2021 Quebec Budget commentary
TAX ALERT |
On March 25, 2021, Quebec’s Minister of Finance, Eric Girard, tabled Quebec’s 2021-2022 Budget. The theme the government presents in the Budget is that Quebec is “resilient and confident”. Although the economy slowed significantly in 2020, the government expects a robust recovery in 2021 and 2022 and, in fact, expects that the labour market will return to full employment in 2022. This expectation is based on (i) being able to ease public health restrictions as vaccinations increase and Quebec eventually achieving herd immunity and (ii) the government operating deficits over the next two years to achieve economic recovery before attempting to restore fiscal balance. The projected deficit for the 2021-2022 year is $12.3 billion, which is a significant increase from last fall’s projection of an $8.3 billion deficit.
In total, the Quebec government is committing $5.2 billion this year on new initiatives, and a total of $15 billion on new initiatives over the next five years. The majority of the $15 billion is allocated towards strengthening the health care system, and the balance is allocated towards various initiatives, including education and accelerating growth and transition to a new economy focused on innovation and sustainability.
Some of the key tax features of the Budget are as follows:
- An immediate decrease of the corporate tax rate for corporations that are eligible for the small business deduction, by reducing the rate on the first $500,000 of income from 4% to 3.2%;
- Significant investment in audit resources to combat tax evasion and tax avoidance, and increased requirements related to transparency of enterprises; and
- Changes to the Quebec Sales Tax (QST) e-commerce regime to more closely align with the GST/HST measures the federal government announced in the Fall Economic Statement.
The following is a summary of the key business and personal income tax and indirect tax measures in the Budget.
Business income tax measures
Small business income tax rate
As of Jan. 1, 2021, Canadian-controlled private corporations (CCPCs) that are eligible for the small business deduction (SBD) are entitled to a preferential corporate tax rate of 4% (reduced from 5%) on the first $500,000 of their taxable income. The Budget proposes a further reduction to 3.2% for taxation years ending after March 25, 2021, which puts the Quebec small business rate on par with the Ontario small business rate.
In addition, the Budget provides for greater flexibility for CCPCs in the service and construction sectors when calculating paid hours for the purpose of determining eligibility for the SBD. Prior to the Budget, CCPCs in the service and construction sectors must have had employees with at least 5,500 remunerated hours to benefit fully from the SBD. Considering the shutdown of certain business operations due to COVID, the Budget provides CCPCs with flexibility in computing the remunerated hours by allowing CCPCs to use the number of paid hours from the immediately preceding taxation year.
These two measures will reduce provincial corporate tax obligations for CCPCs. As a result, CCPCs should review and, as necessary, adjust their instalment payments.
Increase of the Investment and Innovation Tax Credits
Quebec’s 2020 Budget introduced the investment and innovation tax credits (C3i), which are available to businesses that acquire certain eligible properties, such as manufacturing or processing equipment, general-purpose electronic data processing equipment or certain management software packages between March 10, 2020 and Jan. 1, 2025. The amount of the tax credit is dependent on the amount of expenditure, the type of eligible property acquired, and territory/zone where the eligible property is acquired and is to be used.
The 2021 Budget temporarily doubles the C3i tax credit rates for the period beginning March 26, 2021 and ending Dec. 31, 2022. The following table summarizes the C3i tax credit rate for different zones before and after the Budget.
Zone where the property is acquired and to be used mainly
Tax credit rates applicable after March 10, 2020 and ending on March 25, 2021
Tax credit rates applicable after March 25, 2021 and before Jan. 1, 2023
Tax credit rates applicable after Dec. 31, 2022 and before Jan. 1, 2025
Low economic vitality zone
High economic vitality zone
Businesses should take the advantage of the enhanced tax credit to invest in new technological equipment and solutions to streamline their production and management processes through digitalization.
Tax holiday for large investment projects
The existing tax holiday for large investment projects provides relief to eligible businesses from income taxes and contributions to the Health Services Fund (HSF). The amount of the relief is equal to a maximum of 15% of the investments made, spread over a maximum of 15 years. To be eligible for the tax holiday, companies must reach certain investment thresholds during the so-called “startup periods”, which are no more than 60 months after receiving the initial large investment projects certificates.
