Article

2014-2015 Quebec budget highlights

Canadian tax alert

June 4, 2014

Read a summary of the Quebec budget highlights from Deloitte's tax professionals.

Economic context

Minister of Finance Carlos J. Leitão today tabled the 2014-2015 Quebec budget which is intended to promote economic recovery. According to the Minister, the public finance problems stem from spending that is structurally higher than revenue. With Budget 2014-2015, the government is focusing on five specific areas:

  • The budget provides support to private investors by focusing on small and medium enterprises (SMEs), particularly manufacturing SMEs.
  • The government is beginning to implement a maritime strategy, including the development of port and river infrastructures, and an increase in the work carried out at Quebec shipyards.
  • The budget revives the Plan Nord, in an enhanced version, and renews the economic, social and environmental development of northern Quebec.
  • The Minister is focusing on natural resources to revitalize the economy. In particular, the budget introduces a forest industry renewal plan, maintains the current mining tax regime to regain the confidence of the industry and private investors, leverages its action plan for the oil and gas sector and strengthens the role of Hydro-Québec in local economic development, in particular by investing in public transit electrification projects and building a fourth power line from northern Quebec in order to better meet the growing demand for electricity north of Montreal.
  • Infrastructure investment is the fifth focal point for economic recovery. The government is maintaining the level of infrastructure investment stipulated in the Quebec Infrastructures Plan, i.e., $90.3 billion, and is announcing a slight increase in investments for 2014-2015.

Listed below are the economic and tax highlights presented in the budget:

  • New program spending control measures have been announced, representing savings of 2.7 billion in 2014-2015 and 2.4 billion in 2015-2016.
  • The program spending review has been assigned to the Ongoing Program Review Committee, and program spending growth will be limited to 1.8% in 2014-2015 and 0.7% in 2015-2016. In the area of health, program spending growth has been set at 3.0% in 2014-2015 and 2.7% in 2015-2016.
  • The government is stepping up efforts to fight tax evasion.
  • The anticipated deficits are approximately $3.1 billion in 2013-2014 and $2.35 billion in 2014-2015; however, the budget plans for fiscal balance in 2015-2016.
  • The government is maintaining its objectives of reducing the gross debt and the debt representing accumulated deficits by 2025-2026. After a return to a balanced budget, half of the surplus will be used to reduce the debt and the other half to ease the tax burden of Quebecers, with priority going to a gradual elimination of the health contribution.
  • The Minister stated that economic growth in Quebec should accelerate to 1.8% in 2014 and 2.0% in 2015, translating into the creation of 31,300 jobs in 2014 and 46,300 jobs in 2015.
  • The budget announces imminent tax reform and the creation of the Quebec Taxation Review Committee, which will make recommendations on personal and corporate taxation aimed at achieving a contribution and redistribution of wealth that is fair for all Quebecers.

