As expected, the Québec Budget 2021-2022 ("Budget") is focused heavily on re-launching the Québec economy, supporting small businesses impacted by the pandemic, and encouraging investment to accelerate technology adoption.
Towards this goal, the Government is introducing the following tax measures:
- Temporary increase in the investment and innovation tax credit (C3i);
- Enhanced tax holiday for large investment projects;
- Reduced corporate tax rate on SMBs to Ontario level;
- Simplified university R&D tax credit;
- Continued support for businesses affected by the pandemic.
The Budget also introduces additional Québec Sales Tax ("QST") measures to respond to the digitalization of the economy. These rules harmonize the QST with the Federal rules proposed in the November 2020 Fall Economic Statement, including with respect to goods sold from warehouses located in Canada. Finally, the Budget increases tax reporting obligations and provides funding for additional tax audit activity.
I. Supporting businesses and encouraging innovation
A. Temporary increase in the investment and innovation tax credit (C3i)
The investment and innovation tax credit (C3i) encourages businesses across all sectors to acquire new technologies to digitize their production and management processes and upgrade their manufacturing equipment.
The C3i rate corresponds to 10%, 15% or 20% of the eligible expenditures depending on the territory in which the investment is made. The government announced that, for specified expenses incurred to acquire a specified property after March 26, 2021 but before January 1, 2023, the C3i rates will be doubled. For the enhanced credit to apply, the property must be acquired in accordance with a written obligation contracted for after March 25, 2021, and the construction of the property by, or on behalf of, the corporation must begin after March 25, 2021. This temporary increase will apply as follows:
- 40% for a specified property acquired to be used mainly in the low economic vitality zone (up from 20%);
- 30% for a specified property acquired to be used mainly in the intermediate zone (up from 15%);
- 20% for a specified property acquired to be used mainly in the high economic zone (including the Montreal and Québec City area) (up from 10%).
The qualified property correspond to manufacturing and processing materials (depreciation categories 43 or 53), computer materials (depreciation category 50) and management software (depreciation category 12). It is calculated on the portion of the specified expenses incurred to acquire a specified property in excess of $5,000 or $12,500, depending on the property.
The C3i may be refundable, in whole or in part, or non-refundable depending on the corporation's assets and gross income. The C3i is wholly refundable for corporations with assets or gross revenue of $50 million and under and is not refundable for corporations with assets and gross revenue of $100 million and over. The eligible expenses in respect of which a corporation may claim the C3i may not exceed a cumulative limit of $100 million over the lifespan of the C3i.
B. Enhanced tax holiday for large investment projects
The Budget enhances the tax holiday for large investment projects by:
- Extending the start-up period for current initial certificate holders;
- Adding an election relating to the date of the beginning of the tax-free period; and
- Making digitalization projects eligible for the tax holiday.
The tax holiday
A corporation that carries out a large investment project in Québec (directly or through a partnership) may benefit from a tax holiday of 15 years (the "tax free period") in respect of the income from its eligible activities relating to the project and a holiday from employer contributions to the Health Services Fund ("HSF") regarding the portion of wages paid to its employees that is attributable to the time they devote to such activities. The tax holiday may not exceed 15% of the total qualified capital investments relating to the project incurred during the 60-month start-up period, starting on the date the initial qualification certificate is issued for the project.
Currently only a large investment project that pertains to activities in one of the following sectors qualifies: manufacturing, wholesale trade, warehousing and storage, data processing, hosting and related services or development of digital platforms.
In order for the project to qualify, the corporation must obtain an initial qualification certificate, reach the applicable capital investment threshold within the start-up period and continue the activities arising from the investment project in Québec throughout the tax-free period. The capital investment threshold is $100 million, but is reduced to $50 million if substantially all of the investment project is carried out in a designated region and substantially all of the resulting activities will be carried out, throughout the tax-free period, in such a region.
The 15-year tax-free period starts on the date specified by the Minister of Finance on the first annual certificate issued for this project. Annual certificates must be obtained in all subsequent years attesting that the eligible activities continue.
An application for an initial qualification certificate must be made before the investment project begins to be carried out and no later than December 31, 2024. The certificate can be amended for a second investment project that builds on the first project. Applications for an amendment must be filed before the second investment project begins, no later than December 31, 2024 and no later than the date the application for the first annual certificate is made for the first investment project. The second investment project benefits from its own 60-month start-up period and 15-year tax-free period.
