New Year’s Day undoubtedly means different things to different people. For many, it marks the dawn of new beginnings, an opportunity to set goals, roll out new action plans or commence the implementation of existing plans. Indeed, this year, Revenu Québec and persons who have transactions in Québec will not be left out of this euphoria.
Two very interesting changes to Québec’s sales tax system will occur on January 1, 2019. First, the recovery rate for Québec sales tax (QST) paid by large businesses on restricted expenses will increase from 25% to 50% and, second, the first phase of the new QST specified registration system will be rolled out. In this publication, we will discuss both changes and highlight key details of concern to businesses.
Phasing Out Large Business Input Tax Refund Restrictions ─ 50% Recovery Rate Starts January 1, 2019
Large businesses now have more reason to celebrate the new year, as increased input tax refunds (ITRs) will become available on their restricted expenses. Effective January 1, 2019, the recovery rate on large business restricted expenses will increase to 50% of the QST paid for the period from January 1, 2019 to December 31, 2019. This represents a 100% increase from the current 25% recovery rate which has been in effect for 2018.
Large business ITR restrictions
Large businesses are generally not permitted to claim full input tax refunds (ITRs) for QST paid on the following specified expenses:
- telecommunication services (excluding internet access and toll-free telephone services);
- meals and entertainment expenses (subject to the 50% deductibility limitation under the Taxation Act);
- energy not used to manufacture goods for sale;
- licensed road vehicles under 3,000 kilograms (as well as associated parts and certain services); and
- fuel (other than fuel oil) for use in qualifying licensed road vehicles.
ITRs become available when the tax is paid or becomes payable. QST generally becomes payable by a recipient on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due. The consideration, or part thereof, for a taxable supply is deemed to become due on the earliest of:
- the earlier of the day the supplier first issues an invoice in respect of the supply for that consideration or part and the date of that invoice;
- the day the supplier would have, but for an undue delay, issued an invoice in respect of the supply for that consideration or part; and
- the day the recipient is required to pay that consideration or part to the supplier pursuant to an agreement in writing.
As a result, where QST becomes payable by a large business on restricted expenses (noted above) acquired in Québec, the ITR recovery rate will generally be increased to 50% for invoices dated between January 1, 2019 and December 31, 2019. Similarly, invoices dated between January 1, 2018 and December 31, 2018 will remain eligible for the 25% recovery rate in effect for that period. It is important to bear in mind that the new recovery rate will also apply to QST included in qualifying employee expense reimbursements and allowances paid on or after January 1, 2019.
Key action point
Taxpayers are reminded to ensure that their accounting and employee expense reporting systems are properly adjusted in a timely manner to reflect the increased ITR recovery rate and avoid any potential under-recovery of QST.
Québec’s New Specified Registration System Goes Live
On January 1, 2019, the Québec government will usher in the first phase of its specified registration system. The new system, announced in the province’s 2018 budget, is expected to bring about significant changes in the way non-resident suppliers interact with Revenu Québec in terms of the QST compliance requirements.
Key changes
The biggest change the new system will introduce is a QST registration requirement for certain non-resident persons with transactions in Québec. These suppliers, under the new system, will be required to collect QST on eligible supplies made in Québec, but they will not be eligible to claim ITRs for QST they may pay on purchases. For simplicity, the categories of suppliers affected have been broadly classified into two as follows:
Non-resident suppliers of intangible personal property and services
Non-resident suppliers of intangible personal property and services located outside of Canada without physical or significant presence in Québec who are not registered for GST/HST, but whose consideration for all taxable supplies to persons who may reasonably be considered consumers in Québec exceeds $30,000 in the preceding 12-month period will be required to register under the new system, effective January 1, 2019.
Further, digital property and service distribution platforms which enable taxable supplies of intangible personal property and services by non-residents will be required to register under the new system if such supplies are made to consumers in Québec and the value of the consideration for those supplies is more than $30,000 in the preceding 12-month period. Digital platforms include any online platform that enables the transmission of taxable supplies of intangible personal property or services (i.e., a movie streaming service) to specified Québec consumers. Where a digital platform only supplies a transmission service itself, access to a payment system, or advertising services (i.e., by providing links to a non-resident supplier’s website), it will not be subject to the specified registration requirements. Therefore, these new rules only apply to digital platforms that control key elements of the target transactions with non-resident suppliers, such as billing and delivery terms.
Non-resident suppliers registered for GST/HST
The new registration system also impacts non-resident suppliers both within and outside Canada who are registered for GST/HST and make taxable supplies of intangibles, services or goods in Québec. These suppliers will be required to register, effective September 1, 2019, if the value of the consideration for their taxable supplies made in Québec to persons who may reasonably be considered to be consumers in the preceding 12-month period exceeds $30,000.
What do non-residents of Québec need to know?
Salient points which persons affected by this new system need to internalize include:
Duties of a specified supplier
Suppliers registered under the new system are referred to as specified suppliers. Specified suppliers will be required to collect QST at the rate of 9.975% on taxable supplies made in Québec to specified Québec consumers and will not be entitled to claim ITRs on any QST incurred as part of their operations in Québec. A specified Québec consumer is defined as a person who is not registered for the QST and whose usual place of residence is located in Québec. In addition, before collecting QST, a specified supplier will be required to validate a specified Québec consumer’s residency using two pieces of information that can reasonably support it, including, but not limited to, the consumer’s billing address, home or business address, the IP address of the device used by the recipient at the time of entering an agreement, banking information, or SIM card related information.
Commencement dates
For non-resident suppliers with no significant presence in Canada who are not registered for GST/HST, the new registration system takes effect on January 1, 2019, while the effective date for GST-registered, non-resident suppliers located within Canada or outside Canada is September 1, 2019.
Other consideration
A non-resident supplier that may be subject to the new system can elect to register for QST under the general rules, where it otherwise satisfies the optional registration requirements. In such cases, the non-resident will also be required to register for GST/HST, if it has not already done so.
Also, a specified consumer who provides false information to avoid paying QST may be subject to a new penalty, which will be calculated as the greater of $100 and 50% of the QST payable on the transaction.
Additional information
Further information on Québec’s specified registration system can be found in the Revenu Québec publications noted below:
Suppliers Located Outside Canada Who Are Not Registered for the GST/HST;
Suppliers Located Outside Canada Who Are Registered for the GST/HST;
Suppliers Located in Canada but Outside Québec Who Are Registered for the GST/HST; Operators of Digital Platforms for the Distribution of Property or Services; and
If you have further questions about how these QST changes might impact your business, or to find out how Ryan can be of assistance, please call the Ryan TaxDirectTM line at 1.800.667.1600.