Tax and economic measures concerning business

  • Manufacturing SMEs may claim an additional tax rate reduction on the first $500,000 of annual income. The maximum additional reduction a corporation may claim will be 2% as of June 5, 2014, increasing to 4% as of April 1, 2015. The additional rate reduction will be applied on a straight-line basis based on the percentage of manufacturing and processing activities.
  • Remote manufacturing SMEs may claim an additional deduction of up to 6% of gross income in calculating their net income, to reflect higher transportation costs due to the remoteness of certain regions. This additional deduction will apply to a taxation year ending after June 4, 2014.
  • A reduction of the Health Services Fund contribution will be granted until 2020, to eligible employers with payrolls under $5 million, for full-time jobs created in the natural and applied sciences sector.
  • The definition of base salary for purposes of certain source deductions has been amended to include any amount paid, allocated, granted or awarded to an employee because of, or in the course of, his/her office or employment by a person who does not deal at arm’s length with a particular employer.
  • The rate of the R&D salary tax credit is reduced to 14% and, in the case of a Canadian-controlled corporation that may benefit from a rate ranging from 17.5% to 37.5% depending on the amount of its assets, this rate will be reduced to a rate ranging from 14% to 30%. This amendment will apply to R&D expenditures incurred after June 4, 2014.
  • The rate of the R&D university tax credit, the tax credit concerning precompetitive research carried out in private partnership and the tax credit concerning contributions paid to an eligible research consortium is reduced to 28%. This amendment will apply regarding R&D expenditures incurred under a research contract entered into after June 3, 2014.
  • The increase in the rate of the refundable tax credit for R&D salary in relation to biopharmaceutical activities will be eliminated as of June 4, 2014 and, accordingly, Investissement Québec (IQ) will not accept applications for an initial certificate submitted as of that day. In addition, IQ will no longer issue an annual certificate for a taxation year of a corporation beginning after June 4, 2014. However, a corporation previously recognized by IQ as an eligible biopharmaceutical corporation may continue to benefit from the increase in the rate of this refundable tax credit for its taxation year that includes June 4, 2014, but the increase will be reduced by 20% and the rate therefore reduced to 22%. In the case of a Canadian-controlled corporation, the increase in the rate of this tax credit will vary from 22% to 30%. This change will apply to expenditures incurred after June 4, 2014 or to expenditures incurred as part of a research contract entered into after June 3, 2014.
  • The rate of the refundable tax credit for the development of e-business will be reduced from 30% to 24%. This amendment will apply to salaries incurred for an eligible employee after June 4, 2014. In addition, the annual cap of $20,000 per employee will be maintained and not be raised, as previously announced, to $22,500 as of January 1, 2016.
  • Three changes will be made to the tax credit for investments relating to manufacturing and processing equipment:
    • The additional increase of ten percentage points in the rate of the tax credit that applies regarding eligible expenses incurred by manufacturing SMEs will be eliminated.
    • The rise of five percentage points of the increase in the rate of the tax credit for investments granted to a qualified corporation that does not receive the tax credit for job creation regarding qualified property acquired for use mainly in the eastern part of the Bas-Saint-Laurent administrative region or in an intermediate zone will also be eliminated.
    • The base rate and the increases in the rate of the tax credit for investments will be reduced by 20%, and therefore, the base rate of the tax credit for investments will be reduced to 4%. The increased rate may reach 32% where a qualified property is acquired for use mainly in a remote zone, and 24% where a qualified property is acquired for use mainly in the eastern part of the Bas-Saint-Laurent administrative region and 16% where a qualified property is acquired for use mainly in an intermediate zone. In all other cases, the increased rate may reach 8%.
    • These changes to the tax credit for investments will apply regarding eligible expenses incurred after June 4, 2014. However, transitional measures will apply to eligible expenses incurred after June 4, 2014, but before July 1, 2015.
  • The refundable tax credit relating to buildings used in the course of manufacturing or processing activities by a Quebec SME will be eliminated as of June 5, 2014. Accordingly, expenditures relating to a building incurred after June 4, 2014 will not give rise to the tax credit for buildings. However, transitional measures will be introduced regarding expenses incurred after June 4, 2014 but before July 1, 2015.
  • As part of the review of preferential measures for businesses, the refundable tax credit for the integration of information technologies in manufacturing SMEs will be reviewed such that IQ will not issue the certificates needed to receive such credit and will not accept applications for an IT integration contract certificate submitted as of June 4, 2014 and for the entire period of the review of this fiscal measure.
  • The rate of the tax credit for job creation for processing activities in the resource regions will be reduced to 9% for calendar year 2014 and to 8% for calendar year 2015.
  • The rate of the tax credit for job creation in the Vallée de l’aluminium, the tax credit for job creation in Gaspésie and certain maritime regions of Québec, the refundable tax credit for Gaspésie and certain maritime regions of Québec in the fields of marine biotechnology, mariculture and marine products processing will be reduced to 18% for calendar year 2014 and to 16% for calendar year 2015.
  • The rate of the refundable tax credit to foster the modernization of the tourism accommodation offering will be reduced to 20% and the annual threshold of $50,000 of eligible expenditures will be replaced with a single threshold of $50,000. Transitional measures will be introduced regarding these changes.
  • The following measures will be affected by the 20% tax assistance reduction, and transitional provisions will be introduced to bring the amendments into force:
    • the refundable tax credit for on-the-job training periods;
    • the refundable tax credit for technological adaptation services;
    • the refundable tax credit for design;
    • the refundable tax credit for manpower training in the manufacturing, forest and mining sectors;
    • the refundable tax credit for resources;
    • the refundable tax credit for major employment generating projects;
    • the refundable tax credit for the production of multimedia titles;
    • the tax benefits relating to flow-through shares;
    • the refundable tax credit for international financial centres;
    • the refundable tax credit relating to a new financial services corporation;
    • the refundable tax credit for the hiring of employees by a new financial services corporation;
    • the refundable tax credit pertaining to the diversification of markets of Quebec manufacturing companies;
    • the refundable tax credit for Quebec film and television production;
    • the refundable tax credit for film production services
    • the refundable tax credit for film dubbing;
    • the refundable tax credit for sound recording production;
    • the refundable tax credit for the production of shows;
    • the refundable tax credit for book publishing;
    • the tax credit for the production of multimedia environments or events staged outside Quebec.
  • Investment requirements of Capital régional et coopératif Desjardins will be amended.
  • The government support granted to labour funds will be temporarily limited and an investment requirement will be included in their statutes of incorporation to ensure, in particular, that the funds collected are used as a financing tool contributing to the development of Quebec entities.
  • The Mining Tax Act will be amended so that the Minister may, under the conditions he may set, allow the value of mineral substances from a mine that are gemstones to be determined outside the mine site. The Act will also be amended to broaden the definition of the expression “processing” and include hydrometallurgical activities in the calculation of the processing allowance. This change will apply to an operator for a fiscal year beginning after December 31, 2013.
  • The application of the reductions in the rates of the refundable tax credit for resourcesand the improvement to the tax credit in exchange for an equity stake option to the state announced in the March 20, 2012 Budget Speech will be deferred to January 1, 2015.
  • The tax legislation will be amended to enable a Quebec shipowner to create a tax-free reserve to award the execution of construction, renovation and maintenance work on vessels of the shipowner’s fleet to a Quebec shipyard. These amendments will apply to a tax-free reserve created after June 4, 2014 under a certificate issued by the Ministère de l’Économie, de l’Innovation et des Exportations after that date.
  • The legislation will be amended so that a Quebec shipowner may claim an additional capital cost allowance of 50% where the shipowner has a Canadian vessel built or has renovation work done on it by a Quebec shipyard. This amendment will apply to the cost of work done pursuant to a contract entered into after June 4, 2014 but before January 1, 2024.

