On March 25, 2021, Finance Minister Eric Girard tabled Québec’s 2021–22 budget. Focused on the three priorities of strengthening healthcare, supporting education, and accelerating economic recovery and growth, this year’s budget also includes $4.3 billion for measures related to the ongoing COVID-19 pandemic.
Projecting a deficit of $12.3 billion, the government doesn’t anticipate returning to a balanced budget until 2027–28, requiring it to temporarily suspend its Balanced Budget Act.
No new taxes or tax rate increases are included in the budget. However, several significant tax measures and government funding initiatives were announced.
Commodity Tax Measures
Expansion of QST Rules for E-commerce
The 2018 Québec budget introduced the creation of a specified Québec Sales Tax (QST) collection and remittance system for non-resident suppliers, including those using electronic commerce, which make certain taxable supplies of goods, intangibles, and services in Québec to specified consumers. These measures were enacted in 2019. In its 2020 Fall Economic Statement, the federal government proposed legislation regarding the application of GST/HST to certain supplies involving electronic commerce that generally mimics the specified registration system implemented by Québec. However, to prevent inconsistencies between the Québec rules and proposed federal measures, certain adjustments to the current QST system will be required.
The federal proposals will require distribution platform operators to register for GST/HST under the general rules and collect the appropriate tax on sales through their platforms of goods located in Canada by unregistered vendors. Non-resident vendors selling goods on their own through fulfillment warehouses or similar arrangements in Canada will also be required to register for and collect GST/HST on their sales to Canadian purchasers. Furthermore, the proposed legislation will require fulfillment businesses in Canada to notify the Canada Revenue Agency about their activities and retain information on the activities of their non-resident clients. Similar proposals will make all supplies of short-term accommodation in Canada through digital platforms subject to GST/HST. Further details regarding the proposed federal e-commerce measures can be found in our Tax Alert at: Federal Fall Economic Statement 2020
On December 21, 2020, Québec announced plans to harmonize the QST system with the proposed GST/HST rules for electronic commerce, and this year’s budget provides clarification on the changes that will be made. The QST legislation will be amended (with any required adjustments to reflect the provincial context of the new rules) to implement the following:
- Adjustments to ensure that the QST specified registration system operates in a manner consistent with the proposed GST/HST measures for digital products and services;
- Measures to adopt the federal provisions for goods supplied through fulfillment warehouses in Québec; and
- Measures to adopt the federal rules for supplies of short-term accommodation facilitated by digital platform operators in Québec.
In addition, non-resident suppliers registered under the regular GST/HST system and making taxable supplies in Québec, which are currently required to register under the QST specified registration system, will be obliged to collect QST on all taxable supplies made in Québec to specified consumers. Similarly, distribution platform operators registered for GST/HST under the general rules will also be required to register under the QST specified registration system and collect tax in respect of qualifying supplies made through their platforms to specified consumers in Québec by unregistered, non-resident vendors. In both cases, the mandatory registration requirements will apply when the value of taxable supplies made directly to specified consumers in Québec exceeds, or is expected to exceed, $30,000 in a 12-month period.
The proposed QST amendments will be adopted once the federal provisions have been enacted and will have the same effective date as those measures.
Corporate Income Tax Measures
Enhanced Tax Credit for On-the-Job Training
The province will temporarily increase the refundable corporate income tax credit rate for on-the-job training by 25% for the period from March 26, 2021 to April 30, 2022. As a result, eligible employers will be able to claim a tax credit of 30% of qualified expenditures, and 40% of such expenditures in respect of employed immigrants, disabled persons, Indigenous peoples, and persons in internships in remote resource regions, subject to various conditions.
Small Business Deduction Rate Increase
The current small business deduction rate of 7.5% will be increased to a maximum available rate of 8.3%, effective March 26, 2021. This measure essentially reduces the effective provincial corporate tax rate for qualifying small businesses from 4% to 3.2% on the first $500,000 of taxable income and brings the rate in line with the small business tax rate in Ontario.
Tax Holiday for Large Investment Projects
The budget includes a proposal to make all digitalization projects eligible for the existing tax holiday for large investment projects, which provides relief from income taxes and Health Services Fund contributions up to a maximum of 15% of a qualifying organization’s investment in eligible activity sectors over a maximum of 15 years. The tax holiday is subject to a $50 or $100 million minimum eligible investment threshold, depending on the region for the investment, among other conditions. The province has also indicated that the start-up period during which a business must meet the investment threshold will be extended from 60 to 72 months to mitigate the potential impact of delays attributable to the pandemic.
Extension of Employer Health Services Fund Contributions Credit
From a corporate payroll tax perspective, the province has announced that the previously introduced credit for employer contributions to the Health Services Fund will be extended until June 5, 2021. An employer can benefit from this credit in respect of employees on paid leave for the same qualifying periods as those for which it can obtain the Canada Emergency Wage Subsidy.
Innovation, Research, and Development Measures
Investment and Innovation Tax Credit Doubled
The government has announced that it will temporarily double its C3i investment and innovation tax credit rate for qualified expenses incurred by an eligible corporation between March 26, 2021 and December 31, 2022 (or March 31, 2023 in limited circumstances). Introduced in last year’s budget to encourage digital transformation, this tax credit initially applied at rates ranging from 10% to 20% of qualifying expenses, including manufacturing or processing equipment, computer materials, and certain management software, incurred after March 10, 2020 and before January 1, 2025. The temporary increase will provide support for up to 40% of eligible capital investments until the end of 2022.
Simplification of University Research and Development Tax Credit
As further support for innovation in the provincial economy, the province will introduce measures to simplify its university research and development tax credit. Under these changes, corporations will no longer be required to obtain prior approval before applying for the credit, allowing it to be claimed immediately.
Tax Fairness Measures
This year’s budget reiterates the province’s commitment to its Tax Fairness Action Plan, which aims to ensure the reliability of Québec’s tax system by combatting tax evasion and preventing tax avoidance. In addition to the changes for e-commerce noted above, the budget includes additional funding for new tax audit programs, enhanced penalties for promoters of aggressive tax planning arrangements, improvements to Revenu Québec’s cybersecurity, and measures to better detect identity theft.
The government has also indicated that it will implement new measures to target the following issues:
- Cannabis, tobacco, and alcohol smuggling, including the creation of a new investigative team to reduce the illegal sale of alcohol;
- Unreported work in the construction industry and underground economy;
- The exploitation of vulnerable people in the workforce; and
- Fraud against the government and financial crime.
Government Funding Initiatives
To accelerate Québec’s economic recovery, the budget is providing for $4 billion in spending on various initiatives through 2025–2026, including:
- $2.2 billion to increase productivity and spur business investment;
- $523 million to accelerate regional economic development;
- $392 million to promote Québec’s culture, heritage, and the French language;
- $404 million to support the requalification of workers and their integration into the labour market, with a particular focus on information communications technology;
- $218 million towards innovation programs;
- $137 million to help build a sustainable economy; and
- $193 million to continue supporting businesses impacted by the pandemic.
Several measures highlighted in the budget include funding directed toward accelerators and incubators, research and innovation infrastructure, cybersecurity initiatives, and the aluminum, forestry, and tourism sectors.
Further information on the 2021–22 Québec budget may be found on the province’s website at: http://www.budget.finances.gouv.qc.ca/budget/2021-2022/index_en.asp
If you have questions about how any of the proposed changes might impact your organization, please do not hesitate to call the Ryan TaxDirect® line at 1.800.667.1600.