For many years, the Quebec government has requested compensation from the federal government for essentially harmonizing their sales tax roughly 19 years ago. After several years of bickering, the federal government and Quebec have finally put their differences aside, allowing the Quebec Sales Tax (QST) to become further harmonized with the GST/HST.
Under an agreement announced today, and 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. In exchange for this agreement, the federal government will provide transitional funding to Quebec totaling $2.2 billion. This funding will be paid in two instalments, with the first instalment totaling $733 million to be paid on January 1, 2013 (the implementation date), and the second instalment to be paid exactly one year later in the amount of $1.467 billion.
Basic Elements of the QST Harmonization
As it exists today, the QST is collected on an amount that includes the GST. This creates an element of tax being collected on tax. Under this sales tax harmonization agreement, there will be no more tax on tax, as the GST will be removed from the QST tax base. The goal for this further harmonization is to ensure that the tax outcomes produced by the QST legislation are almost identical to those produced by the GST/HST rules, with some limited exceptions. This will be achieved for the most part by making the QST tax base similar to the GST/HST tax base. In addition, various adjustments to current QST definitions and administrative procedures will help in the realization of this goal.
Going forward, Quebec has agreed to change the QST legislation to reflect any changes that are made by the federal government in relation to the GST/HST legislation. These QST changes will typically take effect on the same date as the corresponding change for GST/HST purposes. However, where this is not the case, the QST change is to take place no later than 60 days after the effective date of the GST/HST legislative change.
In many areas, the QST operates much differently than does the GST/HST. In order for harmonization between the GST and QST to be achieved, the following changes to the QST legislation will be required:
- The tax status of financial services for QST purposes will be changed from zero-rated to exempt;
- In order to avoid some instances of non-taxation and double taxation, there will have to be certain adjustments to the QST place of supply rules (i.e., the rules that determine if QST applies to a supply);
- The input tax refund restrictions currently applied to purchases by large businesses of telecommunications, meals and entertainment (subject to the 50% income tax limitation), fuel for licensed road vehicles, licensed road vehicles and electricity/gas not used in manufacturing will be phased out by January 1, 2021;
- Effective April 1, 2013, both the Quebec and federal governments will agree to pay both GST and QST on their purchases; and
- Quebec will implement municipal rebates that operate similarly to those in place for GST purposes by January 1, 2014.
Unlike the harmonization that has taken place in the existing participating provinces, under this agreement, the QST will not cease to exist. The QST will continue to be charged on invoices for supplies considered to be made in Quebec, separately from the GST. In addition, Quebec is empowered to change the rate of QST where it feels it is necessary. Similar to the harmonization that has recently taken place in other jurisdictions, Quebec is permitted to have its tax base differ from the GST tax base, as long as the differences do not exceed 5% of the GST tax base for the province. At this time, Quebec has agreed to have 24 tax base differences in relation to the existing GST/HST legislation, including:
- Zero-rating of motor vehicles acquired for resupply and the collection of the QST on retail purchases of motor vehicles by the SAAQ;
- Zero-rating of tobacco, books, diapers for children and items used for bottle or breast feeding;
- Zero-rating of passenger transportation services from Quebec to another Canadian province where there is a transfer to another conveyance outside of Canada;
- Special measures that apply to operators of restaurant establishments;
- Special measures that are in place for clothing manufacturers; and
- Zero-rating of inter-provincial air ambulance services.
As a final note, further QST harmonization requires that a detailed agreement to govern the rights and obligations of both Quebec and the federal government be created. This agreement will be known as the Canada-Quebec Comprehensive Integrated Tax Coordination Agreement (CITCA) and will be finalized by April 1, 2012. The final CITCA will likely spell out further details of this unique sales tax harmonization announcement.
In the meantime, additional information about the QST harmonization may be found at the Department of Finance QST Harmonization webpage or by calling the Ryan TaxDirect® line at 1-800-667-1600.