On March 30, 2010, the Quebec Minister of Finance, Raymond Bachand, announced that, effective January 1, 2012, the QST rate will increase from 8.5% to 9.5%. Since QST is applied on the GST-included consideration for a supply, the effective QST rate on the consideration for taxable supplies will change to 9.975% from 8.925%.
General Transitional Rules
Generally, taxable supplies of goods and services will be subject to the 9.5% QST if the consideration for the supply becomes payable after December 31, 2011. In addition, the new QST rate will apply to any portion of the consideration for such a supply that becomes due after December 31, 2011, without having been paid before January 1, 2012. In many cases, this means that the invoice date will determine the applicable QST rate, unless payments are made before that date.
For example, if an invoice, dated November 15, 2011, is generated for the sale of computer hardware with payment terms of net 60, QST at the rate of 8.5% should be charged on the supply, since QST is payable as of the invoice date, which is before January 1, 2012. Note that the date the tax became payable (i.e., the invoice date) is earlier than the actual payment date.
However, complications under this general rule can arise when customers make prepayments, or when installment payments are made over a period that straddles January 1, 2012.
For example, suppose Company A contracts with Company B to produce a mould for use by Company A in November 2011. Under the written agreement, Company A must make six equal monthly payments from November 2011 to April 2012, and possession and ownership of the mould will be transferred in April 2012. QST at the rate of 8.5% will apply to the monthly payments required to be made before January 1, 2012. However, payments required to be made on or after January 1, 2012 will be subject to QST at a rate of 9.5%.
On the lease or licence of taxable tangible and intangible personal property, QST at 9.5% will apply to the consideration for a lease interval in respect of a lease, licence or similar arrangement that becomes due after December 31, 2011 and is not paid before January 1, 2012.
Specific Transitional Rules
The general transitional rules above apply to most purchases; however, there are certain circumstances where the transitional rules may differ. Some of these are described below.
Real Property
QST at 9.5% applies to the consideration for the sale of taxable real property (other than residential housing) pursuant to a written agreement concluded after December 31, 2011, where both possession and ownership of the property is transferred on or after January 1, 2012. It is particularly interesting to note that if a written agreement is concluded prior to January 1, 2012, with the transfer of possession and ownership occurring subsequent to December 2011, QST at 8.5% will apply to the transaction. This position has been confirmed through conversations with Revenue Quebec. This position also appears to create an incentive for certain purchasers of taxable real property to sign such agreements before January 1, 2012 in order to take advantage of the lower QST rate.
As a reminder, QST on all taxable sales (as opposed to leases, licences, or other similar arrangements) of real property is generally not collected by the vendor; instead, the tax is self-assessed and remitted by the purchaser where the recipient of the supply is a QST registrant or the supplier is a non-resident of Quebec. These rules are referred to as the “reverse collection rules”.
For leases of real property, the rules are similar to the general rules discussed above for the lease or licence of tangible and intangible personal property. QST at 9.5% applies to the consideration for a lease interval in respect of a lease, licence or similar arrangement that becomes due after December 31, 2011 and is not paid before January 1, 2012.
Continuous Supplies
“Continuous supplies” are goods or services provided through a wire, pipeline or a similar conduit, or satellite or other telecommunications facility, such as electricity, gas, cable and telephone services. QST at 9.5% applies to continuous supplies where the supply is delivered after December 31, 2011, unless the supplier cannot reasonably determine the actual delivery dates of a continuous supply for a period which straddles the effective date of the rate change. In this case, the consideration for the supply will be prorated based on the number of days in the period to which the consideration is applicable.
For example, if the quantity of electricity supplied prior to and after the QST rate change cannot be determined on an invoice for electricity services billed from December 17, 2011 to January 15, 2012, QST at 9.5% would apply to 50% of the amount payable, based on a prorated period of 15 out of 30 days billed on the invoice.
This rule only applies where the supply straddles the implementation date of the rate change.
Timing of Liability
Quebec has stipulated various rules to ensure QST is collected in a timely manner by clarifying the date on which QST is to be considered payable. For example, where there is an undue delay in issuing an invoice to a customer, QST is deemed payable on the day that the invoice would have been issued had there not been a delay. Also, if either the date of an invoice or the payment date under a written agreement is earlier than the date on which the invoice is issued, QST is payable on the earlier date.
