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Quebec Will Align with Federal Passive Income Regime

Quebec Will Align with Federal Passive Income Regime

Province says it will harmonize with federal passive investment taxation regime

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Quebec says it will harmonize with federal measures that phase out the small business deduction for passive investment income for some companies. As a result, the provincial small business deduction for Canadian-controlled private corporations (CCPCs) and associated corporations that earn more than $50,000 of investment income may be reduced or completely eliminated if the corporation earns investment income of $150,000 or more.

Quebec made this announcement in Information Bulletin 2018-10, which was released December 13, 2018. The province's legislation will be amended to incorporate the new harmonized measures, which will apply in addition to Quebec's existing rules limiting the small business deduction (i.e., a corporation's provincial small business deduction may generally also be reduced if its employees are paid for less than 5,500 hours of work; and may be eliminated entirely if employees are paid for 5,000 hours or less).

The change will apply on the same date as the federal measure that it has been harmonized with (i.e., for taxation years that begin after 2018).

Background
Canada's 2018 federal budget introduced the new taxation regime for passive investments that are held inside a private corporation (see TaxNewsFlash-Canada 2018-06 "2018 Federal Budget Highlights"). These rules were enacted in June 2018 and generally apply to taxation years that begin after 2018, they can reduce or eliminate the small business deduction for CCPCs (and associated corporations) that hold passive investments in a corporation that carries on an active business. The small business deduction is generally reduced on a straight-line basis for affected companies that have between $50,000 and $150,000 of investment income, so that the small business deduction is completely eliminated where the corporation earns passive investment income of $150,000 or more.

For more information, contact your KPMG adviser.

Information is current to December 18, 2018. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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