With the purpose of further increasing productivity and the production capacity of businesses, the Budget provides the following enhancements to the tax holiday for large investment projects:
- All digitization projects, regardless of sector, will be eligible for the tax holiday up to Dec. 31, 2024;
- The startup period will be extended for 12 months for current initial certificate holders; and
- Assistance for upgrade projects will be accelerated.
The enhancement of the tax holiday provides an opportunity for businesses in Quebec to upgrade their operations by adopting new technologies and potentially expanding their market.
Refundable tax credit for on-the-job training periods
Businesses that hire students, or apprentices, for a qualified training period may be eligible for a refundable tax credit for on-the-job training periods. The tax credit is based on the qualified expenditure in respect of an eligible trainee.
However, COVID-19 resulted in many young people not being able to secure internships over the past year. In order to facilitate the integration of young people into the labour market, the Budget proposes a temporary 25% increase of the tax credit. For example, the basic rate of tax credit is increased from 24% to 30% if the eligible taxpayer is a corporation.
The enhanced credit will apply to qualified expenditures incurred after March 25, 2021 and before May 1, 2022.
Simplifying the university R&D credit
The university research and development (R&D) tax credit encourages research and innovation activities between the private and the institutional sectors. In brief, this tax credit applies to research contracts granted by companies to a university, a public research centre or a research consortium, with the amount of the credit depending on the size of the company (30% for small and medium businesses and 14% for large businesses). Currently, an entity can claim a R&D university tax credit only after Revenu Quebec issues a favourable ruling that the research contract is eligible. In order to simplify the administrative process, the Budget has removed this requirement.
Simplifying the procedure means that entities can gain access to the R&D credit faster and without incurring the time and expense related to submitting a request for a ruling.
Tax credit in respect of employer contributions to the Health Services Fund (HSF) for employees on paid leave
To complement the federal government’s Canada Emergency Wage Subsidy (CEWS), the Quebec government introduced a tax credit that provides financial support to employers (that have an establishment in Quebec) in respect of employer contributions to the HSF for employees on paid leave. The federal government has extended the CEWS program to June 5, 2021 and the Quebec Budget mirrors the federal extension.
Integrity and fairness of the tax system
As announced in Quebec’s 2020 Budget, the government is committed to combatting tax evasion and tax avoidance. The 2021 Budget promotes the Tax Fairness Action Plan designed to ensure the integrity and fairness of the tax system. The following are some of the steps the government will take under the Tax Fairness Action Plan:
- Allocate $50 million to Revenu Quebec over five years to introduce new tax audit initiatives and increase audits in high risk sectors for tax evasion and avoidance;
- Amend tax legislation so that penalties will apply to both the taxpayers who have implemented abusive tax avoidance transactions and the promoters who market or encourage their use;
- Implement various measures that require mandatory disclosure for certain transactions so that Revenu Quebec can review all transactions subject to mandatory disclosure to ensure compliance with the object and spirit of tax legislation; and
- Increase funding by $8 million to ensure compliance and oversight on improving transparency of enterprises, following Bill 78, An act mainly to improve the transparency of enterprises, tabled on Dec. 8, 2020.
With the Quebec government devising novel ways to combat tax evasion and avoidance, taxpayers should be aware of the potential risks associated with aggressive tax planning.
Trust reporting measures
The Budget proposes additional changes to legislation that will harmonize Quebec’s trust reporting rules with the changes coming into effect for trusts at the federal level. One purpose of these changes is to provide Revenu Quebec with a clearer view of trusts that own rental property. In particular, the definition of ‘excluded trust’ will be amended so that it no longer includes a testamentary trust or a succession that is not a graduated rate estate.
With certain exceptions, the Quebec tax legislation and regulations will be amended to adopt the federal changes. Furthermore, trusts will be required to obtain a Tax Identification Number and include the number in addition to the trust account number (obtained from Canada Revenue Agency) in any return, report or other document required to be filed under Quebec tax law.
Those that manage trusts will need to familiarize themselves with these rules in time for the spring 2022 filing deadlines.
Indirect tax measures
The Quebec Budget introduces changes to the QST regime to harmonize it with certain federal GST/HST changes announced by the federal government as part of its Fall Economic Statement. Specifically, the federal government announced changes relating to GST/HST registration and collection requirements by (i) non-resident suppliers of services and digital products, (ii) digital platform operators facilitating sales of goods, services, and digital products sold by non-residents, and (iii) digital accommodation platform operators. The Quebec Budget announces Quebec’s intention to harmonize the QST with the GST/HST changes announced as part of the Fall Economic Statement.
