [iii] the introduction of a new legislative framework allowing the creation of federal credit cooperatives.
The Ministère des Finances du Québec also indicated that it intends to harmonize with the measures announced in a number of press releases issued since fall 2009. The proposed changes include the following issues:
- The place of supply rules for harmonized sales tax purposes (see our Tax Alert 2010 Issue No. 5)
- The taxation of Canadian multinationals that have foreign affiliates (see our Tax Alert 2009 Issue No. 38)
- The anti-avoidance rules relating to the tax-free savings account
- Compulsory electronic filing of tax returns