Quebec's Minister of Finance and the Economy, Nicolas Marceau, delivered the 2014 Québec budget on February 20, 2014 which aims at a balanced budget for 2015-2016. The budget does not include any general corporate or personal income tax rate changes
The impact of the 2008 financial crisis continues to affect economies throughout the world. The economic growth of 3% in 2013 indicates that the situation remains fragile, with demand slowing down in a number of countries and exports not as strong as expected in emerging countries
In the United States, with the diminished fiscal uncertainty and the strengthening of the private sector, economic growth is projected at 2.8% in 2014, up from 1.9% in 2013.
In Quebec, the government expects a gradual economic recovery, with GDP growth expected at 1.9% in 2014 following an increase of only 1.2 % last year. Economic growth is expected to be supported by private investments and exports.
The government is maintaining its deficit reduction targets announced in Fall 2013 for 2013-14 and 2014-15, with the ultimate target to return to a balanced budget in 2015-16. Nonetheless, the government has identified a $530 million shortfall that it will need to offset either by an increase in revenues or by a decrease in spending.
To reduce its deficit and return to a balanced budget balance, the government intends to maintain tight control on expenditure growth. Of note, program spending increased by 1.2% in 2013-14, the slowest rate in the past 10 years.
The government announced a downward revision to its own-source revenues by comparison to its Fall 2013 projections. Despite this revision, government revenue is projected to increase by 3.0% in 2013-14, 4.6% in 2014-15 and 4.3% in 2015-16. The Quebec government expects to be able to count on a significant upward revision of federal transfers.
Gross debt is expected to increase to $6.7 billion in 2013-14, mainly due to capital investments ($5.2B) and the budget deficit ($2.5 billion). Considering financial assets, net debt is expected to total $182B at the end of March 2014, or 49.8% of GDP. Gross debt would stand at 54% of GDP.
Highlights of Non-Tax Budget Measures
- The government intends to provide “access to efficient railway links, in particular to transport ore from the Labrador Trough to the Côte-Nord region”.
- The government intends to submit its transportation priorities to the federal government, especially for a $1 billion contribution to the light rail system for the Champlain Bridge.
- The government will support the construction of an indoor ice oval in Quebec City.
- The government is reviewing the terms and conditions of the investment-job pricing offer from a minimum of 15 milliwatts to 2 milliwatts .
- The government reaffirms its participation in the exploration activities on the Anticosti Island.
- The government will raise its financial participation in mining companies developing resources in Québec by using the $1 billion in capital from the Capital Mines Hydrocarbures fund.
- The government is investing $10M to develop the residual forest biomass sector.
- The parental contribution for childcare will be increased from to $8 (from$7) by September 2014, and to $9 the year after. An automatic indexation will be applied thereafter.
- A group of experts is suggesting « patient-based funding », a new resource-allocation based on the type and volume of care provided.
- The government is reaffirming its economic growth policy “Putting Jobs First”, announced in the Fall of 2013.
On June 7, 2014, the Minister of Finance and the Economy assigned to the Task Force on the Protection of Quebec Businesses the mandate to recommend measures to enable Quebec firms to better protect themselves from unwanted takeover bids and measures to foster the maintenance and development of head offices in Quebec.
TheTask Force asked KPMG-SECOR to provide examples of the mergers and acquisitions that affect Quebec corporations and the development of decision-making centers located in Quebec, and to review the types of advantages that stem from the presence of head offices.
The report of the Task Force was submitted to the Minister on February 10 2014 and is included in the documents tabled with the budget.
Quebec Business Corporations Act
The report contains recommendations proposing the following amendments to the Quebec Business Corporations Act
- Allow for the adoption of variable voting rights according to the length of time that the shares of corporations are held;
- Allow for the adoption of provisions to prohibit certain transactions by corporations subject to a takeover bid not approved by the board of directors.
The Task Force supports the proposal of the Autorité des marchés financiers to allow the board of directors of corporations that are subject to a hostile takeover bid to fully exercise their fiduciary duties and believes that the proposal, insofar as it is applied to all companies listed on the stock exchange that are reporting issuers in Canada, could restore balance between the initiator of the unsolicited takeover bid and the subject corporation. The Task Force recommends that Quebec should determine whether legislative and regulatory amendments might facilitate theimplementation of the Autorité's proposal.
Development and long-term survival of head offices
The report contains taxation recommendations including that Quebec should:
- Make a provision for more advantageous tax treatment that encourages the employees of corporations listed on the stock exchange to hold shares by deferring the taxation of the employees to the time of sale of the shares instead of the time of their acquisition.
- Grant a more favourable tax treatment of the gains on stock options than elsewhere in Canada to maximize the development of head offices and the attraction and retention of senior executives to Quebec or at least harmonize such tax treatment with the other Canadian provinces.
- Reassess the Quebec taxation system to allow the owners and major shareholders of a corporation to defer the taxation of the gain on the transfer of ownership of a corporation to another generation and introduce a measure that allows family trusts to defer the realization of the gain attributable to their significant investment in a corporation at the time of its sale rather that every 21 years, as long as the business remains active.
- In addition, the Task Force recommends to promoting the financial and operational participation of Quebec investment funds to facilitate the transfer of Quebec corporations to a new generation of Quebec owners and, consequently, to examine the requisite legislative and regulatory amendments.
To support its actions in the fight against tax evasion and step up recovery of the revenues owed to it, the government is announcing new initiatives aimed, in particular, at:
- Increasing controls, particularly in the construction industry;
- Improving revenue collection through the installation of sales recording modules (SRMs) in bars and resto-bars.
New requirements for private construction contracts of $25,000 or more
The government is announced that the requirements from Revenu Quebec for public contracts will also apply to private construction contracts of $25 000 or more. Penalties will apply if these requirements are not met.
