2014 Issue No. 60 4 December 2014 Tax Alert Canada Quebec 2014 fall economic update EY Tax Alerts cover significant tax news, developments and changes in legislation that affect Canadian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. We were elected with a mandate to revitalize the economy and put public finances in order, to restore Quebec s freedom of choice and action and ensure intergenerational fairness. We are on track to successfully carry out that mandate. Quebec Finance Minister Carlos Leitão, 2014 fall economic update Quebec Finance Minister Carlos Leitão gave an update on Quebec s economic and financial situation on 2 December 2014. The update contains several tax measures affecting individuals and corporations. The minister confirmed in the update that the deficit target he set in his June 2014 budget for 2014 15 is maintained at $2.35 billion. The minister also confirmed that he is forecasting a return to a balanced budget in 2015 16. As part of the update, and to achieve his budgetary targets, the minister announced a reduction of tax expenditures of $122 million for 2014 15 and $600 million for 2015 16, as well as certain tax measures in support of economic growth for $195 million over the next three years until fiscal 2016 17. These tax measures are based, in part, on the Québec Taxation Review Committee s interim recommendations to the government its final report is to be filed at the end of the year with tax recommendations to help boost Quebec s economic growth. Following is a brief summary of the tax measures contained in the update.
Business tax measures Financial institutions compensation tax rates increased: The rates of compensation tax for financial institutions are temporarily Table A Taxation years beginning before 3 Dec. 2014 Taxation years ending after 2 Dec. 2014 and beginning before 1 April 2017 increased for taxation years ending after 2 December 2014 and beginning before 1 April 2017 as laid out in Table A. Taxation years ending after 31 March 2017 and beginning before 1 April 2019 For amounts paid as wages Banks, loan corporations, trust corporations or corporations trading in securities 2.8% 4.48% 2.8% Savings and credit unions 2.2% 3.52% 2.2% Other persons 0.9% 1.44% 0.9% For insurance premiums and amounts established regarding insurance funds 0.3% 0.48% 0.3% For taxation years straddling 2 December 2014, a proration in the rates based on the number of days in the taxation year will apply for insurance premiums and amounts established regarding insurance funds. For amounts paid as wages, the new increased rates will apply to the wages paid after 2 December 2014. Similar proration will apply for taxation years straddling 31 March 2017. Corporate instalment payments and monthly amounts payable by financial institutions that are not corporations will need to be adjusted accordingly. Insurance corporation capital tax rate increased: As of 3 December 2014, the rate of the insurance corporation capital tax applicable to personal insurance premiums and uninsured employee benefit plans will be raised from 2% to 3%. The new rate will apply to a 12-month period or taxation year, as applicable, ending after 2 December 2014. A proration in the rates based on the number of days in the period or taxation year will apply for periods or taxation years straddling 2 December 2014. Instalments will also need to be adjusted accordingly. R&D tax credit rates standardized: As of 3 December 2014, the rate of the refundable R&D tax credits for university research contracts, private partnership precompetitive research and research consortium funding will match the R&D tax credit rates for wages or for contracts to arm s-length subcontractors, as outlined in Table B. Quebec 2014 fall economic update 2
Table B R&D tax credits Size Tax credit rates Wages or contracts to arm slength subcontractors Before 3 Dec. 2014 After 2 Dec. 2014 University research contracts Private partnership precompetitive research Funding of research consortiums The $50-million assets threshold used to currently determine what constitutes a small or medium-sized business () for the purposes of the R&D tax credit for wages or for contracts to arm s-length subcontractors will be the same for all four tax credits. Similarly, the current $3-million limit of annual eligible expenditures that is applicable to the higher rate will also apply for each tax credit (separately), as well as the linear rate reduction from to for s with assets between $50 million and $75 million. New R&D tax credits minimum eligible expenditures thresholds: As of taxation years beginning after 2 December 2014, the following annual minimum thresholds, below which no eligible expenditure will be claimable, are introduced for the four refundable R&D tax credits mentioned above: $50,000 for taxpayers or partnerships with assets of less than or equal to $50 million in the previous taxation year or fiscal period $225,000 for taxpayers or partnerships with assets of $75 million or more in the previous taxation year or fiscal period An amount that increases linearly between $50,000 and $225,000 for taxpayers or partnerships with assets between $50 million and $75 million in the previous taxation year or fiscal period These excluded expenditures will first reduce the expenditure amount, giving entitlement to the higher credit rate. New investment tax credit minimum eligible expenditures threshold: Similar to the refundable R&D tax credits, as of 3 December 2014, the first $12,500 of expenses incurred in respect of a property eligible to the tax credit for investments in manufacturing and processing equipment will not give entitlement to the credit. The threshold will not be applicable where the equipment is acquired pursuant to a written obligation entered into prior to 3 December 2014, or is a property whose construction was under way on 2 December 2014. Health Services Fund (HSF) contribution rates reduced: As of 1 January 2015, the HSF contribution rate for s in the primary and manufacturing sectors with a total payroll equal to or less than $1 million will decrease from 2.7% to 1.6%. An is considered to be in these sectors if more than 50% of its payroll for the year is attributable to activities in these sectors. The primary sector refers to activities in agriculture, forestry, fishing, hunting, mining, quarrying, and oil and gas extraction. Similarly, the HSF contribution rate for s in the primary and manufacturing sectors with a total payroll between $1 million and $5 million will range from 1.6% to 4.26% (instead of from 2.7% to 4.26% currently). Quebec 2014 fall economic update 3
