On March 10, 2020, Quebec’s Finance Minister Eric Girard tabled the province’s 2020-2021 budget entitled, “Your Future, Your Budget” (“the Budget”). In its preamble, the Budget states its priorities are to build a green economy, increase the province’s wealth, improve services, and meet the needs of Quebecers.
The Budget projects a $1.9 billion surplus in 2019-2020 after depositing $2.7 billion into the Generations Fund, and forecasts arriving at a balanced budget in the next five years. Due to the strong financial outlook, Mr. Girard believes the province’s economy is resilient to uncertainties, including the financial impact of COVID-19.
In recent years, economic growth in Quebec accelerated with real GDP rising from 2.5 per cent in 2018 to 2.8 per cent in 2019. This is especially remarkable considering the slowdown in worldwide economic growth from 3.5 per cent in 2018 to 2.9 per cent in 2019. As a result of this growth, as of March 31, 2020, the Quebec’s gross debt decreased to $197.7 billion, or 43.0 per cent of GDP, which is its lowest debt burden in 20 years. Despite uncertainties in the global economy, real GDP growth in Quebec is expected to reach 2.0 per cent in 2020 and 1.5 per cent in 2021.
The government recognizes the climate emergency and reiterates its intention to meet its 2030 Green House Gas emissions reduction target by investing more than $6.2 billion in initiatives such as public transit and electrification of transportation, decarbonization of the industrial sector, solutions to mitigate the risks related to flooding, and reduction of fossil energy use in the building sector.
Further, initiatives totaling nearly $5.9 billion by 2024-2025 are introduced to increase the economy’s economic potential and to create wealth for Quebecers. These initiatives include investments in education, reduction of school tax rates, promotion of cultural distinctiveness and enhancement of business productivity and competitiveness.
To address the effects of the COVID-19 crisis on Quebec’s public finance, Quebec’s Minister of Finance provided a snapshot of Québec’s ‘Economic and Financial Situation 2020-2021’ on June 19, 2020, barely three months after the Budget was tabled. The Budget 2020-2021 originally forecasted a surplus of $1.9 billion in 2019-2020 and a balanced budget thereafter. However, due to the tough times brought by the pandemic, the government is now projecting to record a deficit of $14.9 billion this year due to increase in COVID-related spending.
Despite the record deficit, the government is committing to return to fiscal balance within next five years.
BUSINESS INCOME TAX MEASURES
No changes are proposed to the corporate income tax rates.
Investments and innovation tax credits
The Budget intends to introduce the investment and innovation tax credit, also known as C3i, for eligible corporations to support investment in new technologies and to promote the modernization of manufacturing equipment. Eligible corporations are corporations with a permanent establishment and business operations in Quebec. Certain corporations, such as oil-refining corporations, aluminum-producing corporations and corporations exempt from tax will not be eligible for the investment and innovation tax credit. This credit will be effective from March 11, 2020 for eligible expenses incurred before Jan. 1, 2025.
Investment and innovation tax credits available |
Montreal and Quebec metropolitan communities: 10 per cent Other territories or regions: 15 per cent Territories with low economic vitality: 20 per cent |
Eligible property |
Property acquired before Jan. 1, 2025 that is:
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Eligible expenses |
Expenditure exceeding:
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Refundable? |
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Investment Ceiling |
$100 million cap on investment expenditure over five years. |
Businesses that are currently eligible for investment tax credits introduced in 2018 for the acquisition of manufacturing and processing equipment will have the option of choosing to continue claiming the input tax credit or claim the investment and innovation tax credits.
Abolition of the tax credit for the integration of information technology
As a result of introducing the investment and innovation tax credit, the government is abolishing the tax credit for the integration of information technology for small and medium size businesses, which applied to management integration software expenses incurred before Jan. 1, 2021. These expenditures now qualify for the investment and innovation tax credit.
Businesses with existing contracts will be permitted to continue benefiting from the existing tax credit.
Extension of tax holiday for large investment projects
To further support economic productivity and growth potential and attract major investment projects, the Budget extends the eligibility period for the tax holiday for large investment projects.
This program allows eligible businesses investing in large investment projects to receive a tax holiday on their income and contributions to the Health Services Fund equivalent to a maximum of 15 per cent of their investments over a period of up to 15 years. The main investment threshold to qualify as a large investment project, among other things, is at least $100 million if carried out in a central region and at least $50 million if carried out in a designated region.
Currently, to qualify for the tax holiday, a corporation or a partnership must apply for the initial certification before the start of the project and before Dec. 31, 2020. The Budget extends the eligibility period until Dec. 31, 2024 to attract more new large projects in Quebec.
Synergy capital tax credit
To assist small and medium-sized businesses with commercializing their innovations and access international markets, the Budget proposes a synergy capital tax credit for eligible share capital investments in small and medium-sized businesses, effective Jan. 1, 2021. This credit is to encourage businesses to invest in the share capital of Quebec small and medium-sized businesses.