Temporary extension of the start-up period
For investment projects for which an initial qualification certificate has been issued before March 26, 2021, including second investment projects, the 60-month start-up period is extended by 12 months to 72 months. Therefore, projects that are already in their tax-free period would not qualify.
Broadening the eligible sectors of activity
Effective March 26, 2021, qualifying investment projects include modernizing a business of the corporation or partnership, through digital transformation. This refers to an investment project aimed at developing and implementing a digital solution by integrating or upgrading an information system or technology infrastructure, resulting in organizational and operational changes within the business.
The digital solution must focus on value creation for all or part of the business of the corporation or partnership. In addition, the primary objective of the investment project must be one or more of the following objectives:
- optimize the management and analysis of the company's data and the use of its resources;
- increase the company's productivity or efficiency by process automation;
- improve relationships with suppliers or customers by processing information collected about them in real time.
An investment project that consists of an asset maintenance plan or is part of the company's normal course of business cannot qualify as a project to modernize a business through digital transformation.
The qualified capital investments will correspond to the capital expenditures incurred to acquire digital equipment, software and other components of the technology infrastructure or the information system, as well as the expenses incurred to adapt the company's equipment in connection with the implementation of the digital solution.
Choice relating to the date of the beginning of the tax-free period
Under the current rules, the tax-free period for a large investment project is to begin on the later of the following dates:
- the date on which the total capital investments attributable to the carrying out of the project first reaches the applicable capital investment threshold; and
- the date on which the activities arising from the carrying out of the project begin or, where such activities gradually begin, the date on which at least 90% of the goods intended to be used in the course of such activities are ready to be used.
Further, the tax-free period for a large investment project may not begin after the end of the start-up period applicable to the project.
The Budget proposes to allow a corporation or partnership to choose the date of the beginning of the tax-free period applicable to its large investment project and to the second investment project. The selected date must be indicated on the application form for the first annual certificate for the investment project.
The selected date must fall within the period starting on the day on which the total capital investments reach the applicable capital investment threshold and ending on the last day of the 60-month or 72-month, as applicable, start-up period for the project. If no choice is made then the date will be the last day of the start-up period of the investment project.
C. Reduced corporate tax rate on SMBs to Ontario level
In order to match Ontario rates, the Budget reduces the preferred tax rate for small-to-medium-sized businesses, ("SMBs") eligible for the small business deduction ("SBD") from 4.0% to 3.2%. The SBD applies to the first $500,000 of taxable income. Income above that threshold is taxed at a rate of 11.5% in Québec. The rate change will apply to a corporation's taxation years ending after March 25, 2021.
To qualify for the preferred tax rate for SMBs, a corporation must be a Canadian-controlled private corporation whose paid-up capital is $10 million or less and whose adjusted aggregate investment income does not exceed $50,000. Further, the corporation must also be a "primary and manufacturing sectors corporation", or meet a criterion pertaining to the number of remunerated hours.
A corporation is a "primary and manufacturing sector corporation" for a taxation year, if more than 25% of its activities consist of primary and manufacturing sector activities. The corporation's SBD rate is reduced on a linear basis, where its proportion of activities in the primary and manufacturing sectors is between 50% and 25%.
A corporation that is not in the primary or manufacturing sector, such as corporation in the service or construction sector, may still qualify for the preferred rate for SBD if either of the following conditions relating to the number of hours paid are met:;
- for the given year, the total remunerated hours of its employees totalled at least 5,500, or,
- for the taxation year preceding the given year, the total remunerated hours of its employees and those of the corporations with which it is associated totalled at least 5,500.
Similar to the test applicable to corporations in the primary and manufacturing sectors, a corporation's SBD rate for a taxation year is reduced on a linear basis, where the total number of paid hours is between 5,500 and 5,000.
In order to limit the negative impact of the pandemic shutdowns, for a given taxation year that ended after June 30, 2020, but before July 1, 2021, a corporation will be able to benefit from the SBD, if it benefited from the SBD for its previous taxation year. The corporation will claim the SBD based on the number of remunerated hours for the previous taxation year. The corporation must make the request to Revenu Québec when filing its income tax return or, submit the request separately if the tax return has already been filed.
