Quebec announced new harmonization measures and other changes to certain Quebec business income tax measures in an information bulletin published on June 9, 2022. Specifically, Quebec will harmonize its rules with the excessive interest and financing expenses limitation (EIFEL) regime, the new reporting requirements for uncertain tax treatments and the changes to expand eligibility for the small business deduction, among other harmonization measures. The Quebec tax measures included in this bulletin are intended to align with federal tax measures announced in the 2019, 2021 and 2022 federal budgets, including certain measures released in recent draft legislation. Quebec also announced that it will ease eligibility for certain refundable provincial tax credits, including to align such measures with the federal expansion of the small business deduction.
Quebec states that the provincial harmonization changes will only be adopted after the federal measures receive Royal Assent (or related federal Regulations are adopted). In addition, these measures will have the same effective dates as the related federal measures.
Business income tax measures
Quebec will harmonize with various federal tax measures recently released in draft legislation, which were originally announced in the 2021 and 2019 federal budgets. These proposals include measures to:
- Introduce limitations on the deductibility of interest and other financing expenses
- Introduce hybrid mismatch arrangement rules based on the draft measures released on April 29, 2022
- Introduce reporting requirements for uncertain tax treatments, subject to the following additional rules:
- Quebec prescribed form — Reporting corporations must disclose uncertain tax treatments on the form when the reporting corporation's Quebec income tax return is due, and include a copy of the federal information return and any other document regarding the uncertain tax treatment filed with the CRA
- Penalty for failure to disclose — Corporations that fail to disclose an uncertain tax treatment to Revenu Quebec will be subject to a separate penalty of $100 per day up to a maximum of $5,000 (calculated from the second day of the omission)
- Expand eligibility for the immediate expensing of eligible property to include sole proprietorships and certain partnerships
- Address complex transactions that attempt to circumvent the tax debt avoidance rule
- Update the rules that address tax planning related to allocations to redeeming fund unit holders in the mutual fund industry.
Quebec will also harmonize with various business income tax measures announced in the 2022 federal budget, including measures to:
- Broaden eligibility for the small business deduction by increasing the upper limit of the range to $50 million (from $15 million) of taxable capital before the small business deduction is reduced
- Eliminate deferral of investment income of non-CCPCs (substantive CCPCs) and deferral using foreign affiliates (to be harmonized in part)
- Expand the general anti-avoidance rule (GAAR) to apply to tax attributes that have not yet become relevant to the computation of tax
- Add capital cost allowance (CCA) classes for carbon capture, utilization and storage equipment, including eligibility for the Accelerated Investment Incentive
- Add CCA classes for intangible exploration expenses and development expenses for storing carbon dioxide
- Expand access to the accelerated CCA for certain clean energy equipment (Classes 43.1 and 43.2)
- Introduce a new borrowing limit imposed on defined benefit pension plans
- Introduce new annual requirements for financial institutions to report registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs)
- Eliminate the flow-through share regime for oil, gas and coal activities
- Support the use of the new international accounting standard for insurance contracts (IFRS 17) for income tax purposes, subject to certain adjustments
- Prevent taxpayers from claiming certain tax deductions related to hedging and short selling arrangements
- Increase the annual disbursement quota rate to 5% (from 3.5%) for registered charities and changes related to charitable partnerships (see TaxNewsFlash-Canada 2022-24, "2022 Federal Budget Highlights").
Indirect tax measures
Quebec will also amend the QST rules to introduce measures similar to the following indirect tax measures announced in the 2022 federal budget that:
- Expand the GST/HST health care rebate for charities or non-profit organizations to include certain health care services delivered by nurse practitioners
- Make all assignment sales in respect of newly constructed or substantially renovated residential housing taxable for GST/HST purposes.
Personal tax measures
Quebec will harmonize with various personal tax measures announced in the 2022 federal budget, including measures to:
- Introduce a Tax-Free First Home Savings Account
- Increase the Home Buyers' Tax Credit to $10,000 (from $5,000)
- Introduce a residential property "anti-flipping" tax
- Expand the Medical Expense Tax Credit for surrogacy and other related expenses.
Federal measures not adopted by Quebec
Quebec will not harmonize with certain 2022 budget measures, including the following measures:
- The Canada Recovery Dividend and additional tax on banks and life insurer groups
- Investment tax credit for carbon capture, utilization and storage
- The corporate income tax rate reductions for zero-emission technology manufacturing profits
- The new Critical Mineral Exploration Tax Credit
- The Labour Mobility Deduction for Tradespeople
- Changes to the Home Accessibility Tax Credit
- The new Multigenerational Home Renovation Tax Credit.
Quebec business income tax measures
Quebec will also make changes to certain provincial business income tax measures, including measures to:
- Expand access to the tax credit to foster the retention of experienced workers, for taxation years that end after December 30, 2022
- Expand access to the refundable tax credit for small- and medium-sized businesses in respect of persons with a severely limited capacity for employment, for taxation years that end after December 30, 2022
- Expand the additional deduction for transportation costs incurred by remote small and medium-sized businesses by increasing the upper limit to $50 million (from $15 million) of paid-up capital before the additional deduction is reduced (which corresponds to the federal expansion of the small business deduction), for taxation years that begin after April 6, 2022
- Expand access to the income-averaging mechanism for forest producers (which corresponds to the federal expansion of the small business deduction), for taxation years that begin after April 6, 2022
- Narrow the refundable tax credit relating to mining, petroleum, gas or other resources, by excluding expenses related to oil, gas or coal incurred after March 31, 2023.
For more information, contact your KPMG adviser.
Information is current to June 27, 2022. 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.