November 20, 2012
Earlier today, Quebec Minister of Finance and the Economy, Nicolas Marceau, tabled the Quebec provincial budget for 2013-2014. The budget anticipates a return to fiscal balance in 2013-2014 and a balanced budget for the following years.
For 2012-2013, the government is maintaining the $1.5-billion budgetary deficit objective set in March 2012, to which will be added the accounting impact of the extraordinary loss incurred by Hydro-Québec as a result of the closure of the Gentilly-2 nuclear power plant.
As had previously been announced on October 10, 2012, beginning in 2013, a new marginal tax rate of 25.75% will apply to income above $100,000. This represents an increase of 1.75% from the previous top marginal tax rate of 24% that applied to income above $80,201.
Tax Credit for M&P Equipment
Currently, a qualified corporation that acquires a qualified property (i.e., manufacturing and processing property included in Class 29 or 43 of Schedule B of the Regulation respecting the Taxation Act and certain property used in the course of ore smelting, refining or hydrometallurgy activities extracted from certain mineral resource) may receive a tax credit for investments relating to manufacturing and processing equipment. For certain qualified property, the acquisition has to occur before January 1, 2016, whereas for other qualified property, the acquisition has to occur before January 1, 2018.
The base rate of the tax credit is 5%, and this rate can be increased depending on the zones where the qualified property is acquired. For remote zones, such as Côte-Nord and Abitibi-Témiscamingue, the credit is increased up to 40%. For the Bas-Saint-Laurent administrative region, the credit equals 30% and for intermediate zones, such as Saguenay-Lac-Saint-Jean and the RCM Rivière-du-Loup, the credit can reach 20%.
The budget amends the tax credit so that it applies to all qualified property acquired before January 1, 2018. Moreover, qualified corporations making investments in the Bas-Saint-Laurent administrative region and in intermediate zones will be entitled to an increased tax credit of 35% and 25% respectively. However, where a qualified corporation (or an associated corporation) is eligible for the tax credit for job creation, the increased tax credit will remain as before the budget, i.e., 30% and 20%.
Those modifications to the tax credit for investments relating to manufacturing and processing equipment will apply to eligible expenses incurred regarding qualified property acquired after November 20, 2012.
Taxation of refundable tax credits
There are seven refundable tax credits that are currently not considered to be government assistance and are therefore not required to be included in income. The budget proposes to change this rule to require that these credits, received after November 20, 2012 (i.e. budget date) that relate to expenditures incurred in a taxation year beginning after November 20, 2012, to be included in income. The seven credits in question are the following:
The refundable credit for scientific research and experimental development.
The refundable tax credit for university research and for research carried on by a public research centre or research consortium.
The refundable tax credit for fees and dues paid by a research consortium.
The refundable tax credit for private partnership pre-competitive research.
The refundable credit for on-the-job training periods.
The refundable credit for design.
The refundable credit for the construction or conversion of vessels.
Increase in the Contribution by Financial Institutions
The March 30, 2010 budget speech had previously announced a temporary increase in the rates of the compensation tax on financial institutions (“the temporary contribution”). The current budget proposes to, among other things, increase the rates and extend the application period of this temporary contribution.
More specifically, for the period from January 1, 2013 to March 31, 2019, the rates of the temporary contribution will be:
- for amounts paid as wages:
- in the case of a bank, a loan corporation, a trust corporation or a corporation trading in securities, 2.8% (up from 1.9%)
- in the case of a savings and credit union, 2.2% (up from 1.3%)
- in the case of any other person, 0.9% (up from 0.5%)
- for insurance premiums and amounts established regarding insurance funds, 0.3% (up from 0.2%).
The budget also provides certain new rules for the application of the compensation tax on financial institutions.
Refundable Tax Credit for Biopharmaceutical R&D
Biopharmaceutical corporations that will obtain from Investissement Québec an initial certificate demonstrating that their activities are related to human health will be entitled to a R&D tax credit on their salaries of 27.5% for a five-year period. To remain eligible to this tax credit, the biopharmaceutical corporations will have to obtain an eligibility certificate on an annual basis.
An eligible biopharmaceutical corporation that is also a SME (i.e., a Canadian-controlled corporation whose assets, on a consolidated basis, do not exceed $75 million), will continue to benefit from an increased R&D tax credit up to 37.5%. However, this increase of the rate will be reduced on a straight-line basis to 27.5% based on the consolidated value of the assets (between $50 and $75 million).