These changes will require certain non-residents of Quebec to register for the QST when selling into Quebec. Any business that is making sales to purchasers in Quebec should review these changes and the upcoming federal GST/HST changes to ensure they are aware of how the changes affect the business and its registration requirements.
Since Jan. 1, 2019, non-residents of Canada that are not registered for GST/HST have been required to register for QST, and to charge and collect QST on sales made in Quebec to purchasers that are not registered for QST. Also, since Jan. 1, 2019, digital platform operators that facilitate sales of services or digital products to consumers in Quebec have been required to register for and collect QST where the consumers are not registered for QST. Furthermore, since Sept. 1, 2019, GST/HST registrants have been required to register for QST and charge and collect QST on all supplies of tangible goods, services, and digital products supplied to consumers in Quebec where the consumers are not registered for QST.
These requirements generally apply to all such suppliers or platform operators whose sales to consumers in Quebec or sales through the platform to consumers in Quebec exceed $30,000 over a 12-month period.
The federal government’s proposed GST/HST changes in the Fall Economic Statement, which go into force on July 1, 2021, target the following:
- Non-residents of Canada that make sales of services and digital products to purchasers in Canada that are not registered for GST/HST;
- Non-residents of Canada that make sales of tangible goods in Canada to purchasers not registered for GST/HST, where the seller maintains inventory at a fulfilment warehouse in Canada;
- Digital platform operators that facilitate sales of tangible goods to purchasers in Canada that are not registered for GST/HST, if the operator holds goods at a place in Canada;
- Digital platform operators that facilitate sales of services or digital property to purchasers in Canada that are not registered for GST/HST; and
- Digital platform operators that facilitate short-term accommodation transactions through their platforms.
As a result, suppliers and platform operators will generally be required to register for GST/HST effective July 1, 2021 if their sales, or if the sales they facilitate through their platforms on behalf of unregistered vendors to purchasers not registered for GST/HST, exceed $30,000 in a 12-month period.
The goal of these federal and provincial proposals is to reduce the amount of uncollected GST/HST and QST on purchases made by consumers in Canada on sales made by vendors or platform operators who previously did not have a requirement to register for GST/HST or QST, or where enforcement action was difficult, such as in the case of short-term accommodation providers using digital platforms.
Quebec’s Indirect tax proposals in the 2021 Budget
The Quebec Budget proposes several changes to harmonize the QST system with the proposed GST/HST system in the Fall Economic Statement.
Cross-border digital products and cross-border services
While the proposals related to the application of GST/HST to cross-border digital products and services announced in the federal government’s Fall Economic Statement generally mirror the QST that took effect in 2019, Quebec will amend its legislation to ensure that minor technical differences, such as the calculation of the registration threshold, are consistent with the proposed GST/HST legislation.
Goods supplied through fulfillment warehouses
In the Budget, the government proposes that it will make the following changes to the QST legislation:
- Distribution platform operators will be required to register for QST under the normal registration regime (rather than a simplified regime) if tangible goods sold through the operator’s platform are held in Quebec;
- Non-resident vendors will be required to register for QST under the normal registration regime (rather than the simplified regime) if the non-resident vendors make sales from a place in Quebec for delivery in Quebec otherwise than through a distribution platform; and
- Fulfillment businesses in Quebec will be required to file information returns with Revenu Quebec to provide information regarding their non-resident clients and goods held on behalf of those clients.
Additionally, the government will amend the simplified QST registration system to ensure that QST is collectible on tangible goods sold to consumers in Quebec through fulfilment warehouses elsewhere in Canada.
It is expected that these rules will not apply unless the value of taxable sales made on the distribution platform to Quebec consumers exceeds a threshold of $30,000 in Quebec over a 12-month period.
Distribution platform operators registered for GST/HST
The Budget proposes that distribution platform operators who are registered for GST/HST will be required to register for QST under the simplified system if vendors who are not registered for QST use the system to make sales of tangible goods to consumers in Quebec.
Digital platform operators that are already registered for QST under the simplified system because they facilitate sales of services or digital products to consumers in Quebec, will also be required to charge and collect QST on sales of tangible products made through the platform.
Registration for QST under the simplified system by distribution platform operators will be required when the value of consideration for supplies of tangible goods, services, and digital products made through the platform by non-resident suppliers exceeds, or is expected to exceed, $30,000 in a 12-month period.
