On May 31, 2012, the Quebec Ministry of Finance (“Quebec Finance”) released an Information Bulletin outlining “Changes to Québec’s Tax System Pursuant to the Undertakings to Harmonize It with the Federal Tax System Applicable in 2013”. The long-titled document provides further details on the changes that will be made to the QST system in order to further harmonize it with the GST/HST. The announced measures, most of which will take effect on January 1, 2013, primarily relate to the removal of GST from the QST base, changing the tax status of financial services from a zero-rated to an exempt supply, and replacing the existing QST and GST/HST exemptions for the federal and provincial governments with a rebate mechanism.
The bulletin also provides additional information on the partial elimination of the compensatory tax on financial institutions, as a result of the exemption of financial services, as well as other minor changes designed to bring more consistency to the QST and GST/HST systems.
Removal of GST from the QST Base
Quebec Finance has confirmed that, effective January 1, 2013, GST will be removed from the QST base. To prevent any provincial revenue loss as a result of this change, the QST rate will be increased to 9.975% (i.e., the current effective rate), as of the same date.
The bulletin clarifies how to determine which QST rate (i.e., GST-included or excluded) should be applied to supplies of movable (i.e., tangible personal) property, services and immovables (i.e., real property), based on the timing of liability rules currently in an Act respecting the Québec sales tax (“QSTA”). Quebec Finance acknowledges that, as a result of the QST rate change, certain factors and formulae used in the QSTA will have to be adjusted to reflect the new rate.
Making Financial Services Exempt Supplies
One of the most significant changes included in Quebec’s further harmonization plans is the treatment of financial services. Previously zero-rated, supplies of financial services will become exempt as of January 1, 2013, with the result that suppliers of such services will no longer be entitled to full input tax refunds for QST paid in relation to goods and services acquired for consumption or use in those activities.
The exemption of financial services will also necessitate the adoption of many of the specialized rules currently in place for financial institutions under the Excise Tax Act (“ETA”) for QST purposes, including:
- input tax credit/refund calculation and allocation methods, including the special attribution method calculation for selected listed financial institutions;
- elections for transactions within a closely related group that includes a financial institution;
- special rules regarding imports of services and intangibles; and
- specific registration, filing and reporting requirements.
Conversely, certain existing QST rules that were required because of the zero-rated status of financial services will be repealed.
A set of transitional rules will be provided to facilitate the change in the tax status of financial services, and the bulletin provides further details on how those rules will operate. Beyond the basic principle that QST registrants will not be permitted to claim input tax refunds for QST that becomes payable on or after January 1, 2013 (i.e., the “implementation date”) for goods and services acquired in carrying out the supply of exempt financial services, specific transitional rules will be put in place to deal with issues arising from the potential change in use of capital properties.
Specifically, where capital property is used primarily in the course of commercial activities prior to January 1, 2013, and, solely as a result of the exemption of financial services, a registrant ceases or reduces its use of the property in commercial activities, the existing change in use rules under the QSTA would trigger a recapture of the input tax refunds claimed in respect of such properties. To prevent this unintended consequence of the change in tax status of financial services, transitional provisions will be introduced to ensure that businesses supplying financial services are not put at a disadvantage by Quebec’s further harmonization measures.
For the most part, these transitional rules will operate by deeming a registrant to have made, immediately prior to January 1, 2013, a supply of the capital property by way of sale for no consideration, where the registrant uses the property in the course of its commercial activities prior to that date. At the same time, the registrant will be deemed to have received the property (by way of sale) for use other than as capital property.
A variation in the transitional rules will apply in cases where the registrant is a financial institution using movable property with a value of more than $50,000 as capital property primarily in the course of its commercial activities, or the registrant is using an immovable as capital property. In such cases, the registrant will be deemed to have made the supply and acquisition of the property by way of sale and to have collected and paid tax equal to the basic tax content of the property at that time. However, the registrant will not be required to include the deemed tax collected in its net tax calculation. Note that, unlike the existing QST change in use rules, the latter transitional rules will also apply to insignificant (i.e., less than 10%) changes in use. In addition, to prevent input tax refunds from being recovered on capital properties subject to these rules (i.e., through a further change in use or disposition on or after January 1, 2013), the basic tax content calculation for such properties will be adjusted to exclude QST payable prior to the implementation date.
Registration and Reporting Requirements
Recognizing that certain entities may currently only be registered for one of GST/HST or QST, due to the different tax status of financial services under both systems, Quebec Finance has advised that suppliers of financial services which are registered for QST, but not GST/HST, purposes, and will no longer be required to be registered for QST purposes once financial services become exempt supplies, must request cancellation of their registration as of January 1, 2013. While this cancellation will not trigger any recapture of input tax refunds, it will require an adjustment to the calculation of the basic tax content of any capital properties held immediately prior to the cancellation of registration.
Similarly, Quebec Finance realizes that some listed financial institutions are likely registered for GST/HST purposes, but are currently not required to register for QST, since they do not have a permanent establishment (deemed or otherwise) in Quebec. However, with further harmonization, the special attribution method will also apply, for QST purposes, to listed financial institutions with activities in Quebec and another province. Thus, a financial institution in this situation may be deemed to have a permanent establishment in Quebec and, where already registered for GST/HST, may be required to register for QST.
In addition, certain harmonization measures will be introduced to help simplify the administration of the two separate tax systems and bring the QST rules more in line with those in use for GST/HST purposes. Proposed changes include:
- requirements for QST reporting periods of listed financial institutions to be consistent with those for GST/HST purposes, as of January 1, 2013;
- a requirement for financial institutions to use the same allocation method to determine input tax refunds as that used to calculate input tax credits for GST/HST purposes;
- replacing the existing QST rebates for registered pension plan entities (i.e., at 100%, 88% and 77%) with a single rebate of 33% for claim periods beginning on or after January 1, 2013;
- new QST elections for transactions within a closely related group (as redefined) that includes a listed financial institution, as well as deeming provisions to ensure that persons who have made such elections under the GST/HST system also do the same for QST purposes;
- an annual QST information return for financial institutions;
- a QST amendment to adopt the GST/HST treatment of imported goods supplied before release from customs, under which such supplies will be deemed to have been made outside of Canada; and
- changes to limit the circumstances under which optional QST registration will be permitted for non-residents of Quebec.
Rebate for Taxes Paid by Governments
As part of their agreement on further harmonization, effective April 1, 2013, the federal and Quebec governments will both pay GST/HST and QST on their purchases of taxable supplies, with the potential for a recovery of the tax paid through a new rebate mechanism.
Partial Elimination of Compensatory Tax
In light of the impact that exempting financial services from QST will have on a financial institution’s ability to claim input tax refunds, and the resulting effect on Quebec’s finances, the government has decided to partially eliminate the compensatory tax on financial institutions. Effective January 1, 2013, the compensatory tax on financial institutions will no longer apply to paid-up capital, and the tax rate applied to other parts of the tax base will be reduced to:
- for amounts paid as wages, 1.9% for banks, trusts, loan corporations or securities traders, 1.3% for savings and credit unions, and 0.5% for any other financial institutions (excluding insurance corporations and certain insurance funds); and
- 0.2% for insurance premiums and amounts related to insurance funds.
Transitional rules will determine the amount of tax payable, based on proration, where the taxation year of a financial institution includes January 1, 2013.
For further information on the announced changes, the entire Information Bulletin may be found on the Quebec Finance web site at:
Quebec Finance Information Bulletin 2012-4