Additional income deduction for transportation costs: As of 1 January 2015, the application of the cap and trade system for greenhouse gas emission allowances will be broadened to fuel distributors. As a result, and effective for taxation years beginning after 31 December 2014, manufacturing s in every Quebec region will benefit from the following increases in the additional deduction for transportation costs that was announced in the 4 June 2014 budget. An increase of one percentage point in the rates used to calculate the deduction limit (from 2%, 4% and 6% of gross income to 3%, 5% and 7% of gross income) in the Quebec regions already eligible for the June 2014 deduction (i.e., in the intermediate, remote and special remote zones, respectively) An increase in the deduction annual regional cap (from $100,000 to $150,000 in the intermediate zone, and from $250,000 to $350,000 in the remote zone) A broadening of the deduction to manufacturing s located in major urban centres (subject to a limit of 1% of gross income, with a $50,000 cap per corporation) Corporations that are members of a group of associated corporations will have to share the use of the regional cap on a percentage basis. New temporary tax credit for certain interest payable on farming business transfers: A 40% new refundable tax credit of the interest payable on financing obtained through La Financière agricole du Québec s (FAQ) seller-lender formula program is introduced. The program is intended to facilitate transfers of farming businesses with the FAQ guaranteeing the loan and interest rate. The credit will apply to interest attributable to a period beginning after 31 December 2014 and ending 10 years after the date the financing arrangement is entered into. The credit will also apply to interest payable under financing arrangements entered into after 2 December 2014 and before 1 January 2020. Quebec film and television production tax credit increased: Eligible expenditures to the 36% or basic Quebec film and television production tax credit will be temporarily increased by an amount equal to 2% of the amount of qualified labour expenditures for the credit. The increase, which is granted to cover for additional funding costs qualifying corporations generally incur while waiting for the tax assistance, will apply for applications submitted to the Société de développement des entreprises culturelles (SODEC) after 2 December 2014 and before 1 January 2017. Personal income tax measures Capital gains exemption threshold increased: As of 1 January 2015, the $800,000 lifetime capital gains exemption applicable to gains on the disposition of qualified farm property, qualified fishing property or a combination of the two will be raised to $1 million. The indexation of the new threshold will be temporarily suspended until the lifetime capital gains exemption applicable to gains on the disposition of qualified small business corporation shares exceeds $1 million. Union and professional dues tax credit rate reduction: As of the 2015 taxation year, the tax credit rate for eligible dues or contributions to a recognized professional association, union or similar group will be reduced by half, from 20% to 10%. Incentive to work tax credits tightening: As of the 2015 taxation year and similar to the Quebec 2014 fall economic update 4
federal working income tax benefit, full-time students will no longer be eligible for the incentive to work refundable tax credits, unless they are the parent of a child with whom they live. Child care contribution increased: On 20 November 2014, the government announced that the current reduced contribution of $7.30 per day that is payable for subsidized child care services will be gradually increased to up to $20, effective 1 April 2015, for parents with a family net income over $75,000 (the additional contribution for parents with a family net income between $50,000 and $75,000 being raised to $8). Given that the additional contribution will be payable on 30 April of the following year upon filing the Quebec TP-1 income tax return, it was announced in the update that Revenu Québec will prepare an information guide for employers to enable them to assist employees who may request changes to their source deductions to reduce the amount payable upon filing their tax return. displacement (4.0 litres or more) will be increased and a purchase premium will be added to the fee upon any new registration of such vehicles. Learn more For more information, contact your EY or Couzin Taylor advisor or one of the following professionals: Montreal Stéphane Leblanc +1 514 879 2660 stephane.leblanc@ca.ey.com Sandy Maag +1 514 874 4377 sandy.maag@ca.ey.com Quebec City André Vézina +1 418 640 5127 andre.vezina@ca.ey.com Esther Gaulin +1 418 640 5115 esther.gaulin@ca.ey.com It was also announced that the reduced contribution of $7.30 per day charged for child care at school will be raised to $8 per day, as of April 1, 2015. Indirect tax measures Automobile insurance premiums tax rate increased: As of 1 January 2015, the 5% automobile insurance premiums tax rate will be increased to 9%. As a transition relief, monthly filers will have until 31 March 2015 to remit the tax to be collected in January 2015 (the same extension will also apply to quarterly filers who have a reporting period ending on 31 January 2015). Additional vehicle registration fees: As of 1 January 2016, the additional registration fee for vehicles having a large engine Quebec 2014 fall economic update 5
EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY s Tax Services EY s tax professionals across Canada provide you with deep technical knowledge, both global and local, combined with practical, commercial and industry experience. We offer a range of tax-saving services backed by in-depth industry knowledge. Our talented people, consistent methodologies and unwavering commitment to quality service help you build the strong compliance and reporting foundations and sustainable tax strategies that help your business achieve its potential. It s how we make a difference. For more information, visit ey.com/ca/tax. About Couzin Taylor Couzin Taylor LLP is a national firm of Canadian tax lawyers, allied with EY, specializing in tax litigation and tax counsel services. For more information, visit couzintaylor.com. 2014 Ernst & Young LLP. All Rights Reserved. A member firm of Ernst & Young Global Limited. This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication. ey.com Quebec 2014 fall economic update 6