Generally, the increase in the rate of the tax credit will apply to eligible R&D expenditures incurred and R&D work carried out after November 20, 2012 and before January 1, 2018.
New Tax Holiday for Large Investment Projects
The tax holiday for major investment projects is eliminated and replaced with a new tax holiday for large investment projects, the THI. Under this new program, corporations and partnerships that begin to carry out a large investment project in Québec after November 20, 2012 may, under certain conditions, obtain a ten year tax holiday.
The tax holiday is applicable to large investment projects in the manufacturing (including the mineral and wood processing), data processing and storage, wholesale trade or warehousing sectors. However, mineral substance processing activities will not be eligible for the THI. The investment project must require at least $300 million of investment expenditures (excluding expenditures relating to the purchase or use of land or relating to the acquisition of a business already being carried on in Québec).
Eligible corporations may receive a tax holiday on income from activities relating to large investment projects for which the corporation keeps separate books. The holiday consists of a deduction in calculating the corporation’s taxable income. This deduction is determined in accordance with the rules applicable to the existing tax holiday for a major investment projects. The holiday will also apply to members of a partnership carrying out an eligible project.
Corporations and partnerships may also obtain a holiday from employer contributions to the Health Services Funds (HSF) on the wages attributable to the project.
The total tax assistance relating to the tax holiday may not exceed 15% of the total project-related expenditures incurred prior to the starting date of the holiday period.
The ten-year holiday period begins on the later of the following dates: (1) the date the separate business relating to the investment project begins to be carried on and (2) the date when the $300 million threshold of investment expenditures attributable to project is reached.
To receive the THI, corporations or partnerships must submit an initial application prior to November 21, 2015, and obtain annual certificates thereafter.
The elimination of the existing tax holiday for major investment projects will be effective as of November 20, 2012. However, corporations that already have an initial certificate for an investment project may continue to benefit from this tax holiday until it expires, according to the rules that currently apply.
Changes to the Health Contribution
The budget will replace the current health contribution with a new health contribution as of 2013. This new contribution will be based on an individual’s net income and will be payable by each adult, other than an exempt adult, resident in Québec at the end of the year, at the following rates:
- where the adult’s income for the year does not exceed $40,000, the lower of $100 or 5% of the amount by which the income exceeds $18,000;
- where the adult’s income for the year is over $40,000 without exceeding $130,000, the lower of (1) $200 and (2) the aggregate of $100 and 5% of the amount by which his or her income exceeds $40,000;
- where the adult’s income for the year is over $130,000, the lower of (1) $1000 and (2) the aggregate of $200 and 4% of the amount by which his or her income exceeds $130,000.
The amounts of $18,000, $40,000 and $130,000 used to calculate the health contribution will be automatically indexed each year as of 2014. The health contribution will be subject to deduction at source beginning in 2013.
For the purposes of computing the amount of an individual’s tax installments, the new health contribution will be deemed to have applied since 2011.
New Top Marginal Income Tax Rate
As previously announced, as of the 2013 taxation year, a new marginal income tax rate of 25.75% will apply to taxable income over $100,000. This $100,000 threshold will be indexed on an annual basis beginning in 2014.
The addition of this new income tax bracket will be reflected, as of January 1st, 2013, in income tax source deductions.
The rate for determining the income tax payable by an inter vivos trust (including a mutual fund trust and a specified investment flow-through trust) will be increased from 24% to 25.75% as of 2013. The amount of an inter vivos trust’s installment payments will have to be determined as if the 25.75% tax rate had applied since 2011.
As a result, the combined federal and provincial top marginal tax rates for 2013 are as follows:
- Regular income — 49.97% (up from 48.22% in 2012);
- Capital gains — 24.99% (up from 24.11 in 2012);
- Eligible dividends — 35.20% (up from 32.81% in 2012);
- Non-eligible dividends — 38.54% (up from 36.35% in 2012).
The tax rate applicable to inter vivos trusts not resident in Canada on their property income derived from the rental of an immovable property located in Québec that is used primarily for the purposes of earning rental income will be increased from 5.3% to 7.05% as of the 2013 taxation year.