Eligible small and medium-sized businesses |
Canadian-controlled private corporations with a permanent establishment in Québec, with paid-up capital of less than $15 million and gross income of less than $10 million, operating in an eligible sector for at least one year. |
Eligible sectors |
Green technologies, information technologies, life sciences, innovative manufacturing sector, artificial intelligence. Interested small and medium-size businesses may submit an eligibility application to Investissement Québec. |
Eligible investors |
Business corporations with a permanent establishment in Québec and dealing at arm's length with the eligible small and medium-size businesses. Corporations primarily engaged in financing or investing in businesses will not qualify. |
Tax credit |
Nonrefundable tax credit of 30% of the value of investment in eligible shares to a maximum of $225,000 annually. |
Eligible investments |
Investments in capital stock:
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Minimum holding period for shares |
5 years
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The portion of the tax credit that cannot be used in a taxation year can be carried back to the preceding three years or forward to the following 20 years. However, it may not be applied for taxation years ended before Jan. 1, 2021.
Incentive deduction for the commercialization of innovations in Quebec
To further encourage commercialization of Quebec innovations, the Budget introduces an incentive tax deduction for the commercialization of innovation, effective January 1, 2021. This incentive is based on the recommendation of the Organisation for Economic Co-operation and Development.
Eligible corporations |
Corporations with a permanent establishment in Quebec commercializing eligible intellectual property and incurring Research & Development Expenses in Quebec. |
Eligible intellectual property |
Intellectual property resulting from expenditures incurred, in whole or in part, in Québec:
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Eligible Revenue |
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Effective Rate |
Such revenues will be taxed at an effective rate of 2.0 per cent - a reduction of 9.5 per cent from the general 11.5 per cent rate in Quebec. |
The effect of this incentive tax deduction for the commercialization of innovations will be that eligible income will be subject to a combined tax rate of 17 per cent, which is lower than in the rest of Canada and the United States, thereby giving Quebec a competitive edge in the commercialization of innovation.
Enhancing research & development tax credits fostering collaboration
Currently there are three research and development tax credits available for qualified expenditures relating to research contracts entered into with a university, a public research centre or a research consortium, for private partnership research projects and for fees and dues paid to a research consortium
Starting in 2014, the research and development tax credits apply only to the portion of expenditures exceeding a certain threshold for eligible businesses. To further foster collaboration among Quebec’s innovation players, the Budget proposes to eliminate the eligible expenses thresholds (with certain exclusions) relating to research and development tax activities carried out after March 10, 2020.
Refocusing the tax credit for the development of e-business
Over the years, the government has supported the development of certain sectors such as the e-commerce and video games industries by introducing targeted fiscal measures. The Budget adjusts the terms and conditions of certain tax credits to ensure effectiveness of these measures.
Specifically, the Budget proposes to change the availability of the tax credit for the development of e-business which was designed to encourage the creation and supply of high value added software. This credit applies to salaries of employees in the field of computer technology. Given technological advances, the Budget removes website design and development from the activities eligible for the tax credit as computer technology. This change will apply to taxation years beginning after March 10, 2020.
Changing the tax credit for the production of multimedia titles
The Budget proposes to change the tax credit for the development of Quebec’s video game industry to enable such businesses to compete in the international market. This credit applies to the salaries of employees in the field of creation of computer games, vocational training, multimedia titles & edutainment titles. To ensure that the tax assistance supports the production of multimedia titles meeting a high level of interactivity, the change to the tax credit will specify that an eligible multimedia title must be interactive in whole or in part. This change will apply to the taxation years beginning after March 10, 2020.
PERSONAL TAX MEASURES
No changes are proposed to personal income tax rates.
However, there is a change to the non-eligible dividend income tax rate. The existing rate is 47.14 per cent and the new rate is 48.02 per cent. The change to the non-eligible dividend income tax rate is due to a previously-enacted reduction to the non-eligible dividend tax credit.
Introduction of a refundable tax credit for caregivers
To enhance the support to, and to make tax assistance available to a greater number of, caregivers, the Budget introduces a new refundable tax credit for caregivers starting Jan. 1, 2020 replacing the existing refundable tax credit for informal caregivers of persons of full age. This new refundable tax credit for caregivers will be streamlined to comprise of two components, compared to the four components under the current rules.
Component 1 provides:
- A reducible amount of $1,250 which will be reduced based on the carereceiver’s income, regardless of whether the caregiver co-resides with the carereceiver, and
- A universal amount of $1,250, in addition to a reducible amount, for the caregiver co-residing with the carereceiver
The Component 1 tax credit applies to caregivers who provide care to a person 18 years or older with a severe and prolonged impairment, who requires assistance in carrying out a basic activity for daily living. The caregiver must be the carereceiver's spouse or a member of the carereceiver's family, or hold a certificate of ongoing assistance.