Platform-based short-term accommodation
The government also proposes to adopt for QST the federal GST/HST proposals related to short-term accommodation. Accordingly, short-term accommodation platform operators will be required to charge and collect QST on supplies made through their platforms to persons not registered for QST. Furthermore, short-term platform operators will be required to provide to Revenu Quebec certain information about unregistered property owners’ supply of accommodation through the platform, similar to the rules announced in the Fall Economic Statement.
Key takeaways from the indirect tax proposed changes
The government indicates that it will enact these proposals following Royal Assent of the federal proposals. This will ensure that Quebec has an opportunity to consider any technical amendments necessary prior to the enactment of the federal proposals. At this time, the federal proposals will come into effect on July 1, 2021. If this implementation date for the federal proposals does not change, businesses should anticipate an implementation date of July 1, 2021 for the Quebec proposals.
Personal income tax measures
The Budget introduces or expands certain tax measures to support residents of Quebec, but does not propose any changes to personal income tax rates.
Increased support for Quebec seniors
Individuals aged 70 and over that receive home support services (e.g., nursing care or meal preparation) are eligible for a refundable tax credit in respect of eligible expenses. Currently, the tax credit is 35% of the amount of eligible expenses on a maximum of $19,500 of eligible expenses per year for independent seniors and $25,500 of eligible expenses per year for dependent seniors.
The Quebec government is proposing various changes to the tax credit starting in 2022. First, the tax credit rate will gradually increase by 1% each year until it reaches 40% in 2026. Second, dependent seniors will be entitled to at least 35% of their eligible expenses even if their household income exceeds the clawback threshold of $60,135. In 2022, the clawback of the credit for dependent seniors will only apply to the amount of the credit in excess of the 35% minimum.
Currently, seniors that rent a unit in an apartment building (that is not a private seniors’ residence or long-term care facility) qualify for a tax credit equal to 5% of their eligible rent to a maximum amount of $600 of rent per month. The Budget proposes to increase the maximum credit from 5% of $600 to 5% of $1,200, and to set the minimum credit at 5% of $600.
The increase in credits for seniors is intended to allow seniors to remain in their own homes longer. Revenu Quebec will automatically apply the minimum credits based on the information in the Revenu Quebec system, however, individuals should take steps to ensure that Revenu Quebec has accurate and up-to-date information so that they receive the maximum credits to which they are entitled.
Financial assistance for students
In 2020, the Quebec government increased Student Financial Assistance and suspended student loan payments to help students financially navigate the pandemic. The government now offers additional support for students by providing two additional one-time measures. Each full-time college and university student will receive a lump sum of $100 for both the fall 2020 and winter 2021 semester. In addition, the government will pay any interest that accrues on student loans for one year (April 1, 2021 to March 31, 2022) in an attempt to alleviate student debt.
Reduction of the dividend tax credit for non-eligible dividends
Due to the increase in the small business deduction that reduces the corporate tax rate on the first $500,000 of income for CCPCs, there will be a corresponding reduction to the dividend tax credit on non-eligible dividends in order to maintain integration of the tax system. The current rate of 4.01% will reduce to 3.42% of the grossed-up dividend received after Dec. 31, 2021. The gross-up rate will not change.
Facilitation of inter-generational transfers of a business
The government proposes to introduce legislation to encourage the transfer of small businesses between family members, including inter-generational transfers. An entrepreneur selling a business to a family member would be able to take advantage of the lifetime capital gains deduction, without adverse tax consequences, which essentially ensures the same tax outcome as a sale to an unrelated third party.
This measure would allow a Quebec small business to transfer a business to a family member without adverse provincial tax consequences, however, without a similar federal legislative amendments, the measure is only a half measure.
Certain tax measures in Quebec’s Budget – reducing corporate taxes for CCPCs and providing various credits and benefits to stimulate corporate investment and the labour market – show that the government is taking steps to help Quebec’s economy recover in 2021. However, many businesses may be more affected by other tax measures in the Budget, such as the enhanced QST registration and collection requirements and the investment of significant resources in the Tax Fairness Action Plan to, among other things, increase audit activity and disclosure obligations.
Thank you to the following contributors to this content:
Jiani Qian, Senior Manager
Jen Reid, Senior Manager
Kathleen Luan, Manager
Sigita Bersenas, Project Coordinator