On March 27, 2018, Finance Minister Carlos Leitão tabled the Québec budget for 2018-2019. This year’s budget continues to focus on the government’s objective of balancing the provincial budget for the future, touting an anticipated $850 million surplus for 2018-19. Numerous income tax measures were announced to ensure the availability of tax credits designed to improve the affordability of housing in the province, promote experienced workers in the workforce, and make childcare more accessible for families in Québec. The province has also reiterated its commitment to strengthen audit and enforcement procedures, in an effort to reduce tax evasion.
In addition, the budget seeks to provide income tax relief for small and medium-sized businesses through an added capital cost allowance and refundable tax credits for training, film, television and media, as well as the production of ethanol, biodiesel and pyrolysis oil.
From a commodity tax perspective, this year’s budget includes several interesting announcements, as summarized below.
QST and E-commerce
When the QST was introduced in 1992, it did not specifically contemplate e-commerce transactions, since most purchases were made from organizations located in Québec. Within the current QST system, e-commerce transactions follow the general rules and may be considered taxable where the property or services obtained are supplied in Québec.
However, now more than ever, e-commerce has allowed Quebecers to make purchases from suppliers located outside of Québec. Under the current rules, a significant number of non-resident suppliers are not required to be registered for QST, as they don’t have a physical or other significant presence in the province. As a result, many e-commerce transactions escape the application of QST, even though they are otherwise taxable supplies. This presents an issue where the purchases are made by consumers, since the QST is typically a cost to them and a significant source of revenue for the province. The existing legislation requires consumers to self-assess the tax in these situations, but this rarely – if ever – occurs.
The Québec government believes that a substantial amount of tax revenue is lost due to e-commerce transactions with non-residents. In addition, the current situation favours non-resident suppliers over Québec-based businesses, since consumers can purchase supplies from non-registrants without being charged QST. Therefore, the province has introduced measures to rectify this situation through a new QST registration system.
Québec’s legal system operates under civil law, and the terminology is often much different than that used under common law, which can lead to misunderstandings by taxpayers. Note that Québec’s new registration system focuses on the civil law termed supplies (common law equivalent in brackets) of incorporeal movable property (i.e., intangible personal property), services, and corporeal movable property (i.e., tangible personal property or goods) made to consumers.
Mandatory registration for non-resident suppliers
The Government of Québec will now require certain non-resident suppliers of intangible personal property, services or goods to be registered under a new specified registration system. Under this system, organizations will not be entitled to any input tax refunds (ITRs) for QST paid, but will be required to collect and remit QST on taxable supplies made in Québec to certain consumers.
Intangible personal property and services
Suppliers of intangible personal property and services in Québec, which do not have a physical or significant presence in the province, will be required to register with Revenu Québec under the new specified registration system if the consideration for all taxable supplies made to persons in Québec, who may reasonably be considered consumers, exceeds a threshold of $30,000.
In addition, 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 in excess of $30,000. Digital platforms would 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 transport service, 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, since these new rules only apply to digital platforms that control key elements of the transactions with non-resident suppliers, such as billing and delivery terms. The proposed rules have been derived from recommendations made by the Organisation for Economic Co-operation and Development (OECD), which have also been implemented in Australia, New Zealand, Russia and Singapore.
Non-resident suppliers located in Canada
Non-resident suppliers located in Canada that make taxable supplies of goods in Québec to persons reasonably considered to be consumers will also be required to register under the new specified registration system, where the value of the consideration for taxable supplies exceeds $30,000. Non-residents of Québec located outside of Canada that only make taxable supplies of physical goods, and which are not required to register under the current QST rules, will not be required to register for QST (under either the specified or existing system), as QST is collected on supplies of goods to consumers that cross the international border by the Canada Border Services Agency. In this regard, the province intends to improve the collection of QST at the border through further cooperation with the federal government.
Specified Québec consumer
Where a supplier is registered under the new specified registration system, it will be required to collect QST on any taxable supply made in Québec to a specified Québec consumer, which is defined as a person who is not registered for the QST and whose usual place of residence is located in Québec. Specified registrants will be required to validate a consumer’s usual place of residence by obtaining two non-contradictory pieces of information. Examples would include the consumer’s billing or personal address, the IP address of the device used to stream online intangible personal property or services, or information from a SIM card. Where this information cannot be obtained, Revenu Québec may allow an alternative method to be used to verify a customer’s place of residence.
Where a specified Québec consumer provides false information to avoid paying QST, they 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.
