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Quebec restricts Dividend Tax Credit and amends PUC

Quebec restricts Dividend Tax Credit and amends PUC

Quebec released Information bulletin 2019-11 on December 16, 2019

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Quebec has introduced changes to the notion of tax paid-up capital, to reflect the changes introduced by the Accounting Standards Board on the accounting treatment of retractable or mandatorily redeemable shares. The province has also restricted eligibility for the dividend tax credit. This information is among measures included in Information bulletin 2019-11, issued on December 16, 2019. The 20-page Information bulletin also indicates that Finance Quebec is continuing to study Canada's proposed amendments to the stock option regime and the province says it will announce whether it will harmonize at a later date.

Financial statement "paid-up capital"

Quebec is amending its tax legislation in light of changes made by the Accounting Standards Board (ASB) to the accounting treatment of "retractable or mandatorily redeemable shares".

Background

Under Quebec legislation, tax paid-up capital is used to determine a corporation's eligibility for certain tax measures (such as the small business deduction). Generally, a corporation's tax paid-up capital is based on financial statements prepared in accordance with generally accepted accounting principles and includes certain equity and long-term liability amounts.

ASB's new standard

Under the ASB's new standard, redeemable shares recorded at their issued and paid-up or stated capital amount may be reclassified as a liability and recorded at their redemption amount. This may result in an unwanted increase in the amount of the corporation's tax paid-up capital since the redemption amount usually exceeds the issued and paid-up or stated capital of these redeemable shares. The offsetting adjustment for this increase is either a:

  • Reduction to the amount of retained earnings shown in the corporation's financial statements,
    or
  • Is recorded in a separate component, which reduces the amount of the corporation's equity.


Currently, Quebec legislation does not allow an amount recorded in a separate component of a corporation's equity to be deducted in the calculation of tax paid-up capital, which would therefore not offset the increase in the tax paid-up capital resulting from the accounting change.

The Information Bulletin announces that any provision recorded in connection with the redemption of retractable or mandatory redeemable shares will be, regardless of the accounting approach used in the presentation of a corporation's financial statements, included in the calculation of tax paid-up capital, effective for fiscal years beginning as of January 1, 2020.

Quebec dividend tax credit

Quebec is restricting the eligibility for the dividend tax credit for dividends received or deemed received after December 31, 2019.

The Quebec tax legislation will be updated so that only an individual, including a trust, who is resident in Quebec on the last day of a taxation year can benefit from the dividend tax credit for that year. This will apply to dividends received or deemed received after December 31, 2019.

Background

The Quebec tax legislation provides specific rules for calculating the Quebec tax payable of:

  • An individual resident in Quebec on the last day of a taxation year who carried on a business outside Quebec in Canada during the year,
  • An individual resident in Canada outside Quebec on the last day of a taxation year who has, at any time in the year, carried on a business in Quebec, and
  • An individual who was not resident in Canada at any time in a taxation year and who, during the year, was employed in Quebec, carried on a business in Quebec or disposed of taxable Quebec property.


Under these specific rules, the tax payable by such an individual for a taxation year is equal to the portion of the tax otherwise determined represented by a proportion that takes into account the individual's income earned in Quebec and his or her income earned in Quebec and elsewhere or in Canada for that year.

Currently, these individuals may deduct from their tax otherwise payable for the year, in respect of the dividend tax credit, an amount that is determined by taking into account that proportion applicable to the individual for the year.

Federal measures

Quebec says that if it were to harmonize with the proposed Federal stock option regime changes, it would share an effective date with the Federal rules (i.e., it would affect stock options granted under an agreement entered into on or after January 1, 2020).

Quebec also says it will be harmonize with Federal measures to recognize eligible Canadian journalism organizations as qualified donees.

Changes to certain Quebec refundable tax credits

The information bulletin also introduces changes to certain refundable tax credits, specifically by:

  • Expanding the refundable tax credit to support print media companies
    • An eligible corporation or partnership may claim this credit if its information technology activities are carried out by a wholly-owned subsidiary whose activities essentially consist of providing information technology support to the eligible corporation
    • For 2019, these subsidiaries may be considered as "eligible employees" for the purpose of the refundable tax credit.
  • Amending refundable tax credits for the production of Multimedia titles
    • The notion of "qualified labour expenditure", will be changed so that remuneration based on the profits or revenues derived from the operation of a multimedia title may be considered as "qualified labour expenditure"
    • This change will apply for expenditures incurred in a taxation after December 16, 2019.
  • Extending the refundable tax credit relating to information technology integration
  • Extending the refundable tax credit for interest payable on financing obtained under the seller-lender formula of La financière agricole du Québec.

Lodging Tax

The bulletin also clarifies the tax on lodging for persons operating a digital accommodation platform, which was announced in the provincial 2019 budget and will:

  • Require mandatory electronic filing and tax remittances
  • Allow persons operating an accommodation platform to remit the tax on lodging collected in a currency other than the Canadian dollar
  • Not impose a penalty for a maximum period of 12-months as of January 1, 2020, where persons operating an accommodation platform show that they have taken reasonable measures to meet the new QST obligations, but were unable to do so.

For more information, contact your KPMG adviser.

Information is current to December 17, 2019. 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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