The contractor will be required to obtain an attestation (valid for a period of 90 days) from Revenu Quebec and provide it to the recognized client. The recognized client will then be required to validate the authenticity of the attestation obtained from the contractor on Revenu Quebec's website.,
The government is announcing more audits of applications for QST registration to fight billing fraud.
To detect unreported work, including unreported overtime and unlicensed work, Revenu Quebec, the Commission de la construction du Quebec, the Régie du bâtiment du Quebec and the Commission de la santé et de la sécurité du travail will conduct more inspections and checks of large construction sites, new-construction sites and residential renovation sites in evenings and on weekends. The government will also provide workers more information on the negative effects of unreported work on their fringe benefits.
To fight tax evasion even more effectively, the government is announcing:
- Installation of sales recording modules in bars and resto-bars;
- Implementation of the attestation from Revenu Quebec for employment agencies for contracts of more than $2,500 starting in fall 2014.
The fight against tax evasion involves working with the penal justice, to recover unpaid amounts, build a sense of trust and fairness within the public and deter tax evasion. This leads to a substantial increase in the number of cases before the Quebec courts.
The budget proposes to increase case-management capacity in penal matters.
The budget announces that the Ministère de l'Emploi et de la Solidarité sociale intends to carry out more investigations into network fraud scams. Also the Ministère de l'Emploi et de la Solidarité sociale will continue to step up the fight against unreported work relative to employment agencies..
To expedite penal case management and enhance the efficacy of measures at the Ministère de l'Emploi et de la Solidarité sociale, the budget announces that the government will allocate an additional amount of $10 million a year in funding as of 2014-2015, to the spending budget of the Ministère des Finances et de l'Économie du Quebec.
The budget announces that the applicable rate for the purposes of the calculation of the tax credit for the acquisition of the shares of Capital régional et coopératif Desjardins will be reduced to 45% (from 50%) for shares acquired after February 28, 2014. Consequently, the maximum amount of this non-refundable tax credit will decline to $2,250 (from $2,500).
Where Capital régional et coopératif Desjardins redeems or purchases a share (including a fraction of share) less than seven years after it was issued, the person who purchased the share (the “taker”), or the person to whom such share was passed on to by inheritance must generally pay a tax, for the taxation year during which the redemption or purchase is made. This tax is equal to the amount obtained by applying, to the lesser of the specified portion of the amount paid by the taker to acquire the share and the price paid by the corporation for its redemption or its agreed purchase price by agreement, the percentage attributable to the number of days the share was not held.
To reflect the rate applicable for the purposes of calculating the tax credit to 45% (from 50%), the budget amends the tax legislation to stipulate that the applicable rate for obtaining the specified portion of the amount paid by a taker to acquire a share of Capital régional et coopératif Desjardins will correspond 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.
The budget also proposes the following modifications to an Act constituting Capital Régional et Coopératif Desjardins to increase the investments in territories facing economic difficulties:
- Recognition of RCMs outside resource regions facing economic difficulties;
- Increase in the amount of investments made by Capital régional et coopératif Desjardins in eligible entities and through a limited partnership, after February 20, 2014 and before January 1, 2018;
- Identification of territories facing economic difficulties;
- Preservation of the right of Capital régional et coopératif Desjardins to collect a maximum of $150 million for the capital-raising period beginning March 1, 2014 and ending February 28, 2015.
A qualified corporation that owns a hotel establishment, a tourist home, a resort, a bed and breakfast establishment or youth hostel located in Quebec (outside the Montreal and Quebec City regions) is entitled to a tax credit for a taxation year when its qualified expenses exceed a minimum threshold.
To foster the modernization of the tourism accommodation offering, the budget announces the replacement of the annual threshold of $50,000 with a onetime threshold of $50,000. Similar modification will be made to qualified partnerships.
This change will apply to taxation years of a corporation ending after February 20, 2014.
The budget announced the modification of Quebec's tax legislation and regulations to incorporate some of the measures announced in teh 2014 federal budget on February 11, 2014. These changes will be adopted only after the assent of the relevant federal statutes or the adoption of the relevant federal regulations and will apply on the same dates as those applicable to the corresponding federal measures.
The following measures will be incorporated in Quebec's tax legislation and regulations:
- Addition of certain expenses to the list of expenses eligible for the medical expenses tax credit;
- Introduction of a tax credit for volunteers participating in search and rescue activities;
- Measures relating to 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 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 by an estate;
- Donations of cultural property acquired under a gifting arrangement that is a tax shelter;
- Revocation or refusal of registration of organizations or associations that receive gifts from foreign states that support terrorism;
- 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 in the 2014 federal budget that are not proposed to be harmonized include
- the increase in the maximum amount of expenditures eligible for the adoption expense tax credit
- the extension of the mineral exploration tax credit for flow-through share investors
- the extension of the deferral period of gifts of ecosensitive land made by a corporation
- the addition of a specific anti-avoidance rule concerning tax withholding on interest payments
- rules relating to amateur athlete trust
- automatic determination of the GST/HST credit
- consequential amendments arising from the elimination of graduated rate taxation for certain trusts and estates
- rules on cap applicable to transfers of pension benefits to a registered retirement savings plan
The Quebec sales tax (QST) system will be modified to incorporate, as applicable, the federal measures relating to the GST/HST election for closely related persons and the measures seeking to strengthen compliance with GST/HST registration.
The budget also restates the previously announced harmonization decisions with the federal measures improving the application of the GST/HST in the health care sector.
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Your KPMG adviser can help you assess the effect of the tax changes in this year's Quebec 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 Quebec Ministry of Finance and the Economy .