Bulletin d information Gouvernement du Québec Ministère des Finances 97-5 October 16, 1997 Subject: Eligibility of large businesses for input tax refunds regarding trucks and other tax measures INPUT TAX REFUND REGARDING MOTOR VEHICLES OF 3 000 KILOGRAMS OR MORE The Québec sales tax (QST) system stipulates that large businesses cannot claim an input tax refund (ITR) regarding certain goods and services acquired in the course of their commercial activities, while small and medium-size businesses (SMB) are entitled to an ITR regarding these same goods and services. The restrictions on the granting of an ITR, applicable notably to road vehicles that must be registered pursuant to the Highway Safety Code in order to travel on public roads and on the fuel used to power the engine of such vehicles, have a particular impact on the activities of large businesses in the trucking industry, whose main expenditures relate to the purchase of motor vehicles and fuel.
- 2 - To prevent that the tax system influence the structure of the trucking industry where stakeholders are competing directly with each other, regardless of the size of their business, the government decided, on May 16, 1997, to extend entitlement to an ITR regarding fuel oil to all businesses. 1 In the same context, large businesses may henceforth claim an ITR for road vehicles weighing 3 000 kilograms or more, since the restriction on obtaining an ITR regarding such vehicles will also be eliminated as of October 17, 1997. Accordingly, the QST that is payable after October 16, 1997 and which is not paid prior to October 17, 1997 in respect of the acquisition of a road vehicle of 3 000 kilograms or more may be included in the calculation by a large business of the ITR. INCREASE IN THE FUEL TAX APPLICABLE TO FUEL OIL In view of the government s objective of eliminating the deficit, the revenue shortfall resulting from the elimination of the restriction on obtaining an ITR by large businesses regarding road vehicles of 3 000 kilograms or more will be offset by an increase of 1 cent a litre in the fuel tax applicable to fuel oil. Accordingly, as of October 17, 1997, the rate of this tax which is currently of 15.2 cents a litre will be raised to 16.2 cents a litre. This increase in the fuel tax will not apply to fuel oil that vendors of this product have in stock at midnight on October 16, 1997 and in respect of which the tax has been collected in advance. Consequently, no inventory will be required. 1 Ministère des Finances Information Bulletin 97-2.
- 3 - NON-COLLECTION OF THE QST ON THE INTRAPROVINCIAL PORTION OF A CONTINUOUS INTERPROVINCIAL MERCHANDISE TRANSPORTATION SERVICE TO QUÉBEC Under the QST system, carriers which supply merchandise transportation services from a place in Canada outside Québec to a place in Québec, do not have to collect the tax in regard to such services. Rather, the residents of Québec who acquire such services must assess themselves in regard to such services, if they are not used exclusively in the course of their commercial activities. The current system is unfair at the competitive level for carriers which provide only the intraprovincial portion of a continuous interprovincial merchandise transportation service to Québec. These carriers must collect the QST on this portion, unlike their competitors which provide the whole of such a service. The QST system will be changed to correct this situation. Accordingly, carriers will no longer have to collect the QST on the intraprovincial portion of a continuous interprovincial merchandise transportation service to Québec if they have satisfactory documentary evidence that the intraprovincial portion is part of such a service. Thise measure has been in effect since July 1, 1992. EASING OF THE ACQUISITION OF CONTROL RULE FOR THE APPLICATION OF RESTRICTIONS ON OBTAINING AN ITR It was announced in the March 25, 1997 Budget Speech that a new measure would be implemented to determine SMB or large business status of a registrant for the application of restrictions on obtaining an ITR that are maintained for large businesses. Under the new measure, a registrant must henceforth prove its status as an SMB or large business in respect of each of its fiscal year.