Tax and economic measures concerning individuals

  • The government is cancelling the $2-a-day increase in the rate for childcare servicesand is announcing that this rate will be indexed according to the rate of growth in the cost of the program. This means that the rate will rise from $7.00 to $7.30 on October 1, 2014.
  • As of the 2015 taxation year, the tax credit for experienced workers (65 or older) will be calculated on the first $4,000 (instead of $3,000) of eligible work income in excess of the first $5,000 of such income.
  • refundable tax credit of up to $40 per year will be granted to low- or middle-income persons aged 70 or older who register for recognized activity programs. The credit will apply to amounts paid after June 4, 2014.
  • The tax legislation will be amended to provide that, for the income splitting mechanism to be applicable in a particular taxation year, the person whose income is split must have reached 65 years of age before the end of the year, or, if the person died or ceased to be resident in Canada in the year, on the date of his or her death or on the date on which he or she ceased to be resident in Canada.  This amendment will apply as of taxation year 2014.
  • The applicable rate for the purposes of calculating the tax credit for the acquisition of shares of Capital régional et coopératif Desjardins will be reduced from 50% to 45% for shares acquired after February 28, 2014. Accordingly, the maximum amount an individual may deduct in calculating his/her tax otherwise payable will decline from $2,500 to $2,250.

Other measures

  • The rate of the specific tax on tobacco products will be increased as of June 5, 2014.
  • As of August 1, 2014, the rate of the specific tax on alcoholic beverages sold in Quebec, which varies according to type of product sold, will be harmonized such that, for a given beverage, the rate will be the same regardless of where the beverage is consumed.
  • The responsibilities relating to the application of the Mining Tax Act, currently held by the Minister of Energy and Natural Resources, will be assumed by the Minister of Revenue as of April 1, 2015.
  • On January 15, 2014, the Canada Revenue Agency launched the Offshore Tax Informant Program. This program offers financial awards to individuals who supply information on major cases of international tax non-compliance resulting in the recovery of a substantial amount of tax owing. Quebec's tax legislation and regulations will be amended to stipulate that tax must be withheld at a rate of 20% regarding awards paid and that such an award will have to be included in the calculation of income.

