Tax Insights: June 2014 Quebec budget – Tax highlights

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In brief

Carlos Leitao, Quebec Minister of Finance, delivered today, June 4, 2014, the 2014/2015 Budget of the Government of Quebec. Below are the highlights of the most important tax measures included in the budget.

The PwC Tax Insights analyzing the tax measures in the Budget will be posted shortly on our Website.

Measures concerning businesses

No changes to tax rates for businesses other than the tax rate for manufacturing SMEs.

Reduced tax rate for manufacturing SMEs

The maximum additional deduction for the tax rate a manufacturing SME may claim will be 2% for taxation years ending after June 4, 2014, and will rise to 4% for a taxation year ending after March 31, 2015.

Additional deduction for transportation costs of remote manufacturing SMEs

Certain corporations may claim an additional deduction in calculating their net income, which may reach 6% of their gross income for such taxation year. The amount of this additional deduction a corporation may claim for a taxation year will depend on a number of parameters, i.e. the region where it carries out its manufacturing activities, the level of its manufacturing activities, the size of the corporation, its gross income for such taxation year and a regional cap. This measure will apply to a taxation year of a corporation ending after June 4, 2014.

Reduced contribution to the Health Services Fund to boost innovation in SMEs

A temporary reduction in the contribution to the Health Services Fund will be implemented for full-time jobs created in the natural and applied sciences sector. This reduction will be granted until 2020 for the increase in payroll attributable to the hiring of specialized employees.

On their part the employers whose total salary charge is between $1M and $5M will be able to benefit from a partial reduction regarding the contribution payable regarding such employees.

Introduction of incentives to foster the marine industry

  • Creation of a tax-free reserve toward the construction, renovation and maintenance work on vessels of a fleet in a Québec shipyard. Interest income, dividends and capital gains realized during a year in relation to the eligible funds of a tax-free reserve may receive a tax holiday which will consist of a deduction in calculating the shipowner’s taxable income for the year. A certificate from the Quebec Ministry of Economic Development, Innovation and Export Trade will have to be obtained. This measure will end no later than December 31, 2033.
  • Additional capital cost allowance of a vessel corresponding to 50% of the capital cost allowance in relation to work done by a qualified shipyard. This amendment will apply, for a taxation year, pursuant to a contract a taxpayer enters into after June 4, 2014 but before January 1, 2024.

Modifications to the Mining Tax Act

  • The Mining Tax Act will be amended so that the value of mineral substances from a mine that are gemstones will be determined outside the mine site under certain conditions established by the Minister of Energy and Natural Resources.
  • The definition of the expression “processing” for the purposes of the Mining Tax Act will be changed to include hydrometallurgy. Hydrometallurgy will also be added to the calculation of the processing allowance. This change will apply to an operator for a fiscal year beginning after December 31, 2013.

A 20% reduction in tax assistance intended for businesses

The tax legislation will be amended to reduce by 20% the rate of certain refundable tax credits, including the following:

  • Refundable tax credit for technological adaptation services;
  • Refundable tax credit for design;
  • Refundable tax credits for the production of multimedia titles;
  • Refundable tax credit for major employment generating projects;
  • Refundable tax credit for job creation in the resource regions, the Vallée de l’aluminium and in the Gaspésie and certain maritime regions of Quebec (reduction by 10% of the tax credit for each of the calendar years 2014 and 2015);
  • Refundable tax credit for resources;
  • Tax benefits relating to flow-through shares (reduction by 20% of the additional deductions);
  • Refundable tax credit for international financial centres;
  • Refundable tax credit to foster the modernization of the tourism accommodation offering;
  • Refundable tax credit for on-the-job training periods;
  • Refundable tax credit for manpower training in the manufacturing, forest and mining sectors;
  • Refundable tax credit for the development of e-business;
  • R&D salary tax credit;
  • R&D university tax credit;
  • Tax credit concerning pre-competitive research carried out in private partnership;
  • Tax credit concerning contributions paid to an eligible research consortium.
Elimination of the increase from 17.5% to 27.5% in the rate of the refundable tax credit for R&D salaries in relation to biopharmaceutical activities
  • This increase in the rate of the tax credit for R&D salaries will be eliminated as of June 4, 2014.
  • A corporation previously recognized by Investissement Québec as an eligible biopharmaceutical corporation may continue to benefit from the increase in the rate, but the current increase will be reduced by 20%.

Tax credit for investments relating to manufacturing and processing equipment

  • Elimination of the increase in the rate of the tax credit for investments for certain administrative regions and RCMs, and reduction of the base rate and the increases in the rate of the tax credit for investments by 20%.
  • Elimination of the additional increase in the rate of the tax credit for investments for manufacturing SMEs.

Elimination of the refundable tax credit relating to buildings used in the course of manufacturing or processing activities by a Quebec manufacturing SME

The refundable tax credit for the integration of information technologies in manufacturing SMEs is under review starting June 4, 2014

Deferral of changes to January 1, 2015 to the refundable tax credit for resources announced in the March 20, 2012 Budget speech (i.e. reductions of the refundable tax credit for resources and improvement to the tax credit in exchange for an equity stake option by the government) applicable to eligible corporations incurring expenses relating to mining resources, oil and natural gas, other natural resources or renewable energy and energy conservation.

