November 26, 2012
Financial institutions and other businesses operating in Quebec will have to change many of their systems and processes to prepare for amendments to the Quebec Sales Tax (QST) effective January 1, 2013. Quebec released a bill on November 14, 2012 that confirms previously released information about the QST changes, which will further harmonize the QST rules with the federal GST rules. The bill also provides transitional measures that will help businesses comply with the new rules.
Your business may have to adjust its systems and processes for the QST changes if it:
- Is a financial institution doing business in Quebec
- Is QST registered
- Has an employee pension plan or is a pension plan
- Does construction work in Quebec
- Makes supplies to the federal or the provincial government.
|Financial services to become QST-exempt|
The most significant change for many entities is the change to the tax status of financial services from zero-rated to QST-exempt. Many proposed amendments are a direct result of this change. For example, businesses that supply financial services that will become QST-exempt effective January 1, 2013 will no longer be able to claim input tax refunds for QST paid on costs related to their financial services. These businesses should ensure that their suppliers issue their invoices no later than December 31, 2012 so they can be entitled to claim input tax refunds for QST paid on costs related to their currently zero-rated financial services.
Similar to the GST system, the QST amendments propose new rules for different types of financial institutions. Some of these rules apply specifically to financial institutions that qualify as selected listed financial institutions (SLFIs) while others apply specifically for non-SLFIs. As such, it is important for an entity to first determine whether it qualifies as a “financial institution” and second, whether it also qualifies as a SLFI.
Highlights of QST changes
The most significant changes included in more than 100 pages of proposed legislation in the bill are:
- The QST tax rate will increase to 9.975% (from 9.5%)
- The QST will no longer apply to the GST (i.e., QST will apply to the price not including the GST)
- Financial services will become QST-exempt supplies and financial institutions will no longer be entitled to claim input tax refunds for the QST paid related to their QST-exempt financial services
- The numerous rules for selected listed financial institutions under the GST system will now be included in the QST system, including new tax liability calculations and filing requirements
- The structure of pension plan rebates will be amended and the new QST rules for selected listed financial institutions will apply to some pension entities
- The federal and the provincial governments will pay the GST/HST and QST (effective April 1, 2013).
Despite the bill’s many provisions, some issues related to the upcoming QST changes are still outstanding.
Quebec to adopt proposed federal changes in the future
Quebec noted in its news release of November 14, 2012 that the bill (Bill 5) addresses the provisions that are current law in the federal Excise Tax Act (ETA). Quebec Bill 5 does not address proposed amendments to the ETA or any related proposed regulations, such as the draft financial institutions regulations of January 28, 2011. Quebec stated that it would adopt such upcoming federal amendments at a later date.
Although the QST law with the proposed new provisions will better parallel the GST law, some differences will likely remain. Businesses will have to continue to ensure they comply with both GST and QST requirements.
Inside this Issue
This TaxNewsFlash-Canada summarizes selected changes in the QST bill affecting:
- Most businesses
- All financial institutions
- Selected listed financial institutions
- Financial institutions that are not SLFIs
Tax rate and the tax base
Currently, the 9.5% QST applies to the price and the GST, resulting in an effective QST rate of 9.975%. The QST changes will remove the GST from the QST base but increase the QST to 9.975% (from 9.5%), effective January 1, 2013.
The change to the QST rate will require several other amendments affecting self-assessment requirements, new housing rebates, employee allowances, coupons, termination of agreements, seizures and repossessions and salvage, among other things.
The bill includes several transitional rules to determine the tax rate and the tax base for transactions that straddle the January 1, 2013 implementation date.
Generally, the new 9.975% QST rate will apply to the tax that becomes payable as of January 1, 2013, with some exceptions. However, the law provides several rules to determine when tax becomes payable depending on the nature of the supply and the type of transaction. Businesses should carefully review their operations to determine how to apply these new transitional rules based on their own facts and circumstances.
Businesses should carefully review their systems and their processes to make sure they address all the changes related to the new tax rate.
The QST pension plan rules will change significantly. The current 100%, 88%, and 77% rebate rates will be reduced to 33%. Similar to the federal GST/HST rules, some pension plans will no longer be entitled to rebates where listed financial institutions (FIs) made contributions above a particular threshold. The rebate calculations will significantly change for pension plans that qualify as selected listed financial institutions (SLFIs).
As many of the rules for SLFIs are currently in draft form in the federal legislation, Bill 5 does not provide all the related Quebec amendments. Other amendments should be released once the federal government adopts its final FI-related regulations.