Harmonization measures and consequential amendments

  • Quebec’s tax legislation and regulations will be amended to incorporate the following measures introduced by the federal budget of February 11, 2014:
    • the addition of certain expenses to the list of those eligible for the tax credit for medical expenses;
    • the introduction of a tax credit for volunteers participating in search and rescue activities, it being understood that the tax credit conversion rate will be equal to the rate applicable to the first taxable income bracket of the personal income tax table;
    • property used in the course of carrying on a farming business and a fishing business;
    • the tax deferral granted to certain farmers located in regions hit by drought, flooding or excessive moisture;
    • the inclusion of certain income attributed to a minor by a partnership or a trust for the purposes of calculating tax on split income;
    • the elimination of the graduated rate taxation for certain trusts and estates;
    • the elimination of the 60-month exemption from the residency presumption rules that apply to non-resident trusts and from certain other related rules;
    • the extension from five to ten years of the deferral period of gifts of ecosensitive land made by an individual;
    • donations in the context of death;
    • donations of cultural property acquired under a gifting arrangement that is a tax shelter;
    • the registration of organizations or associations that receive gifts from foreign states that support terrorism;
    • the change to the anti-avoidance rule concerning captive insurance corporations;
    • the addition of new eligibility conditions to the exception relating to offshore regulated financial institutions;
    • the change to the anti-avoidance rule currently contained in the thin capitalization rules;
    • the increase in the thresholds determining how frequently employers must remit withholdings at source;
    • the changes concerning the accelerated capital cost allowance for clean energy generation equipment to include water-current energy equipment and gasification equipment;
    • the inclusion of income paid to an amateur athlete trust for the purpose of determining the maximum amount deductible on account of a registered retirement savings plan;
    • the cap on transfers of pension benefits to registered retirement savings plans where the amount of accumulated benefits has been reduced in particular because of the underfunding of the registered pension plan.
  • Quebec’s tax legislation and regulations will not be amended to incorporate the following measures of the federal budget of February 11, 2014:
    • the increase in the maximum amount of expenditures eligible for the adoption expense tax credit;
    • the extension of the mineral exploration tax credit for flow-through share investors;
    • the automatic determination of the GST/HST credit;
    • consequential amendments arising from the elimination of graduated rate taxation for certain trusts and estates;
    • the extension from five to ten years of the deferral period of gifts of ecosensitive land made by a corporation;
    • The addition of a specific anti-avoidance rule concerning tax withholding on interest payments.
  • Quebec’s tax system will be amended to incorporate the federal measures made public on April 8, 2014 regarding technical changes to the GST/HST that:
    • make technical changes to the provisions concerning real property to ensure consistent treatment of different types of housing and proper application of the special valuation rule for subsidized housing within the framework of the place-of-supply rules and in the context of a change in the tax rate;
    • clarify the application of GST/HST public service body rebates in relation to non-profit organizations that operate certain health care facilities;
    • zero-rate precious metal refining services supplied to non-resident persons not registered for the purposes of the GST/HST regime;
    • simplify the tax treatment of the temporary importation of certain railcars;
    • codify the longstanding relieving provisions related to the tax treatment upon re-entry into Canada of Canadian goods on which the GST/HST has already been paid;
    • update certain legislative references noted in the regulations, other than those noted in the Taxes, Duties and Fees (GST/HST) Regulations, which have no equivalent in the QST system.

For further details, we refer you to the Quebec Ministry of Finance and the Economy website.

Contacts

Heather Evans
Canadian Managing Partner, Tax
416-601-6472

Albert Baker
National Tax Policy Leader
416-643-8753 

Judith Bellehumeur
Managing Partner, Quebec, Tax
514-393-6512

Denis de la Chevrotière
Managing Partner, Quebec Regions, Tax
819-797-7419

This publication is produced by Deloitte LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.

 

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