Quebec budget – changes affecting financial institutions
Canadian Tax Alert, April 6, 2010
Mr. Raymond Bachand, Quebec Minister of Finance, tabled the 2010-2011 provincial budget in the National Assembly on March 30, 2010. The following is a summary of the budget measures that will apply to financial institutions.
International financial centres (IFCs)
The partial exemptions that an IFC operator currently enjoys in respect of income tax, capital tax and employer contributions to the Health Services Fund, as well as the deduction in calculating taxable income that an IFC employee (other than a foreign specialist) can claim, will be replaced with a refundable tax credit for the IFC operator of up to $20,000 per eligible employee on an annual basis.
- Operators of existing IFCs that are corporations may elect, effective March 31, 2010, to be subject to the new refundable tax credit regime. If they do not so elect, to they will continue to be covered by the existing regime until December 31, 2012.
- A partnership will not be eligible for the new measure but may continue to benefit from the current regime until December 31, 2013.
- Each year, an IFC operator will be required to obtain an eligibility certificate from the Minister of Finance certifying that it holds a valid qualification certificate and confirming that for the period of the taxation year covered by the qualification certificate, all or part of its activities constituted eligible activities and that such eligible activities required, at all times, a minimum of six eligible full-time employees. The eligible activities covered by the new refundable tax credit will be the same as those under the existing IFC regime.
- At least 75% of the work time of an eligible employee of the eligible corporation must be devoted to carrying out qualified international financial transactions (QIFT) and the eligible employee holds a full-time job involving at least 26 hours per week for an expected minimum period of 40 weeks. Duties that are not directly related to carrying out QIFT, such as corporate management and administration, will not be considered eligible activities. Eligible employees will also be required to obtain eligibility certificates.
- The refundable tax credit will be equal to 30% of eligible salaries incurred by the IFC operator in respect of eligible employees in a taxation year and may not exceed $20,000 (i.e., the eligible salary will be limited to $66 667). The eligible salaries must have been paid at the time of filing the claim for the refundable tax credit.
- To claim the refundable tax credit for a taxation year, the IFC operator will be required to enclose with its tax return the prescribed form, a copy of the operator’s eligibility certificate, as well as copies of the eligibility certificates issued in respect of its eligible employees.
- Regardless of whether an election is made by his/her employer, an IFC employee (other than a foreign specialist) who currently claims a deduction in the calculation of taxable income of up to $50,000 per annum, may continue to claim a deduction until December 31, 2013, as follows:
- 2010: 37.5% of the employee’s income from the IFC, to a maximum of $50,000;
- 2011: 30% of the employee’s income from the IFC, to a maximum of $40,000;
- 2012: 20% of the employee’s income from the IFC, to a maximum of $26,667;
- 2013: 10% of the employee’s income from the IFC, to a maximum of $13,333;
- An IFC employee who ceases to work for an IFC after March 30, 2010, may no longer claim IFC employee status and will no longer be eligible for the IFC employee deduction
- The deduction currently available to a foreign specialist working for an IFC operator will continue to be available under the refundable tax credit regime. Under the current legislation, a foreign specialist may claim a deduction in calculating taxable income as follows: for the first two years of employment, 100% of world income; and for the third, fourth and fifth years of employment, 75%, 50% and 37.5% of world income, respectively.
- No new eligibility certificates in respect of IFC employees (other than foreign specialists) will be issued after March 30, 2010, with the following exceptions:
- an employee who entered into an employment contract with an IFC operator no later than March 30, 2010 and commenced employment with such operator no later than June 30, 2010 may be issued an eligibility certificate ;
- a foreign specialist who, on March 30, 2010, was working for an IFC and for whom the five-year tax reduction period ends after March 30, 2010, may, if he/she satisfies the conditions otherwise applicable, be issued an eligibility certificate as of the day following the expiration of the five-year period. Such employee will then be entitled to the deduction from taxable income available to IFC employees until December 31, 2013.
- In light of the continuing deduction for foreign specialists, new foreign specialist eligibility certificates will be issued after March 30, 2010.
Quebec compensatory tax
- The rates applicable to salaries paid and insurance premiums will be temporarily raised. The rate increases will apply to taxation years ending after March 30, 2010 and beginning before April 1, 2014. The rate applicable to the paid-up capital component will remain unchanged at 0.25%.
The rates will be increased as follows:
|Salaries paid||Insurance premiums|
|Before March 31,2010||After March 30,2010||Before March 31, 2010||After March 30, 2010|
|Bank, loan company, trust company and securities trading company||2%||3.9%||N/A||N/A|
|Savings and credit union||2.5%||3.8%||N/A||N/A|
|Any other person||1%||1.5%||N/A||N/A|
- In the case of a taxation year that straddles the applicable dates, the rate increases applicable to salaries paid will apply to salaries paid after March 30, 2010 and before April 1, 2014. The rate increase applicable to insurance premiums will be apportioned to reflect the number of days in the above-mentioned periods. Transitional rules are also provided in situations where the corporation becomes or ceases to be a financial institution.
- It will be necessary to adjust corporate instalment payments to reflect these increases.
Scientific research and experimental development (SR&ED)
- Over the years, as a result of a technicality in the way the rules were interpreted, the wage tax credit could not be claimed in situations where an SR&ED contract payment was made to an arm’s length corporation that compensated the owner-manager through dividends (and not salary). Such situations were common, particularly in the financial services industry. The budget provides a solution for taxation years that are not statute-barred by treating the owner-manager as an eligible employee for SR&ED purposes.
- As a result of the 2009-2010 budget, the QST rate is scheduled to increase from 7.5% to 8.5% of as of January 1, 2011 (effective rate of 8.925%). The 2010-2011 budget further increases the QST rate by 1% as of January 1, 2012, bringing it to 9.5% (effective rate of 9.975%).
- The QST will be harmonized with the HST in respect of the legislation applicable to the place of supply, subject to particularities of the Quebec tax system.
- The QST will be harmonized with the GST/HST in respect of the requirement to file electronic returns for reporting periods ending after June 2010.
- The QST will be amended to incorporate federal legislative proposals (GST/HST) giving effect to legal decisions concerning the financial services.
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