A person that provides financial services that is registered for QST purposes and is not registered for GST purposes on January 1, 2013 will be required to cancel its QST registration.
Some non-residents of Canada that have registered for QST for drop shipment rules purposes and who are not registered for GST will also have to cancel their QST registration.
FIs registered for GST purposes that qualify as Quebec SLFIs (see below for details) will be required to register for QST purposes.
Businesses that are required to cancel their QST registration should carefully review and understand all the ramifications and possible options before the deadline for cancelling their registration.
Quebec proposes to amend the QST system to make QST reporting periods correspond with GST reporting periods. As such, if a listed financial institution has a QST reporting period that includes January 1, 2013 that does not match its GST reporting period, the QST reporting period will end on December 31, 2012. A new QST reporting period will begin on January 1, 2013 to match the listed financial institution’s GST reporting period and will end on the same date as that GST reporting period.
QST treatment of financial services
One of the most important changes resulting from the further harmonization of the QST rules with the GST rules is that financial services, which are currently QST zero-rated supplies, will generally become QST-exempt supplies. Financial services supplied to non-residents of Canada may remain QST zero-rated.
As a result of these changes, FIs that could have previously claimed input tax refunds (ITRs) for QST paid in making supplies of zero-rated financial services will no longer be entitled to ITRs. As such, their costs may increase significantly. FIs will no longer be entitled to claim ITRs for any QST that becomes payable after December 31, 2012 even if the supplies were acquired before January 1, 2013.
Who is an FI for QST purposes?
The QST amendments adopt the federal ETA’s definitions of FIs. Under these rules, a person is an FI if it is:
- A listed FI (e.g., a bank or insurer)
- A de minimis FI (i.e., an entity that has a certain amount of financial income in the prior fiscal year).
Certain entities that are not listed FIs could become de minimis FIs for QST purposes by virtue of their income from interest and dividends, as well as other financial services, depending on the situation. These FIs will become subject to the same complex rules for FIs for QST purposes that apply for GST purposes as a result of the new QST exemption for financial services.
The QST amendments include many provisions to take into account that most financial services will become QST-exempt. The amendments address many areas such as allocation between taxable and exempt supplies for claiming ITRs, self-assessment rules and change-of-use rules.
Financial institutions compensation tax
Quebec’s 2013 budget released on November 20, 2012 announced changes to the measures affecting the financial institutions compensation tax included in Bill 5. The budget proposes to increase the rates that are effective January 1, 2013 and extend the application period of this “temporary” compensation tax as illustrated in the table below.
|Financial Institutions Compensation Tax|
Rate for January 1, 2013 – March 31, 2014
Proposed Rate for January 1, 2013 – March 31, 2019
|Wages paid by bank, loan corporation, trust corporation, corporation trading in securities
|Wages paid by credit union
|Wages paid by other persons
FIs need to understand how the proposed new compensation tax rates and the loss of ITRs will affect their budgets and the pricing of their products.
Change-of-use rules and basic tax content
The QST will adopt the GST rules that deal with the change-of-use for capital property of FIs.
The QST amendments also propose similar rules to those in the ETA for entities that become or cease to be FIs, which will cause these entities to be subject to the change-of-use rules.
The change-of-use rules apply when an FI decreases or increases the use of a capital property in the course of its commercial activities that may result in a payment or refund of tax. Quebec has proposed measure to alleviate the potential significant liability for FIs in Quebec, due to the change of tax status of their financial services supplies. FIs should carefully review and understand these rules.
The change-of-use rules use the concept of “the basic tax content” to determine the payment or refund of tax. The QST amendments also incorporate the ETA’s definition of basic tax content. The changes generally take effect on January 1, 2013. As such, FIs may need to track GST/HST separately from QST paid on capital property.
Election to treat supplies as financial services
For GST purposes, corporations that are part of a closely related group that includes an FI can elect to deem some supplies made between members of the group to be financial services (known as a “section 150 election”).
The proposed QST amendments incorporate this election. As such, corporations that make this section 150 election for GST purposes will be deemed to have also made that election for QST purposes.
Corporations that want to make the election for QST purposes after December 31, 2012 will need to file the election.
GST/HST annual information return
The GST system requires FIs (except certain SLFIs) to file form GST111 “Financial Institution GST/HST Annual Information Return” (GST111 return) annually.
