Harmonization of the QST regime
Canadian Indirect Tax News, October 5, 2011 (11-4)
On September 30, 2011, the Prime Minister of Canada and the Premier of Quebec announced that they had signed a memorandum of agreement (MOA) concerning the harmonization of the Quebec sales tax (QST) and the federal goods and services tax (GST). More than 19 years after a value-added tax system was put in place, Quebec is obtaining $2.2 billion in financial compensation from the federal government.
Unlike in the other provinces, the harmonization agreement does not involve the implementation of a single harmonized sales tax (HST). The Act respecting the Quebec sales tax will continue to apply, with amendments that will take effect according to the terms of the agreement. Thus, the GST and QST will always appear separately on merchants’ invoices. The planned date for implementing the amended QST is January 1, 2013.
Further to this MOA, a detailed agreement will be concluded by April 1, 2012.
Main changes in the QST as a result of this agreement
- The amended QST will no longer apply on a tax base including the GST. To offset the loss of revenue caused by this change, the QST rate will be adjusted from 9.5% to 9.975%, the same effective rate as in the current regime, as of January 1, 2013.
- Financial services will be exempt in the amended QST regime as they are for GST/HST. This will make it impossible to apply for input tax refunds (ITRs) as of January 1, 2013, for purchases made in the course of supplying financial services.
- The compensation tax on financial institutions will be eliminated as of January 1, 2013
- The restrictions on the recovery of QST in respect of certain expenditures made by large businesses will be phased out over a three-year period, starting in 2018
- The place of supply rules will mirror the rules for GST/HST
- As of April 1, 2013, the Canadian and Quebec governments will pay the GST/HST and the amended QST on purchases made by their respective governments
What isn’t changing
The government of Quebec has retained its fiscal autonomy as part of this agreement. Therefore:
- Quebec will continue to administer the QST and GST in its territory
- Quebec has retained its flexibility with regard to setting tax policies:
- It may increase or decrease the amended QST rate
- Certain measures specific to Quebec will remain in effect, such as the administrative measures under Quebec’s Tax Administration Act, the zero-rating rule for automobiles acquired for resale, the control measures applicable to the clothing, manufacturing, and restaurant services industries, etc.
- The zero-rating rules in place at the time the MOA was signed remain in place, such as the rules for tobacco products, books, children’s diapers and items used for bottle-feeding or breastfeeding, certain interprovincial passenger transportation services, and certain goods and services provided by municipalities
- The amended QST tax base may differ from the GST/HST tax base by no more than 5%
Quebec may set its own rates for amended QST rebates to municipalities, universities, schools, hospitals, charities, and qualifying not-for-profit organizations. The current QST rebate structure for municipalities will apply only until December 31, 2013.
Who wins? Who loses?
The changes as announced will have very little impact on consumers, given that the products and services they buy will be taxed in the same way as before.
The big losers are undoubtedly companies in the financial services sector, which will no longer be entitled to ITRs on QST paid on their purchases. The loss of these ITRs is estimated to total an average of $250 million per year as of 2013.
For large businesses, the harmonization announcement is good news since, starting in 2018, they will be able to apply for ITRs in respect of QST paid on expenditures that are currently restricted, thereby facilitating the administration of the tax and representing potential tax savings of about $950 million per year, when the restrictions have been 100% eliminated.
To be continued
Deloitte will perform an in-depth analysis of the detailed measures announced in the next few months in connection with this transition. We can help your business to prepare and plan for the important step of implementing the amended QST regime.
This publication is produced by Deloitte & Touche LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.