- 4 - A special rule was stipulated to prevent a large business, by acquiring control of an SMB during the latter s fiscal year, from indirectly claiming ITRs regarding goods and services covered by the restrictions. At the time control of a corporation which is an SMB is acquired by a large business during the SMB s fiscal year, the latter and any corporation to which it is related cease to qualify as an SMB. However, by covering all corporations related to the SMB, the scope of the acquisition of control rule proved to be too large. Accordingly, this rule will be eased by having it apply to corporations associated with the SMB rather than to those related to it. This measure is effective as of March 26, 1997. CHANGES RELATING TO THE PROPERTY TAX SYSTEM FOR BUSINESSES OPERATING A NATURAL GAS DISTRIBUTION OR TELECOMMUNICATIONS NETWORK Property taxation of wireless telecommunications networks Businesses which operate a telecommunications, natural gas or electricity distribution network are subject to a special tax system under the Act respecting municipal taxation. Compensation in lieu of property taxes is payable to the ministère du Revenu according to an indicator of the income of the business (taxable income). These amounts, reduced by the collection and distribution costs, are then redistributed among the municipalities by the ministère des Affaires municipales. Technological advances in the wireless telecommunications field have enabled vast networks to be set up consisting mainly of antennas. However, given that the property base of these types of networks is considerably smaller than that of a conventional telecommunications network, it is appropriate that the businesses operating them be subject to the general system rather than the special system. Accordingly, structures that are part of a wireless telecommunications network will henceforth be included in the property assessment roll of each municipality in which they are located. For this purpose, a wireless telecommunications network means, in particular, cellular telephony, paging, wireless data transmission, air-ground communications, mobile
- 5 - radio-communications, personal numerical communications services and wireless services by satellite. This change becomes effective for the purposes of a municipal fiscal year beginning with that of 1997. Accordingly, the necessary changes to the assessment roll are effective as of January 1, 1997. Moroever, no collection and distribution costs will be withheld by the ministère du Revenu regarding the amounts that will be collected, as compensation in lieu of property taxes, after the date of this information bulletin from the businesses which operate wireless telecommunications networks, for the municipal fiscal years prior to 1997. Person operating a natural gas distribution or telecommunications network that is not limited to Québec The tax base for compensation in lieu of property taxes was thoroughly reorganized in the May 14, 1992 Budget Speech. An application rule concerning the geographical delimitation of this tax base was set out at that time. The legislation giving effect to this statement does not accurately reflect the underlying tax policy since it reduces the tax payable, rather than the taxable income, in the proportion represented by the gross income from the operation of a network that is reasonably attributable to other jurisdictions compared to all the gross income attributed to these other jurisdictions and to that of Québec. Consequently, a change will be made so that this proportion be applicable to taxable income, to which the tax rates will then be applied. This change applies as of taxation years ending after May 14, 1992.
- 6 - EXTENSION OF THE APPLICATION PERIOD OF INCREASED RATES OF THE TAX CREDIT FOR DESIGN A refundable tax credit with two sections was introduced in 1994 for certain expenditures relating to eligible design activities. The first section of this tax credit concerns industrial design or fashion design activities carried out as part of an outside consulting contract. The other section enables an eligible corporation to be entitled, according to certain rules, to the refundable tax credit for design for wage expenditures incurred for designers it employs, for the fashion and furnishings sectors. For an eligible corporation that enters into an outside consulting contract, the rate of the tax credit is 20% (up to 40% in the case of an SMB 2 ) if the outside consulting contract is entered into before January 1, 1998 regarding an eligible design activity completed before January 1, 1999. In the case of the tax credit for wage expenditures, the rate is also 20% (up to 40% in the case of an SMB) if the eligible wage is incurred before January 1, 1998. These rates must subsequently be reduced to 10% (20% in the case of an SMB). The rates temporarily established to 40% for an SMB and to 20% for other corporations are extended for two more years. Accordingly, they will continue to apply to outside consulting contracts entered into before January 1, 2000, regarding an eligible design activity completed before January 1, 2001. In the case of the tax credit for wage expenditures, they will apply to eligible wages incurred before January 1, 2000. 2 A corporation qualifies as an SMB for a taxation year if its assets shown on its books and in its financial statements for the preceding taxation year does not exceed $50 million.