The QST amendments propose that qualifying FIs will also be required to file a separate annual information return for QST purposes.
The QST amendments include related penalties similar to those in the GST system, which provides for a maximum penalty of $1,000 for failure to provide amounts or misstating amounts on a GST111 return. The penalty applies for each amount that is not provided or each misstatement (i.e., a penalty of up to $1,000 for each line on the return).
Not all entities realize they are FIs for QST purposes. With the penalties on the Quebec annual information return and all of the other compliance issues for FIs in Quebec, it is more important than ever that entities know whether they are FIs and if so, comply with all of these rules.
Quebec selected listed financial institutions
Many entities have become SLFIs for GST purposes based on the proposed federal regulations of January 28, 2011. These entities include many pension plans, mutual funds, segregated funds, other types of investment plans and certain insurance companies.
We expect similar amendments to be made for QST purposes when the federal government enacts the January 28, 2011 regulations. As a result, some entities that would generally be SLFIs for GST purposes will be SLFIs for QST purposes provided that they would have a permanent establishment in Quebec based on the QST proposed amendments as well as per the federal draft FI regulations. We expect these amendments to the legislation and regulations to apply retroactively to January 1, 2013.
Input tax refunds and the special attribution method
Similar to the federal rules for the provincial component of the HST, Quebec SLFIs will not be entitled to claim ITRs. Instead, the calculation of the QST liability or refunds will be part of the Quebec special attribution method (SAM) formula, which appears to be similar to the federal SAM formula.
For GST purposes, SLFIs calculate their liability for the provincial component of the HST under the federal SAM formula in the ETA, as follows:
Based on the QST amendments, the Quebec SAM formula will be as follows:
“A - B” -> same as ETA
C -> same as ETA but Quebec to be treated as an HST province
D -> QST rate
E -> GST rate
F -> QST payable by the SLFI
G -> is the positive or negative prescribed amount.
The calculation of the “G” amount should be included in upcoming Quebec regulations. It is still unclear how the Quebec SAM formula will apply to the current restricted ITRs. If they are part of the “G” adjustments, SLFIs will need to change the way that they track the QST on supplies subject to the restricted ITR rules.
A SLFI that has made a section 150 election to deem certain supplies to be financial services normally would also make a second election that would reduce the amount payable under the federal SAM formula. The QST amendments include similar rules.
This second election will not need to be made for QST purposes, provided that it was already in place for GST purposes. If this election is not in place as of January 1, 2013, the SLFI will be required to make the election in both the GST/HST and QST systems.
Filing final returns
For reporting periods that end after December 31, 2012, a SLFI (registered or not registered) will be required to file a final return as well as interim returns, if necessary. Based on the QST amendments and the GST system, there would appear to be two final returns for SLFIs: the form GST494 for GST/HST purposes, and a final return for QST purposes.
Based on previous releases, the CRA will administer both GST/HST and QST for SLFIs. We understand that the two final returns may be merged into a single form. However, even in the case of a single merged final return, it appears that FIs will still have to track in their system all related QST information in order to identify the QST component on the return.
SLFIs that are registered for GST purposes that will allocate to Quebec an amount in element “C” of the SAM formula will be required to register for QST purposes as of January 1, 2013.
Input tax refund allocation
The proposed QST amendments have generally incorporated the special GST rules for FIs’ entitlement to claim input tax credits (ITCs) related to their commercial activities.
In general, FIs are required to develop ITC allocation methods that deal with the following types of inputs:
|ITC Allocation Methods|
||Type of Input
||Percentage of ITCs based upon purpose of acquisition and actual use as distributed between commercial and exempt activities|
||100% use in commercial or exempt activities
||Full ITCs/No ITCs|
||Input that can be attributed to certain activities
||Percentage of ITCs based upon distribution between commercial and exempt activities|
||Overhead costs that cannot be attributed to certain activities
||Percentage of ITCs based upon FI’s overall commercial/exempt ratio|
In certain cases where an FI is using a particular allocation method for GST purposes, the FI will be required to use the same allocation method for QST purposes.
FIs will be required to use the allocation method in their first return of a fiscal year. FIs will only be able to change their method if the Minister consents to the alteration.
The QST amendments also incorporate several other GST rules that affect an FI’s allocation method.
As a result of all these changes, FIs operating in Quebec will have an added compliance burden. FIs will need to determine what class of inputs each of their QST-taxable expenses falls into for purposes of claiming ITRs, if applicable. While the system of allocating between taxable and exempt supplies will be the same under the QST and the GST systems, the allocation between taxable and exempt activities may differ in Quebec from the allocation across the rest of Canada.
