Canada: New measures to harmonize with federal budget, other business income tax changes (Quebec)

Quebec announced new harmonization measures

Quebec announced new harmonization measures

Quebec announced new harmonization measures with respect to certain business income tax, indirect tax, and individual (personal) tax measures, as well as other changes to certain Quebec business income tax measures.  

Harmonization 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 29 April 2022)
  • Introduce reporting requirements for uncertain tax treatments
  • 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-Canadian-controlled private corporations (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 and registered retirement income funds
  • Eliminate the flow-through share regime for oil, gas and coal activities
  • Support the use of the new international accounting standard for insurance contracts 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 

Indirect tax measures

Quebec will also amend the Quebec sales tax (QST) rules to introduce measures similar to the following indirect tax measures announced in the 2022 federal budget that:

  • Expand the goods and services tax/harmonized sales tax (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

Individual (personal) tax measures

Quebec will harmonize with various individual 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

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.

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 tax years ending after 30 December 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 tax years ending after 30 December 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 tax years beginning after 6 April 2022
  • Expand access to the income-averaging mechanism for forest producers (which corresponds to the federal expansion of the small business deduction), for tax years beginning after 6 April 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 31 March 2023

Read a June 2022 report prepared by the KPMG member firm in Canada

*$=Canadian dollar

 

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