- 7 - CHANGES TO THE TAX CREDIT FOR THE ACQUISITION OF LESS POLLUTING DRY-CLEANING MACHINES Effective date of the measure moved forward A temporary refundable tax credit was introduced in the March 25, 1997 Budget Speech regarding expenses relating to the acquisition of dry-cleaning machines allowing the elimination or a considerable reduction of the use of perchloroethylene. This measure was part of the January 1, 1998 implementation of a specific duty applicable to the purchase of perchloroethylene. It was designed to support and accelerate modernization efforts of firms and to assist their conversion from a technology that consumes large quantities of this product to less polluting technology. It was to apply to eligible acquisition expenses incurred after December 31, 1997 and before January 1, 2002. The rate of the tax credit can reach 40% of acquisition expenses. It varies with the gross income earned from the business by the taxpayer for the taxation year preceding that during which the acquisition expenses were incurred, and according to the type of equipment acquired. To avoid penalizing eligible taxpayers who, since the Budget Speech, have undertaken the conversion of their dry-cleaning procedures to acquire technology eligible for this tax assistance, and prevent unduly delaying the necessary acquisitions of a business, the implementation of this tax credit will be moved forward. This measure applies to eligible acquisition expenses incurred as of March 26, 1997. The measure s expiration date remains unchanged, namely, December 31, 2001. In this context, the general requirement stipulated regarding the necessity for a certificate from the ministère de l Environnement et de la Faune (MEF) before acquiring the eligible equipment, is withdrawn. In all cases, this certificate must nonetheless be obtained and attached to the form stipulated by the ministère du Revenu, within time periods similar to those otherwise mentioned in the tax legislation for claiming R&D tax credits, i.e., in general, within the 18 months following the end of the taxation year during which the eligible acquisition expenses will have been incurred.
- 8 - Furthermore, the eligible equipment covered by a written lease contract concluded after March 25, 1997, day of the Budget speech, may constitute eligible equipment provided it is acquired by the eligible taxpayer. In this case, the conditions of eligibility will be considered when the equipment is leased, to determine whether older machinery has been replaced by the eligible equipment. When the equipment, originally leased, has been acquired by the taxpayer, he will be required to demonstrate to the MEF that it satisfies the requirements for obtaining a certificate. Technical changes Regarding the eligibility of used equipment, to simplify the application of this measure, the rule to the effect that the equipment must not have been put in use more than five years before its acquisition is replaced by a rule to the effect that the equipment must not have been acquired more than five years after its manufacture. Finally, the rule concerning the fact that the capital cost of used equipment must not exceed the capital cost of such equipment when first put in use is withdrawn. CHANGE TO THE STOCK SAVINGS PLAN (SSP) REGARDING THE NUMBER OF EMPLOYEES OF THE ISSUING CORPORATION In general, according to the existing terms and conditions of the SSP, a corporation which intends to proceed with a public issue of shares under this plan must, in particular, have had, throughout the 12 months preceding the date of the receipt for the final prospectus, at least five full-time employees who are not insiders as understood by the Securities Act or persons to whom they are related. To determine if this criterion is satisfied, account is taken of certain corporate reorganizations such as the amalgamation of liquidation of corporations. For a public issue of shares for which the receipt of the final prospectus (or prospectus exemption) has been granted after the date of publication of this information bulletin, the period of 12 months throughout which a corporation must have at least five full-time employees will be eased. This period will be reduced to six months provided the corporation has already proceeded with a public issue of shares under the SSP and a category of shares of its capital stock is listed on the Montréal Exchange on the date of the final prospectus (or prospectus exemption).