QST charged in error under the special registration system and paid by a registrant under the existing system or a specified Québec consumer should be rebated by the non-resident supplier. However, specified Québec consumers may also apply for a rebate directly from Revenu Québec in order to recover the tax.
A non-resident supplier that may be subject to the new registration 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.
Revenu Québec will provide a means to determine if non-resident suppliers are registered under the new system, in order to help prevent possible abuse.
To reduce administrative costs for non-resident suppliers affected by the implementation of the new registration system, Revenu Québec plans to introduce an online service that will be used to process registrations and file returns, and also allow QST remittances to be paid electronically. In addition, amendments will be made to allow non-resident suppliers registered under the new system to pay their QST liabilities in currencies other than the Canadian dollar.
Non-resident suppliers registered under the specified registration system will be subject to the same record-keeping requirements as other QST registrants.
The new specified registration system measures are expected to take effect on January 1, 2019, for non-resident suppliers located outside of Canada, and on September 1, 2019, for non-resident suppliers located within Canada.
Complications on the way
There are numerous complications that might arise with the new specified registration system. Determining whether an organization hits the $30,000 registration threshold could be problematic for businesses that do not know if their customers are consumers or located in Québec. Suppliers will be required to obtain evidence to determine residency, which could also prove burdensome. The budget indicates that this threshold is based on taxable supplies made by suppliers in Québec “to persons that may reasonably be considered consumers”.
A likely exposure resulting from this new system will be ITRs claimed by organizations for QST charged by registrants of the new system. Where a QST registrant purchases a taxable supply, a specified registrant should not charge the purchaser QST, and if the supplier charges the tax in error, the purchaser will be required to get a rebate from the non-resident supplier. It will be interesting to see how aggressively Revenu Québec auditors pursue this issue, and if ITRs claimed in error will be denied to increase net tax owing. In theory, this should not happen, considering that a rebate would be available to the purchaser and auditors are generally required to audit to net tax. In addition, the budget announcement does not address whether non-registered public service bodies will be eligible to claim rebates for QST paid to specified registrants.
Registrants under the specified registration system may decide to charge QST on all supplies made in Québec, rather than attempt to determine whether or not a particular recipient is registered for QST. The recipient, therefore, could face an administrative burden to determine whether the supplier is in fact a QST registrant under the existing rules, where QST should be charged and an ITR is available, or a registrant under the specified system, where QST should not apply to the transaction.
Employee expense reports could become a nightmare in respect of determining ITR eligibility, since documentation is often lacking where the factor method is used to recover QST on employee reimbursements. If an employee pays QST to a registrant under the specified system and is reimbursed by the employer, will the employer be deemed to have paid recoverable QST pursuant to section 212 of the Act respecting the Québec sales tax? If the answer is no, a significant amount of time will be required to analyze employee expense reports and additional supporting documentation may be needed to verify each supplier’s registration status.
Complexity and confusion often accompany substantial legislative change. We look forward to seeing how Revenu Québec addresses all of these concerns in the months leading up to implementation.
Québec agreed to enter into a coordinated agreement for the taxation of cannabis with the federal government in December 2017. Under this agreement, the amount of duty on cannabis products will equal the greater of $1 per gram and 10% of the producer’s selling price. The province will receive 75% of the duty amount on products intended for sale in Québec, which will be collected by the federal government through the use of the federal excise tax system.
The Fight against Tax Evasion
As in previous budgets, the Government of Québec reiterated its commitment to continue the fight against tax evasion and abusive tax avoidance, both of which continue to erode its tax base. In particular, it announced the implementation of the Tax Fairness Action plan, which includes the mandatory collection of QST by non-resident suppliers (as discussed above), rewarding tax informants, removing loopholes available through international taxation, restricting income tax sprinkling, improving tax transparency, reviewing the voluntary disclosure program, and combating payroll tax avoidance from unreported work in the employment agency sector.
Sales Recording Modules (SRMs) for food trucks and trailers
To further crack down on tax evasion and facilitate tax compliance from a sales tax perspective, the Act respecting the Québec sales tax will be amended to include a requirement for operators of food trucks and trailers to issue a bill to customers, in keeping with similar requirements for other restaurant and bar establishments. To help enforce this measure, the government will require food trucks and trailers to be equipped with a sales recording module by the summer of 2019, and will provide a subsidy program to help fund the acquisition, installation and update of this equipment.
Further information on Québec’s 2018 budget can be found on the province’s website at:
If you have any questions about how any of these proposed changes might impact your organization, please do not hesitate to call the Ryan TaxDirectTM line at 1.800.667.1600.