On March 26, 2015, Minister of Finance Carlos Leitão tabled Quebec’s 2015 budget. The “Together Building Our Economy” fiscal plan anticipates a return to a balanced budget in 2015-16 after six years of deficits. This year’s budget includes several interesting tax changes, some of which correspond to recommendations in the Quebec Taxation Review Committee report released on March 19.
Recommendations of the Quebec Taxation Review Committee
The Quebec Taxation Review Committee (the “Committee”) was commissioned last year to review the current taxation system in Quebec and recommend changes to ensure adequate funding for public services while encouraging economic growth in the province.
The Committee made a total of 71 recommendations, 28 of which have already been implemented or relate to the introduction of a measure in this year’s budget. In addition, the government plans to further study 41 other recommendations, 18 of which are to be discussed with the federal government and other provinces. Of particular interest from a commodity tax perspective, the following recommendations are to be studied:
- a 1.025% increase to the QST rate, which would bring it from 9.975% to 11%;
- harmonization of the tax rate on insurance premiums with the QST rate;
- increasing the rate of tax on tobacco products by $1 per carton per year for five years;
- increasing the tax on alcohol by 7.8 cents per litre of beer each year for five years;
- increasing the fuel tax on gasoline and diesel by 1 cent per litre per year for five years; and
- initiating discussions with the federal government in order to obtain consent to administer registration requirements that would make it mandatory for businesses located outside Quebec, with no physical or significant presence in the province, to register for QST when making taxable supplies in Quebec.
However, while a few of these recommendations would be relatively easy to implement, none of them will be put into effect as a result of this year’s budget.
Commodity Tax Measures
Input Tax Refund Restrictions
The 2015 budget confirms the government’s intention, as agreed to in the Comprehensive Integrated Tax Coordination Agreement (“CITCA”) between the Government of Canada and the Government of Quebec, to phase out the input tax refund restrictions currently in place for large businesses in relation to certain types of expenses. As outlined in the CITCA, the QST system will be amended to phase out these restrictions in equal annual proportions, starting on January 1, 2018. Large businesses will be eligible to claim input tax refunds for QST payable in relation to restricted expenses that become payable as of January 1 at the rate of: 25% in 2018; 50% in 2019; and 75% in 2020. Note that these restrictions will be eliminated entirely, allowing full input tax refunds to be claimed, as of January 1, 2021.
Gasoline Tax in Border Regions
In Quebec, the general rate of gasoline tax is currently 19.2 cents per litre, but this rate is reduced in certain regions that border another Canadian province or a U.S. state, generally within a maximum distance of 20 kilometres from the border. In order to further bridge the taxation gap between Quebec and adjacent jurisdictions, the budget proposes an additional reduction in the gasoline tax rate in these regions. Effective April 1, 2015, the reduction of 1 to 4 cents per litre which currently applies in regions within 20 kilometres of New Brunswick or Ontario will be doubled (resulting in a reduction from 2 to 8 cents). Similarly, the reduction in regions bordering the U.S. will vary from 3 to 12 cents per litre, a 50% enhancement to the current reduction (2 to 8 cents).
Continued Measures Against Tax Evasion
The focus on the fight against tax evasion continues in this year’s budget, with the introduction of several new measures, building on some of the major initiatives announced in last year’s budget.
New initiatives announced in the 2015 budget include:
- the implementation of an agreement to share revenue from tax assessments related to criminal activity;
- additional actions to curb tax evasion in the construction sector; and
- the introduction of provisions to counteract aggressive tax planning based on the interposition of a trust or partnership.
With the assistance of these additional measures, Revenue Quebec’s total tax recovery target is $3.6 billion for 2015-2016, $39 million more than the revised forecast for 2014-15.
Payroll Tax Measures
Changes to the Quebec Training Tax
Employers with a Quebec payroll over $1 million are required to spend at least 1% of their Quebec payroll amount on employee training. If an employer invests less than 1% in training, then the difference must be contributed to the Quebec Workforce Skills and Development Recognition Fund (“WSDRF”). The WSDRF contributions paid by companies are sometimes referred to as the “Quebec training tax”.
The 2015 budget proposes to increase the payroll threshold for WSDRF purposes from $1 million to $2 million, as of 2015. This change should benefit companies that would otherwise have paid $10,000 to $20,000 per year in WSDRF contributions on their Quebec payrolls.
Health Service Fund
One of the recommendations of the Committee which has been implemented in the 2015 budget is the extension of the reduction in Health Service Fund (“HSF”) contributions announced in 2014 for small and medium businesses (“SMBs”). The budget announced a reduction in the HSF contribution rate from 2.7% to 2.55%, effective January 1, 2017 for SMBs in the service and construction sectors with a payroll equal to or less than $1 million. The rate will be further reduced to 2.40% and 2.25%, effective January 1, 2018 and January 1, 2019, respectively. In addition, SMBs with payroll between $1 million and $5 million will also see a gradual reduction based on their level of payroll.
Additional information on the 2015-2016 Quebec budget is available on the province’s web site at:
http://www.budget.finances.gouv.qc.ca/budget/2015-2016/index_en.asp