Tax Insights: Fall 2018 Update on Québec’s Economic and Financial Situation: Tax highlights

Issue 2018-47

In brief

On December 3, 2018, Québec Finance Minister Eric Girard tabled his ministry’s fall 2018 Update on Québec’s Economic and Financial Situation. The economic update:

• harmonizes with a number of measures announced in the 2018 Federal Fall Economic Statement with respect to businesses
• changes the additional capital cost allowance of 60%
• institutes an additional capital cost allowance of 30%

This Tax Insights discusses these measures outlined in the economic update.

In detail

Business tax measures

Harmonization with the proposed federal accelerated depreciation measures

Subject to the special rules with regard to property, including a property that is a qualified intellectual property or general-purpose electronic data processing equipment, Québec’s tax system will be amended to incorporate the proposed federal amendments to the Income Tax Regulations relating to accelerated depreciation by:

• allowing taxpayers to deduct the full cost of manufacturing and processing machinery or equipment and clean energy generation equipment for the taxation year in which the property becomes available for use, where such property becomes available for use before 2024, with a gradual reduction afterwards
• instituting an accelerated investment incentive, i.e. an accelerated capital cost allowance that allows taxpayers to deduct up to three times the amount that could otherwise be deducted for the tax year in which the property becomes available for use

Property that is qualified intellectual property or general-purpose electronic data processing equipment

In applying the Québec tax system, the full cost of acquiring a property that is a qualified intellectual property or general-purpose electronic data processing equipment will be deductible in the tax year in which the property becomes available for use.

Qualified intellectual property will mean property acquired after December 3, 2018 that is a patent or a right to use patented information, a licence, a permit, know-how, a commercial secret or other similar property constituting knowledge, and that:

• is property included in Class 14 or Class 44 or property that is incorporeal capital property
• is acquired in the course of a technology transfer or is developed by or on behalf of the taxpayer
• begins to be used within a reasonable time after being acquired or developed
• is used, for the period covering the process of implementing the innovation or invention only in Québec and primarily in the course of carrying on a business
• is not, during the implementation period, a property that is used to earn or produce gross revenue consisting of rent or royalty
• is not property acquired from a person or partnership with which the taxpayer does not deal at arm’s length

Change and elimination of the additional 60% capital cost allowance

In the March 2018 Québec Economic Plan, an additional capital cost allowance of 60% was introduced for investments in manufacturing or processing equipment and general-purpose electronic data processing equipment acquired before April 1, 2020.

The tax legislation will be amended so that when calculating the amount that a taxpayer may deduct in computing income, the additional capital cost allowance of 60% cannot exceed the level of assistance granted by this deduction at the time it was instituted. These amendments will apply to an eligible asset acquired after November 20, 2018, but no later than December 3, 2018.

The additional capital cost allowance of 60% will be eliminated for assets acquired after December 3, 2018. The additional capital cost allowance of 60% may be claimed for eligible assets acquired after December 3, 2018 and before July 1, 2019, if either of the following conditions is met:

• the eligible asset is acquired pursuant to a written obligation contracted no later than December 3, 2018
• construction of the asset began before December 3, 2018

Introduction of an additional capital cost allowance of 30%

A permanent additional capital cost allowance of 30% will be introduced for the following investments:

• manufacturing or processing equipment included in Class 53 of Schedule B of the Regulation respecting the Taxation Act
• clean energy generation equipment
• general-purpose electronic data processing equipment and systems software, i.e. an asset included in Class 50 of that Schedule
• qualified intellectual property as defined above

The contemplated properties must meet the following conditions:

• the asset must be new
• the asset must not be acquired from an individual or partnership with which the taxpayer does not deal at arm’s length
• the asset must be used mainly in Québec in the course of carrying on a business
• the taxpayer must not have benefited from the additional capital cost allowance of 60% with respect to this asset

The legislation will be amended so that a taxpayer who acquires the contemplated property after December 3, 2018, can deduct an amount corresponding to 30% of the amount deducted in calculating income for the preceding taxation year as capital cost allowance with respect to the asset. In addition, a separate class will be provided for properties of a same class, for which a taxpayer may claim the additional deduction of 30%.