- 9 - INTERPROVINCIAL TAXATION Reserve for capital gains The disposal of an asset which is a fixed asset and whose value has increased since it was acquired by a taxpayer generates the realization of a capital gain. This gain is generally the difference between the proceeds of disposal of the asset and its tax cost. However, when the proceeds of disposal of an asset which is a fixed asset are not entirely receivable during the year of the sale, the taxation of a portion of the capital gain realized can be carried forward to the years when the balance of the sale price is to be received. However, at least 20% of the gain must be included annually in calculating income, which creates a reserve period of five years at most. Federal and Québec tax legislation are identical in this regard. However, each is independent in the sense that a separate reserve can be requested from each level of government. The existence of a Québec reserve distinct from the federal reserve can give rise to transactions to avoid provincial capital gains tax. To correct this situation, Québec s tax legislation will be changed so that the maximum amount of reserve that can be claimed for Québec tax purposes, in calculating a taxpayer s capital gain, can no longer exceed the amount allowed as a deduction in this regard for federal tax purposes. This change will apply to disposals made during taxation years of a taxpayer ending after the publication date of this information bulletin.
- 10 - Tax attributes of a taxpayer who becomes liable for Québec tax Québec s tax legislation stipulates that a taxpayer who has been allowed a deduction under federal legislation, while he was not subject to taxation in Québec, is deemed to have benefited from this deduction for the application of Québec legislation. This presumption applies in regard to a deduction in the calculation of income and a deduction in the calculation of taxable income. These rules are designed to ensure that the tax attributes of a taxpayer who becomes subject to taxation in Québec are essentially the same at the Québec and federal levels, so that a taxpayer does not benefit twice from the same deduction at the provincial level. However, these rules do not apply in regard to all the tax attributes of a taxpayer, in particular concerning the cost, capital cost or cost amount of an asset, so that a taxpayer who becomes subject to taxation in Québec can receive an unjustified tax benefit.
- 11 - To correct this situation, Québec s legislation will be changed so that for the purposes of calculating the income of a taxpayer for a taxation year, the changes made to the cost, capital cost or cost amount of an asset of the taxpayer under federal legislation, when he was not subject to taxation in Québec, are deemed to have also been made for the application of Québec legislation. This change will apply regarding taxation years of a taxpayer that end after the publication date of this information bulletin. FEDERAL AVIATION FUEL EXCISE TAX REFUND PROGRAM On March 5, 1997, the federal government released the details of the aviation fuel excise tax refund program announced on November 27, 1996 3. Under this program, air transportation companies active in Canada can obtain a refund of the federal excise tax paid on aviation fuel, in return for waiving their right to apply their tax losses against their taxable income. The tax refund will be added in calculating the company s income, except to the extent that the company s tax losses are reduced according to the provisions of the program. No measure similar to this federal program will be implemented in Québec s tax system. Consequently, an amount added for purposes of calculating the federal income of an air transportation company which receives benefits under this program will not have to be included in calculating its income for Québec tax purposes. In addition, the excise tax refund obtained as compensation for losses will not reduce expenditures allowable as a deduction, nor constitute a taxable amount under Québec s tax legislation. Finally, the amount of an air transportation company s tax losses will remain unchanged for Québec tax purposes. 3 Federal Department of Finance Release 97-018.
- 12 - DETAILS OF THE CALCULATION OF THE PRESCRIPTION DRUG INSURANCE PREMIUM COLLECTED BY THE MINISTÈRE DU REVENU The Québec government recently implemented a general prescription drug insurance plan which guarantees all Quebecers fair access to the prescription drugs made necessary by their state of health. The coverage provided by the Régie de l assurancemaladie du Québec is financed by a premium payable, for the first time, in regard to the 1997 taxation year. In order to take into account the ability to pay of each taxpayer, deductions are allowed in calculating the premium payable by the beneficiary of the public prescription drug insurance plan. The amount of these deductions is set so as to exempt from payment of this premium a person or couple who receives the maximum guaranteed income supplement from the federal government. If necessary, these deductions also include amounts of essential needs for a child recognized in the tax system. In this context, the first child of a single-parent family is considered as a spouse. Given that the maximum guaranteed income supplement is indexed quarterly, changes must be made to the amounts of the deductions used in calculating the prescription drug insurance premium for 1997. The amounts of the deductions allowed in calculating the premium payable by a beneficiary, announced on July 3, 1997 in the ministère des Finances Information Bulletin 97-4, will accordingly be replaced by the amounts shown in the following table. DEDUCTIONS VARYING WITH FAMILY SITUATION Prescription drug insurance (1997). 1 adult, no children $10 610. 1 adult, 1 child $17 200. 1 adult, 2 children or more $19 800. 2 adults, no children $17 200. 2 adults, 1 child $19 800. 2 adults, 2 children or more $22 200