Among various consequential amendments, the following rates will be increased from 24% up to 25.75% as of the 2013 taxation year:
- the rate applicable to split income of children;
- the rate of the special tax relative to an income-averaging annuity payment for artistic activities;
- the applicable rate for the purposes of calculating the refundable tax credit for child care expenses for individuals resident in Canada outside Québec who carried on a business in Québec and whose eligible spouse, where applicable, is not resident in Québec.
The tax on excess profit sharing plan amounts will also have to be calculated at the rate of 25.75%.
As of 2013, 80% of realized capital gains will have to be included in the alternative minimum tax base. The previous inclusion rate was 75%.
New Refundable Tax Credit for Children’s Activities
A refundable tax credit equal to 20% of all eligible amounts paid after December 31, 2012 relating to activities that take place after that date will be gradually implemented as of the 2013 taxation year.
The credit applies with respect to each child that is, at the beginning of the year, at least 5 but not yet 16 years of age (or not yet 18 years of age if the child has a severe and prolonged impairment in mental or physical functions) and whose household income does not exceed $130,000. The eligible expense limit for each eligible child is set at $100 for the 2013 taxation year, and will be gradually increased by $100 per year until 2017. The limit is doubled for children with a severe and prolonged impairment in mental or physical functions.
For the purposes of the new credit, recognized activities, eligible expenses, physical activities and artistic, cultural, recreational and developmental activities are similar to those of the federal non-refundable Children’s Fitness Tax Credit and the non-refundable Children’s Arts Tax Credit.
Tobacco Tax Increases
The specific tax on tobacco products is increased as of November 21, 2012:
- the rate of 10.9 cents per cigarette is increased to 12.9 cents per cigarette;
- the rate of 10.9 cents per gram of loose tobacco or leaf tobacco is increased to 12.9 cents per gram;
- the rate of 16.77 cents per gram of any tobacco other than cigarettes, loose tobacco, leaf tobacco and cigars is increased to 19.85 cents per gram;
- the minimum rate applicable to a tobacco stick is increased from 10.9 to 12.9 cents per stick.
Liquor Tax Increases
As of 3 a.m. on November 21, 2012, the rates of the specific tax applicable to alcoholic beverages sold for consumption in an establishment will be increased to $0.82 per liter for beer and $2.47 per liter for all other beverages, while those applicable to alcoholic beverages sold for consumption other than in an establishment will be increased to $0.50 per liter for beer and $1.12 per liter for other beverages. The reductions in tax rates applicable to certain microbrewers and small-scale producers will be computed on the basis of these new rates.
Anti-Tax Evasion Measures
Stepping up its efforts to fight tax evasion, the government seeks to recover an additional $80 million in unpaid tax in 2013-2014, an additional $90 million in unpaid tax in 2014-2015 and an additional $100 million in unpaid tax as of 2015-2016. As such, the government will implement the following initiatives:
- The setting up of a specialized team responsible for the early detection of failures to file and the accelerated recovery of unpaid taxes owing;
- The development of a new audit strategy for individuals carrying on business to target taxpayers with a high risk profile;
Ongoing analysis of innovative tax inspection measures, such as sales recording modules, to target new sectors where the introduction of such measures could facilitate tax compliance and expedite investigations;
- The creation of new filing obligations for certain trusts
- Obliging employment agencies to obtain a certificate from Revenu Québec confirming that the agency has duly filed its tax returns and has no outstanding accounts with Revenu Québec.
The government also expressed its intention to work in collaboration with other government departments and to intensify its fight against tax evasion in areas such as the construction sector, illicit tobacco trade, and economic and financial crimes. It also expressed its intention to implement measures aimed at facilitating exchanges of information between government departments and organizations.
Indexing the Price of Heritage Pool Electricity
In the 2010-2011 budget, the government announced an increase in the average cost of heritage pool electricity of 1 cent per kilowatthour over five years. In the current budget, the government proposes to cancel this increase and to instead index the cost of heritage pool electricity, beginning in 2014, to the change in Québec’s total consumer price index.
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Your KPMG adviser can help you assess the effect of the tax changes in this year’s Québec budget on your personal finances or business affairs, and point out ways to take advantage of their benefits or ease their impact. We can also keep you abreast of the progress of these proposals as they make their way into law and help you bring any concerns you may have to the attention of the Québec Ministry of Finance.
Information is current to November 20, 2012. The information contained in this TaxNewsFlash-Canada 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.
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