Proposed personal tax changes
During the election campaign, the PQ said it intends to introduce two new individual income tax brackets. If these changes are adopted, Quebec individual taxpayers earning over $130,000 per year would see their provincial (fourth) tax bracket rise to 28% (from 24%), while a new top (fifth) bracket of 31% would be applied to income over $250,000. The PQ also proposed to increase the capital gains inclusion rate to 75% (from 50%) and to raise the tax on dividends by cutting the current dividend tax credit by 50%. It is unclear whether this tax credit cut would apply to both eligible and non-eligible dividends.
Effect on combined top marginal tax rates
The table below shows how the federal and Quebec rates for different types of income earned in the proposed new fourth and fifth tax brackets would be affected in 2013 if the PQ government enacts its election campaign proposals. While the available information is not entirely clear, we have assumed that the dividend tax credit for both eligible and non-eligible dividends would be cut in half for this purpose.
As shown in the table, the Quebec combined top marginal tax rate for regular income would jump by 15% to 55.22% (from 48.22%). The proposed rate applied to capital gains in 2013, which has an increase of 47%, would rise to 35.36% (from 24.11%). Eligible dividends would realize the highest hike (55%) to make the combined top marginal rate 50.68% (from 32.81%). Finally, the rate in the top marginal bracket for non-eligible dividends would be higher by 38% at 50.1% (from 36.35%).
It is interesting to note that the proposed rate changes would cause the eligible dividend tax rates in the proposed fourth and fifth brackets to be slightly higher than the corresponding rates for non-eligible dividends.
Effect on employee stock option benefits
Currently, Quebec generally only allows a deduction equal to 25% of a taxable employee stock option benefit, rather than the 50% deduction that is allowed federally and in the other Canadian provinces. This results in an effective tax rate of 30.11% (i.e., $30 on a $100 employee stock option benefit), which is higher than the current Quebec top marginal rate of 24.11% on capital gains.
As a result of the proposed income tax rate changes, a Quebec resident earning taxable income at the proposed fifth tax bracket level that earns an employee stock option benefit of $100 will now pay income taxes of $35 (rather than $30), which is an effective tax increase of 17%. Similarly, a Quebec resident earning taxable income at the proposed fourth tax bracket level would pay tax of $33 on an employee stock option benefit of $100. As a result of the increase in the capital gains inclusion rate, stock option benefits will be taxed at the same tax rate as capital gains.
Comparative of tax rates for 2013
The PQ's proposed Quebec individual income tax rate increases are even more dramatic when compared with other provinces' 2013 combined top marginal income tax rates.
As illustrated above, Quebec's current ("status quo") combined top marginal tax rates for 2013 were actually slightly lower than those in Ontario for all types of income. If the PQ government introduces its proposed tax hikes in 2013, Quebec's individual combined top marginal tax rates would be significantly higher than Ontario's for all types of income:
- The rate applied to regular income would be 11% higher in Quebec
- The rate applied to capital gains would be 43% higher in Quebec
- Eligible dividends would be subject to almost 50% higher tax rate in Quebec
- Non-eligible dividends would be taxed 37% higher in Quebec.
Comparing the PQ's proposed tax rates to Alberta's tax rates makes the proposed rates appear even more drastic. The PQ's proposed 2013 rate on capital gains would be 81% higher than Alberta's, and the proposed 2013 eligible dividends tax rate would be 163% higher in Quebec than Alberta.
Corporate tax implications
Although we have not yet crunched the numbers, it is also expected that the proposed Quebec dividend tax rate increases will have a serious adverse effect on the concept of integration for income earned through a Canadian-controlled private corporation. However, the impact of the increased capital gains inclusion rate causes a 50% increase in the effective tax rate for a general corporation to 20.18% (from 13.45%) and is significantly higher than the corporate tax rate on capital gains in other provinces, as illustrated in the following table:
In addition, as the proposed increase to Quebec's capital gains inclusion rate would affect corporations, private corporations would presumably be required to track a separate capital dividend account balance for Quebec and take this into account when making capital dividend elections on payment of dividends to their shareholders.
It is not known whether Quebec's minority PQ government will be able to enact these tax proposals. Even if the proposals are enacted, it is not certain whether they will raise the amount of tax revenue forecasted, as Quebec's high income taxpayers and their employers or businesses may take steps to avoid or mitigate the effect of the proposed tax rate spikes.
For more information, contact your KPMG adviser.
Information is current to September 18, 2012. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.