- 13 - For the purposes of calculating the prescription drug insurance premium for 1998 and subsequent years, the amounts of these deductions will be adjusted automatically, by regulation, to reflect the quaterly indexation of the maximum guaranteed income supplement and, if necessary, the increase in the amounts of recognized needs for a child in the tax system. RESTRICTION ON THE REFUNDABLE TAX CREDIT FOR THE QST REGARDING INCARCERATED PERSONS In the March 25, 1997 Budget Speech, significant changes were made to the refundable tax credit for the QST. These changes are designed to improve this tax credit while making it simpler for individuals who are entitled to it, that is to say for those who devote a large part of their income to the consumption of essential goods. To comply more closely with the objectives of this measure, the tax legislation will stipulate that an individual will not be entitled to the tax credit if he is incarcerated, at the end of the year, in a prison or similar establishment for one or more periods totaling more than six months during the year. In addition, such a person will not be considered in the calculation of the tax credit for the QST of another individual, and his income will not be taken into account in determining his spouse s tax credit for the QST. This exclusion will apply for purposes of calculating the tax credit for the QST as of the 1997 taxation year. CLARIFICATION CONCERNING THE TAXATION OF CERTAIN INCOME The use of informers to solve crimes has become widespread. However, it may be complex to determine the exact nature, for income tax purposes, of payments made in exchange for information.
- 14 - Accordingly, the tax legislation will be changed so that such payments, whether paid as a lump sum or otherwise, will henceforth be subject to income tax as income from other sources. However, this change will not apply to amounts paid to cover expenses or regarding an allowance which would not be otherwise taxable under the legislation, in calculating employment income. The tax regulations will also be changed so that payments made to an informer constitute remuneration and that the payer is required to make the necessary source withholdings, which will generally be equivalent to those applicable to payments made under a pension plan. These changes will apply in regard to amounts paid after the publication date of this information bulletin under an agreement concluded after such date. However, the payer s obligation to make source withholdings will only become effective for amounts paid after October 31, 1997. TECHNICAL CHANGE TO THE CALCULATION OF TAX CREDITS REDUCED BY INCOME In the March 25, 1997 Budget Speech, a simplification in the calculation of tax credits reduced by income was announced. This simplification is based notably on the introduction of a single reduction threshold for all such credits, set at $26 000. It was stated at the time that these tax credits would be granted solely in proportion to the number of days in the year during which the taxpayer resided in Canada. To further simplify the application of these parameters, the tax legislation will be changed to stipulate that for the purposes of calculating the tax credits reduced by income, the income of a taxpayer who resides in Canada for part of the year will be deemed equal to the amount that would have corresponded to his income for such year had he resided in Canada throughout the year. Consequently, it will no longer be necessary to set up calculation rules designed to grant these tax credits solely in proportion to the number of days of residence in Canada.
- 15 - HARMONIZATION WITH FEDERAL MEASURES EXTENDING THE TIME FOR NEW ASSESSMENTS In general, under federal tax legislation, the normal assessment period of three or four years can be extended to six or seven years, depending on the circumstances. These additional time limits are provided for, in particular, in the case where a new assessment for a taxation year results from an operation in which a taxpayer and a non-resident person with whom he is not at arm s length are parties. A similar assessment time limit has been announced to enable the issuing of new assessments following the reduction, according to the tax legislation, of an amount a corporation is supposed to have renounced under the rules relating to flow-through shares 4. Québec s tax legislation will be changed to incorporate, with adaptations on the basis of its general principles, these two measures. The measure mentioned in the first paragraph will apply to situations for which the normal time limit for assessment will not be expired the day of the publication date of this information bulletin. The measure mentioned in the second paragraph will apply on the same date as the one retained for federal tax purposes. 4 Federal Bill C-69, paragraph 103(4).
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