Component 2 provides a universal amount of $1,250 to caregivers who reside with an eligible relative aged 70 or older who does not have severe and prolonged impairment.
Other changes to refundable tax credits for caregivers
As of 2020, a caregiver who paid respite expenses in respect of a carereceiver having a severe and prolonged impairment in mental or physical functions can claim an additional amount under the refundable tax credit for caregivers. This assistance for respite expenses will be equal to 30 per cent of total qualifying expenses up to $5,200 and will no longer be reducible.
The various changes made to the refundable tax credit for caregivers will provide more tax assistance to most of the people who claimed the refundable tax credit for volunteer respite services or the refundable tax credit for respite expenses of informal caregivers. Consequently, these two tax credits will be eliminated as of 2021.
Simplifying payments of the solidarity tax credit to a surviving spouse
Tax assistance is provided in the form of a solidarity tax credit to offset the regressive nature of taxes for low and middle-income families. Only one spouse in the family can claim this credit. If the spouse who receives this credit dies, the tax credit ceases to be paid after the death.
Under the current system, the surviving spouse must claim the tax credit by completing schedule D of the income tax return and file it with Revenu Quebec in order to receive payments for remainder of the year. To reduce this administrative burden to the surviving spouse, the solidarity tax credit will be paid automatically to the surviving spouse as soon as Revenu Quebec is informed of the death of other spouse. This automatic payment will apply in respect of deaths that occur on or after July 1, 2020.
Other measures
Additional reduction in school tax rates
In the 2019-2020 budget, the government announced gradual standardization of school tax rates as of July 1, 2019 with a view to applying a single tax rate across Québec. After gradual transition, a single school tax rate, based on the lowest effective tax rate in 2018‑2019, will be applied throughout Québec. The first school tax rates reduction took place in 2019. An additional reduction has been announced effective July 1, 2020.
Tax Fairness Action Plan
To fund public services and ensure integrity of the tax system, the government announces the Tax Fairness Action Plan. As part of the plan, the government will invest $29.6 million over five years in targeted initiatives to strengthen corporate transparency, step up actions to fight tax evasion and avoidance and address fraud against the government more effectively. It is expected that these initiatives will generate an additional $160 million in tax revenues over five years.
INDIRECT TAX MEASURES
Suppliers outside Quebec
The Budget did not include any immediate Quebec indirect tax changes. However, the Quebec Minister of Finance has announced the Province’s intention to change the Quebec sales tax rules applicable to certain suppliers outside Quebec. These anticipated changes will directly affect businesses outside Quebec who are not registered for Goods and sales tax / Harmonized sales tax purposes (“Foreign Suppliers”), which supply tangible personal property (i.e., goods) to Quebec consumers.
2019 Quebec sales tax changes
Effective Jan. 1, 2019, Quebec introduced new rules requiring Foreign Suppliers to register for, collect and remit Quebec sales tax on supplies of intangible property (e.g., online subscriptions to access movies, music, books, or other digitized products) and services made to Quebec consumers, where these supplies exceed $30,000 per 12-month period. Under these rules, Foreign Suppliers that are required to register for Quebec sales tax, while required to charge Quebec sales tax on sales of intangible property and services, are not required to charge Quebec sales tax on sales of tangible personal property.
Budget announcement
The 2019 changes were introduced in accordance with Quebec’s policy goal of ensuring tax fairness, especially in the e-commerce space. Although sales of tangible personal property by Foreign Suppliers were not impacted by the 2019 changes, Quebec was working with the Canada Border Services Agency on a pilot project to ensure the collection of Quebec sales tax on goods imported into Canada for delivery to Quebec. Because the results of this project pilot were not as desired, the Province has reiterated in the Budget documents its commitment to ensuring that Quebec sales tax is collected on goods imported into Canada for delivery in Quebec.
To this end, the Budget documents indicate that Quebec will work with the federal government to implement in 2021 a harmonized solution to collect Quebec sales tax on supplies of tangible personal property by non-residents of Canada.
CONCLUSION
The Budget suggests that economic activity is expected to continue increasing in Quebec in the coming years. As a result, the government further announced in this Budget additional investments mainly by implementing targeted, non-recurring measures to support environmental leadership, facilitate innovation, to increase the potential of the economy and to create wealth, and to improve services for Quebecers.
However, the economic and financial forecasts presented in this Budget are based on several assumptions, some of which are associated with risks that could influence forecasts. The main sources of uncertainty include: worsening of the COVID-19 epidemic, an escalation in trade tensions, uncertainties in European and global landscape, limited leeway for central banks to stimulate the economy when interest rates are already very low, as well as different-than-forecasted trends in commodity prices.
Authored and reviewed by:
Paresh Hemavat, Slava Gutyr, Yash Khatri, Julie Poulin, Irina Im and Beverly Lucas-King.