In order to ensure a better integration of the Quebec corporate tax system with the personal tax system, the rate of the dividend tax credit for non-eligible dividends has been reduced in the 2021-2022 budget to reflect the announced increase in the SBD. As a result, the rate of the non-eligible dividend tax credit, which is currently 4.01% of the grossed-up amount of the dividend, will be reduced to 3.42% of the grossed-up amount of the dividend received or deemed received after December 31, 2021.
D. Simplified university R&D tax credit
As of March 25, 2021, companies no longer have to obtain a favorable advanced ruling from the Minister of Revenue before applying for the university R&D tax credit for research contracts granted to a university, public research center or research consortium.
E. Continued support for businesses affected by the pandemic
To support the sectors affected by the pandemic, the Government is:
- maintaining the Concerted Temporary Action Program for Businesses (PACTE) and the Emergency Assistance Program for Small and Medium-Sized Businesses (PAUPME);
- extending by three qualifying periods, namely until June 5, 2021, the tax credit in respect of employer contributions to the HSF for employees on paid leave where the employer benefits from the Canada Emergency Wage Subsidy (CEWS) with respect to the same period.
II. Harmonizing the QST rules to the GST/HST rules for digital transactions
The Federal Fall Economic Statement introduced several measures to collect the Goods and Services Tax/Harmonized Sales Tax ("GST/HST") on e-commerce transactions with Canadian consumers. Some of these measures were consistent with the QST e-commerce measures introduced by the Government of Québec in 2019. However, one measure addressing the sale of goods shipped from locations inside of Canada, was unique to the Federal proposals. The Federal measures are discussed here.
Current QST measures
The existing Québec e-commerce measures require suppliers without a physical or significant presence in Québec that are making taxable supplies of incorporeal movable property (intangible property) or services in Québec to specified Québec consumers, as well as digital property and services distribution platforms allowing these suppliers to make such supplies, to register under a specified QST registration system.
Further, a seller of physical goods without a presence in Québec was also required to register and collect the QST under the specified regime if the seller was already registered under the general GST/HST. Distribution platforms allowing the supplies of physical goods were not required to register or collect the QST.
These measure are discussed in detail here.
Harmonization of rules
The Québec Government now proposes to make amendments to these rules to harmonize them with the GST/HST measures. As draft legislation has not yet been introduced by Québec, the tenor of the amendments is not clear. The Budget provides registration thresholds as an example of rules requiring amendment. We would hope for further harmonization of other measures such as the definition of distribution platform.
Sales through fulfillment warehouses
The Budget proposes to adopt all of the Federal measures in respect to supplies of physical goods made by non-resident vendors through fulfilment warehouses in Canada. The obligation for a vendor or platform to register under the general, as opposed to the specified, QST regime depends on whether the goods are located in a fulfillment warehouse in Québec or in Canada outside Québec or shipped from a location in Québec or in Canada outside Québec.
This will mean that with respect to sales of physical goods located in a fulfillment warehouse in Québec or shipped from a place in Québec to a purchaser in Québec:
- where the sale is made through a platform, the distribution platform operator will be required to register under the general QST regime and to collect and remit the tax applicable to the sales of those goods through the platform by a vendor who is not QST registered;
- where the sale is made by a non-resident vendor directly, the vendor will be required to register under the general QST regime and to collect and remit the tax applicable to the sale; and,
- fulfillment businesses in Québec will be required to notify Revenu Québec that they are carrying on a fulfillment business and to maintain records regarding their non-resident clients and the physical goods they store on behalf of their non-resident clients.
Where the physical goods being sold are located in a fulfillment warehouse in Canada but outside Québec or shipped from a place in Canada but outside Québec:
- where the sale is made through a platform, and the distribution platform operator is GST/HST registered under the general GST/HST regime, it will be required to register under the specified QST regime and to collect and remit the tax applicable to the sales of those goods through the platform by a non-resident, non-QST registered vendor.
- where the sale is made by a non-resident vendor directly and the vendor is GST/HST registered under the general GST/HST regime, it will be required to be registered under the specified QST regime and to collect the QST on the sale.
