Harmonization of the QST regime is in its final stage
Canadian Indirect Tax News - September 15, 2011 (11-3)
Quebec and federal government announcements
In its last budget, presented on March 17, 2011, the government of Quebec reaffirmed its objective to obtain fair compensation from the federal government for sales tax harmonization. Indeed, the Quebec sales tax (QST) regime has been substantially harmonized with the goods and services tax (GST) regime since 1992, but Quebec did not obtain compensation from the federal government for harmonization, as Ontario and British Columbia did in 2010.
On June 6, 2011, the federal government confirmed its support for the Quebec compensation by providing for a $2.2 billion payment to Quebec in the 2011-2012 budget in expectation of a satisfactory agreement between Canada and Quebec on sales tax harmonization.
Earlier, in the throne speech of June 3, 2011, the federal government stated its intention to complete work already underway with the Government of Quebec to reach an agreement on tax harmonization no later than September 15, 2011.
Finally, in an announcement released on September 14, 2011, the federal government has indicated that, considering the significant progress in the talks between federal and Quebec governments regarding QST harmonization, it was agreed to extend the deadline on their negotiations, with a view to reach an agreement by the end of September.
What the new QST harmonized regime may look like
In a document attached to the Quebec 2011-2012 budget, the government of Quebec stated that they would agree to harmonize the QST in a manner comparable to the provincial HST harmonization in participating provinces. Notably, the government of Quebec would accept:
- Withdrawal of the GST from the QST base
- Gradual elimination of the restrictions concerning Input Tax Refunds (ITRs) over eight years
- The principle of complete harmonization for financial services (i.e., the treatment of financial services as exempt, rather than zero-rated)
- Compliance with the 5% limit on tax differences (exemptions and tax rebates)
However, the government of Quebec also indicated in this budget document its firm intention that:
- The QST would continue to be imposed under a Quebec tax statute
- Revenue Quebec would continue to administer the two taxes
- Revenue Quebec would maintain measures that ensure consistency with Quebec’s tax policy or revenue measures, such as zero-rating the sale of motor vehicles between resellers
Things to consider
No effective date for the harmonization of the QST regime has been announced yet. Also, no proposed legislation or transitional rules have been released.
With the exception of the QST rate calculation, the harmonization of the QST regime will not generally impact consumers and most businesses in Quebec. However, the complete harmonization of the QST will have a greater impact on the financial services industry and its client base. There may also be an impact for businesses outside Quebec that are not registered for the QST. Consequently, it is important to prepare and plan for what lies ahead.
- How can the QST be completely harmonized with the GST/HST while maintaining its own provincial legislation?
- Would GST/HST registrants be automatically registered for QST purposes?
- Will the Quebec Compensatory Tax for Listed Financial Institutions be eliminated?
- How will or can the Special Attribution Method for Selected Listed Financial Institutions be incorporated into the QST legislation?
- With the withdrawal of the GST from the QST base, will the QST rate increase beyond the recently introduced and pending rate increases?
- Will self-assessment be required in respect of supplies made outside Quebec?
- How will pension plans be treated? Will they be restricted to a rebate of only 33% of the QST paid?
Considering the impacts of the QST harmonization – planning aspects
- Plan for systems modifications, as the GST would no longer be in the QST base
- Inter-company elections made or not made should be revisited, especially in FI groups
- Forecast the economic impact of being restricted from claiming the QST at 8.5% (9.5% starting January 1, 2012 and possibly higher) related to financial services, i.e., cash flow, budget, etc.
- Consider the impact of the possible withdrawal of the Quebec Compensatory Tax
- FIs should consider the potential benefits of accelerating purchases to minimize sales tax costs, and determine the pros and cons of purchasing versus leasing property
- FIs should also be prepared to put in place an ITR allocation method
Deloitte is monitoring the policy and administrative developments on this transition and we can assist your business in preparing and planning for this major step in QST harmonization.
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.