Harmonization with certain measures of the February 11, 2014 Federal Budget

Measures retained:

  • Change to the anti-avoidance rule concerning captive insurance corporations;
  • Addition of new eligibility conditions to the exception relating to offshore-regulated financial institutions;
  • Change to the anti-avoidance rule currently contained in the thin capitalization rules;
  • Increase in the thresholds determining how frequently employers must remit withholdings at source;
  • Changes concerning the accelerated capital cost allowance for clean-energy generation equipment to include water-current energy equipment and gasification equipment.

Measures to increase the investments of Capital régional et coopératif Desjardins (CRCD) in territories facing economic difficulties

  • For investments made after December 31, 2013 and before January 1, 2018, certain regional county municipalities outside resource regions facing economic difficulties will be recognized as regions facing economic difficulties for the purpose of CRCD’s investment requirements.
  • Increase in the amount of investments in eligible entities and made through a limited partnership for the purpose of the computation of the investment requirements of CRCD.
  • For the purpose of the gross-up relating to the investment requirements, certain regional county municipalities will be recognized as territories facing economic difficulties.
  • For a capital-raising period beginning after February 28, 2014, the applicable rate for the purposes of calculating the special tax relating to excessive capitalization will decline from 50% to 45% to reflect the reduction in tax assistance for the acquisition of shares issued by CRCD.

Measures concerning individuals

No changes to tax rates for individuals.

Enhancement of the tax credit for experienced workers that will, as of the 2015 taxation year, be calculated on an experienced worker’s first $4,000 of eligible work income in excess of the first $5,000 of such income

Introduction of a refundable tax credit for seniors’ activities up to $40 a year to be granted to low- or middle-income persons 70 years of age or older who register for recognized activity programs, and paid after June 4, 2014

Amendment to ensure the fairness of the mechanism for splitting retirement income between spouses

In order to eliminate the preferential tax treatment applicable to individuals who receive a life annuity under a registered pension plan and to improve fairness of the mechanism for splitting retirement income, 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 during 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, starting as of taxation year 2014.

Salary paid for the purposes of determining various employer contributions

The definition of “base wages”, as defined in the Taxation Act for the purposes of the compensatory tax required of financial institutions (which is used as the point of departure in determining the contributions required under various Acts), will be changed to include any amount paid, allocated, granted or awarded to the employee because of, or in the course of, his office or employment by a person not at arm’s length with the given employer, unless such amount was excluded from the employee’s base wages if it had been paid, allocated, granted or awarded by the employer.

Harmonization with certain measures of the February 11, 2014 Federal Budget

Measures retained:

  • Addition of certain expenses to the list of expenses eligible for the tax credit for medical expenses;
  • Introduction of a tax credit for volunteers participating in search and rescue activities;
  • Measures relating to the property used in the course of carrying on a farming business and a fishing business;
  • Tax deferral granted to certain farmers located in regions hit by drought, flooding or excessive moisture;
  • Inclusion of certain income attributed to a minor by a partnership or a trust for the purposes of calculating tax on split income;
  • Elimination of graduated rate taxation for certain trusts and estates;
  • Elimination of the 60-month exemption from the residency presumption rules that apply to non-resident trusts and from certain other related rules;
  • 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;
  • Inclusion of income paid to an amateur athlete trust for the purpose of determining the maximum amount deductible on account of registered retirement savings plans (“RRSPs”);
  • Cap on transfer of pension benefits to RRSPs where the amount of accumulated benefits has been reduced, in particular, because of under-funding of the registered pension plan.

Measures relating to the acquisition of shares of CRCD

  • Reduction of the tax credit rate applicable to the acquisition of shares of CRCD acquired after February 28, 2014, from 50% to 45%.
  • Changes to the computation of the special tax applicable on the redemption or purchase of shares by CRCD to:
    • 50% where the share was issued before March 24, 2006, or after November 9, 2007 and before March 1, 2014;
    • 35% where the share was issued after March 23, 2006 and before November 10, 2007;
    • 45% where the share is issued after February 28, 2014.

Other tax measures

Increase in the specific tax on tobacco products as of June 5, 2014

Standardization of the rates of the specific tax on alcoholic beverages as of August 1, 2014

Measures applicable to labour funds

  • Temporary cap on government assistance for the capitalization of labour funds with respect to the cap applicable to the investment requirement to the Fonds de solidarité FTQ and with respect to the capital that Fondaction is authorized to collect.
  • Recognition of investments made by Fonds de solidarité FTQ in a fund to finance sector-based venture capital funds and by Fondaction to develop the residual forest biomass sector as eligible investments for the purpose of the computation of their respective investment requirements.

Transfer to Revenu Québec of responsibilities relating to the application of the Mining Tax Act

Harmonization with certain measures of the February 11, 2014 Federal Budget and of certain technical measures announced by the federal government on April 8, 2014, with respect to GST/HST for the purpose of the Quebec sales tax (QST)

Relating to:

  • the GST/HST election for closely related persons;
  • strengthen compliance with GST/HST registration;
  • making technical changes to the provisions concerning real property;
  • clarifying the application of GST/HST public service body rebates in relation to non-profit organizations that operate certain health-care facilities; 
  • zero-rating precious metals refining services supplied to non-resident persons not registered for the purposes of the GST/HST system;
  • simplifying the tax treatment of the temporary importation of certain railcars;
  • codifying the long-standing relieving provisions related to the tax treatment upon re-entry into Canada of Canadian goods on which the GST/HST has already been paid;
  • updating certain legislative references stipulated in the regulations, other than the reference stipulated in the Taxes, Duties and Fees (GST/HST) Regulations, which has no equivalent in the QST system.