In both cases where goods are warehoused in Canada but outside Québec, registration will be required if supplies of taxable incorporeal property, physical goods and services to specified Québec consumers, exceed or are expected to exceed $30,000 during a 12-month period.
Finally, the QST legislation will be amended in order to incorporate all of the federal proposals relating to the application of the GST/HST to platform-based short-term accommodations.
These new changes take effect July 1, 2021.
III. Maintenance of the compensation tax for financial institutions
Financial institutions doing business in Quebec are subject to the compensation tax for financial institutions ("CTFI"). The CTFI is calculated using two tax bases: amounts paid as wages and insurance premiums. The CTFI has undergone several changes over the years, including the introduction of a temporary surtax in December 2014. This temporary surtax was scheduled to be eliminated as of April 1, 2022 and the CTFI was scheduled to be eliminated effective April 1, 2024. However, as part of the Budget, the Government announced that the CTFI would be maintained beyond March 31, 2024. As such, while CTFI rates will be reduced effective April 1, 2022 to eliminate the surtax as planned, the CTFI will now be permanent.
IV. Increasing tax disclosure
Over the last year, a number of measures have been undertaken by the Québec Government aimed at increasing taxpayer disclosure. Of note, in December 2020, the Government introduced Bill 78, An act mainly to improve the transparency of enterprises, which requires entities registered on the Québec Enterprise Registrar to disclose their ultimate beneficial owners. In addition, Bill 78 adds the possibility of using a person's legal name for the purposes of a search in the enterprise register. For more details, click here.
Further, on March 17, 2021, Québec introduced the Mandatory Transaction Disclosure Regulation, which added certain transactions to the list of "specified transactions" that must be disclosed to Revenu Québec. These transactions are as follows: (i) avoidance of deemed disposal of trust property, (ii) payments to businesses in countries not covered by a tax agreement, (iii) multiplication of the capital gains deduction and (iv) tax attribute trading.
The Budget introduces additional measures requiring disclosure of beneficial ownership by trusts and expands the types of trusts holding specified immovables in Québec that must file a Québec information return.
Disclosure of beneficial ownership information regarding trusts
Under the current Federal and Québec rules, a trust is only required to file an annual tax return if it has taxes payable or makes income or capital distributions to one or more beneficiaries. Even when a trust is required to file a return of income for a year, there currently exists no reporting requirements concerning the personal information of trustees, beneficiaries, settlors or other persons.
The Federal reporting requirements released on July 27, 2018 require express trusts (a trust created with the settlor's express intent) that are resident in Canada and non-resident trusts that are currently required to file a T3 tax return to report the identity of all trustees, beneficiaries and settlors on an annual basis, as well as the identity of each person who has the ability (through the trust terms or a related agreement) to exert control over trustee decisions regarding the appointment of income or capital of the trust (e.g., a protector). As a result, for taxation years of a trust beginning after December 31, 2021, certain trusts will have to file a T3 tax return where currently they do not have to file such a return.
The Budget announces the introduction of similar rules with respect to the obligation to file a tax return and provide certain information on trusts in Québec, except with respect to the calculation of the applicable penalties for non-compliance. Those penalties will be equal to $1,000 and an additional penalty of $100 per day, calculated as of the second day that the omission or default persists, up to a maximum of $5,000. Existing Québec penalties will continue to apply.
Change in the Québec requirement for a trust to file an information return
A trust, other than an excluded trust, that is resident in Canada outside Quebec and that, at any time in the taxation year, owns a specified immovable, or is a member of a partnership that owns a specified immovable, is required to file, for a taxation year, an information return with Revenu Quebec.
The expression "specified immovable" means an immovable property situated in Québec and that is principally used for the purpose of earning or producing gross revenue that is rent.
The Government has announced new amendments to Quebec tax regulations regarding the expression "excluded trust." Under this new definition, testamentary trusts and successions will no longer qualify as an "excluded trust", with the exception of a succession that is a graduated rate estate (defined at section 646.0.1 Taxation Act).
For additional tax advice in respect of this Budget or other tax services from Gowling WLG, please contact any of the following authors: Malya Amghar, Laura Gheorghiu, Daniel Lacelle.
The authors wish to thank Yasmine Mekallach for her assistance in the preparation of this publication.