Self-assessment for financial institutions
Expenses incurred outside Canada
The QST amendments include self-assessment rules similar to the special GST rules for FIs that are based on complex rules linked to income tax-deductible expenses of Canadian FIs that are incurred outside Canada.
The QST amendment also include special rules for Canadian FIs to deal with expenses incurred by branches outside Canada that are still deductible in Canada.
These QST rules will apply to FIs that are subject to the same rules for GST purposes and are residents of Quebec. The QST amendments include rules to deem certain qualifying taxpayers to be residents of Quebec.
The rules apply to the taxation on fiscal years that end after December 31, 2012.
The tax would be payable at the time the income tax returns are to be filed (i.e., six month after the end of the fiscal year).
Quebec SLFIs, as opposed to other FIs, will not be required to self-assess QST under these rules.
Expenses incurred inside Canada
Since financial services will become QST-exempt supplies, FIs that are not SLFIs should be aware that other self-assessment rules could apply to them. This includes the self-assessment requirements related to certain goods and services acquired in another province to the extent that they are acquired for consumption, use or supply 10% or more in Quebec.
Financial services related to commercial activities
The GST system allows a GST/HST registrant that is not an FI to claim ITCs for inputs to the supply of financial services that are related to the person’s commercial activities.
The QST amendments propose to allow similar treatment for a QST registrant that pays QST on inputs to the supply of financial services that are related to the person’s commercial activities.
This provision allows entities that are not FIs — and generally engaged in commercial activities — to claim ITRs for QST paid on costs incurred in the supply of financial services that are related to their commercial activities. Prior to January 1, 2013, this provision is not necessary for QST purposes as these supplies of financial services are currently zero-rated.
For example, a manufacturer who incurs QST-taxable costs while obtaining a loan to finance its taxable manufacturing operations should be entitled to claim an ITR for the QST paid, under the QST amendments.
On the other hand, an FI that incurs QST-taxable costs while obtaining a loan to finance its taxable activities will no longer be entitled claim an ITR for the QST paid on the costs.
Holding companies are generally not considered to be engaged in commercial activities. Therefore, absent a special provision, holding companies cannot claim ITCs for GST/HST paid on costs related to the ownership of shares or indebtedness of other corporations.
However, the GST system generally allows a parent of a corporation engaged exclusively in commercial activities to register and claim ITCs for the GST paid on costs relating to the parent’s ownership of shares in the subsidiary or ownership of debt of the other corporation when the corporations are related or there is a takeover by the parent company.
The proposed QST amendments incorporate similar rules for QST paid on costs relating to the parent’s ownership of shares in the subsidiary engaged exclusively in commercial activities.
Under existing QST rules, a holding company is generally entitled to claim ITRs for QST paid on costs related to the ownership of shares because financial services are QST zero-rated. Under the QST amendments, a holding company will only be entitled to ITRs based on the same type of rules that are available for holding companies for GST purposes.
Similar to the GST system, some holding companies will be entitled to register for QST voluntarily.
QST rebates for supplies used in other provinces
For GST purposes, investment plans and segregated funds that are not SLFIs and that acquire supplies in a province for use in another province with a lower rate of provincial component of the HST (PVAT) (or no PVAT) are entitled to a rebate of the difference in the PVAT rates. The QST amendments propose a similar rebate.
Other rebates may also apply to non-SLFIs to allow a QST rebate for certain supplies acquired in Quebec for consumption or use in another province.
|Download KPMG’s new Tax Hub Canada app|
KPMG’s free Tax Hub Canada App for iPads and Blackberrys provides timely, convenient tax news and tax rates to help you respond to changes in tax rules and regulations. Download the app today.
We can help
Your KPMG adviser can help you manage the impact of these and other federal or provincial indirect tax deadlines and changes that may affect your business. We can help you manage your indirect tax compliance obligations in all relevant jurisdictions and also help you ensure that you are not missing refund opportunities. For details, contact your KPMG adviser.
Information is current to November 22, 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.
KPMG LLP, an Audit, Tax and Advisory firm (kpmg.ca) and a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative (“KPMG International”). KPMG member firms around the world have 145,000 professionals, in 152 countries.
The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such.
KPMG's Canadian Web site is located at http://www.kpmg.ca/
© 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.