Override Rule
The override rule stipulates that if QST is not otherwise payable by the last day of the calendar month after the calendar month in which any of the following events takes place, QST becomes payable on that day:
- in the case of a sale of tangible personal property (other than a sale referred to below), the buyer acquires ownership or possession of the property;
- in the case of a sale of tangible personal property on approval, consignment, sale-or-return basis or similar terms, the buyer acquires ownership of the property or re-supplies it to someone other than the seller; or
- in the case of a supply under a written agreement for construction, renovation, alteration or repair of real property, or of a ship or other marine vessel when the work is reasonably expected to last more than three months, the work is substantially completed.
For example, a customer in Quebec may have entered into an agreement to purchase production machinery in November 2011. The customer actually receives ownership and possession of the machinery in December 2011, but will not receive an invoice for payment until November 2012. No payments will be made by the customer before November 2012. Under this scenario, the override rule stipulates that QST is considered payable at the end of January 2012. As a result, QST at the rate of 9.5% applies to the sale, since this date is after January 1, 2012.
Further QST Rate Increase in 2013
Under an agreement to take effect on January 1, 2013, the GST/HST and QST rules and tax bases will become more harmonized in an effort to reduce the administrative burden that businesses currently face when forced to comply with two sets of rules. Since QST is collected on an amount that includes GST, the effective rate of QST at the time of the January 1, 2012 rate increase will be 9.975%. However, as of January 1, 2013, QST will apply on the value of consideration for the supply excluding GST. To ensure that there is no impact on the QST payable by taxpayers at the time of further harmonization, Quebec has indicated that the QST rate will increase to 9.975% from 9.5%. Without this increase, Quebec would face declining tax revenue from the QST.
Employee Expense Reimbursements and Allowances
Expense Reimbursements
Revenue Quebec has released the new factors and percentages that may be used by QST registrants to calculate input tax refunds on reimbursements to employees, partners or volunteers, in light of the QST rate increases to 8.5%, effective January 1, 2011, and 9.5%, effective January 1, 2012.
Large businesses may use a specified percentage applied to expense amounts reimbursed (or allowances paid) to employees, members or volunteers. This method, which was formerly referred to as the “4.1% method”, has been renamed the “LB simplified method”. For expenses incurred by employees after December 31, 2010 and before January 1, 2012, the specified percentage is 4.5%, and will increase to 5% for expenses incurred after December 31, 2011. Please note that, although an employer is deemed to have paid QST at the time the reimbursement is paid to the employee under the legislation, input tax refunds for all expense reimbursements paid in relation to expenses incurred by employees prior to January 1, 2012 should be claimed using a factor of 4.5% — even if the employer pays the employee in January 2012 or later.
In addition, a specified factor may be applied to calculate input tax refunds on reimbursed expenses for small and medium-sized businesses (“SMBs”), as well as the partial rebates available to charities, qualifying non-profit organizations and selected public service bodies. Previously, this method was known as the “7/107th method”, but is now referred to as the “SMB simplified method”. For expenses incurred by employees after December 31, 2010 and before January 1, 2012, the SMB simplified factor is currently 8/108, and will increase to 9/109 for expenses incurred after December 31, 2011.
Below is a link to the Revenue Quebec website that summarizes the simplified methods discussed above:
http://www.revenuquebec.ca/en/centre-information/nf/2010/2010-12-01.aspx
For example, suppose an employee incurred hotel and meal expenses while on a business trip to Quebec in December 2011, and submitted an expense report to the large business employer on December 31, 2011 for the reimbursement of these expenses. The employer made a cheque available to the employee for these expenses on January 10, 2012. Since the employee incurred these expenses prior to January 1, 2012, the employer would apply the 4.5% large business simplified method to the expense reimbursement paid on January 10, 2012 in order to determine its input tax refund amount.
Employee Allowances
In many cases, businesses are also able to claim input tax refunds for allowances paid to employees, partners or volunteers. Where an input tax refund can be claimed on an allowance, one of two factors may be used to calculate the input tax refund. For allowances related to expenses incurred by employees on or after January 1, 2012, the factor is 9.5/109.5 (previously 8.5/108.5) of an allowance that is used for supplies eligible for input tax refunds, or 5% (previously 4.5%) for allowances paid through employee expense reports of large businesses that meet the conditions to use the LB simplified method.
For example, if an employee submits an expense report to the employer on January 3, 2012, and it includes a mileage allowance (e.g., at $0.50/km) for a business trip to Gatineau, Quebec on December 20, 2011, the 8.5/108.5 or 4.5% should be applied to the allowance to calculate the input tax refund for the employer, since the employee incurred the related expense prior to January 1, 2012. The new factors of 9.5/109.5 or 5% would apply to a similar allowance paid in relation to business travel after December 31, 2011.