The Taxation Act (Québec) Versus
the Income Tax Act (Canada) —
A Practitioner’s Guide
to Certain Key Differences
67th Annual Tax
Conference
Christian Meighen, McCarthy Tétrault LLP
Michel Ranger, McMillan LLP
67e Conférence
fiscale annuelle
2015
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
Table of Contents
1. Introduction & Historical Background
2. General Concepts Regarding the Taxation of Business
Associations Under the QTA
3. Taxable Québec Property
4. SR&ED Tax Credits
5. Aggressive Tax Planning
6. Other Notable Differences
2
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
1. Introduction & Historical Background
•
•
•
•
•
•
•
•
3
1965: Commission royale d’enquête sur la fiscalité au Québec
Report
1966: Royal Commission on Taxation (“Carter Commission”)
Report
1971: Income Tax Act (Canada) (“ITA”)
1972: Taxation Act (Québec) (“QTA”) – Replacing the Provincial
Income Tax Act (1954)
QTA reflects Québec & Carter Commission reforms that led to the
enactment of the ITA in 1971
Yet, there are significant differences between the ITA and QTA
For example: no QTA equivalents to ITA Parts IV, IV.1, VI.1 and XIII
Policy divergence or indirect harmonization?
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
1. Introduction & Historical Background (cont’d)
a) Indirect Harmonization: Some Asymmetries Accounted for
Through Legislation and Side Agreements
• Example: Parts IV.1 and VI.1 (introduced into the ITA in 1987)
• The two parts work together to discourage after-tax financing
through preferred shares where the issuer is in a nontaxpaying position
•
•
Federally, a deduction is provided for taxpaying issuers under
110(1)(k) ITA
Reason for asymmetry: provisions of the Federal-Provincial
Fiscal Arrangements Act and a side agreement between the
federal and provincial governments to transfer a portion of
taxes collected under Parts IV.1 and VI.1 to Québec
• Québec introduced section 725.1.1 in 1991 to mirror the effects of
110(1)(k) ITA on taxpaying issuers
4
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
1. Introduction & Historical Background (cont’d)
b) Parts IV & XIII introduced in the ITA in 1971
• Part IV tax generally applies to private corporations and is
imposed on portfolio dividends received from unconnected
corporations and on dividends that entitle the payer corporation
to a dividend refund
• In theory, amount of the tax is meant to be equivalent to the
combined federal and provincial tax payable by an individual at
the highest marginal rate
• Part IV tax is included in RDTOH and is therefore ultimately
refundable
• Purpose is to deter individuals from deferring tax on investment
income
5
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
1. Introduction & Historical Background (cont’d)
b) Parts IV & XIII Introduced in the ITA in 1971 (cont’d)
• Part XIII: Tax imposed on non-residents earning
Canadian source income of a passive nature
• Amount withheld equal to 25% of gross payment by
Canadian resident (in the absence of a bilateral tax
treaty)
• Most of Canada’s bilateral tax treaties provide for
reduced rates of withholding
• Potential constitutional/tax treaty limitations
6
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
2. General Concepts Regarding the Taxation of
Business Associations Under the QTA
a) The Concept of “Establishment” Under the QTA
• Every corporation that has an “establishment” in Québec at any
time in a taxation year is subject to tax in Québec for that taxation
year (22 QTA)
• Revenue Québec administratively only requires a taxpayer to file
a tax return in Québec where it has an establishment in Québec
(see Technical Interpretation 04-0107815)
• Establishment means a fixed place where the taxpayer carries on
the taxpayer’s business or, if there is no such place, the
taxpayer’s principal place of business (12(1) QTA)
• Deeming rules 12(2) - 16.2 QTA similar to 400(2) of the ITA
Regulations
7
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
2. General Concepts Regarding the Taxation of Business
Associations Under the QTA (cont’d)
b)
Anomalies Created by the Definition of “Establishment” Under the QTA
•
•
8
Corporation that owns immovable property in Québec used principally
for the purpose of earning gross rental income is deemed to have an
establishment therein and is therefore subject to tax in Québec (12(2)
and 22 QTA)
For federal tax purposes, the rental income is not a taxable income
earned in a province (Reg. 400 ITA Regulations – presupposes rental
property not used to carry on a business)
•
Corporation does not therefore qualify for the federal abatement equal
to 10% of the taxable income earned in a province as provided for in
124(1) ITA
•
Corporation is thus subject to an increase of 10% in its combined tax
rate (i.e. 36.9% instead of 26.9%)
•
CRA does not intend to grant any administrative relief in these
circumstances (see Technical Interpretation 2006-0196171C6)
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
2. General Concepts Regarding the Taxation of Business
Associations Under the QTA (cont’d)
b) Anomalies Created by the Definition of
“Establishment” Under the QTA (cont’d)
•
•
9
Where a corporation has an establishment in Québec and an
establishment outside Québec, it is generally only subject to tax
in Québec based on the proportion of its income allocated to
Québec (Reg. 771R4 of the QTA Regulations)
For a non-resident corporation, pursuant to Reg. 771R43 of the
QTA Regulations, the proportion is determined taking into
account only the business attributable to its establishments in
Canada as though the business conducted by the corporation in
Canada were a distinct business carried on by a distinct person
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
2. General Concepts Regarding the Taxation of Business
Associations Under the QTA (cont’d)
b) Anomalies Created by the Definition of “Establishment” Under
the QTA (cont’d)
10
•
According to Reg. 771R43 of the QTA Regulations, salaries paid by
non-resident corporations at establishments outside of Canada and
gross revenue of establishments outside of Canada are not taken into
account for the purposes of determining the proportion
•
Result:
•
Where a non-resident corporation has gross revenue that is
reasonably attributable to an establishment in Québec or pays
salaries to an employee of the establishment in Québec, it will be
subject to tax in Québec on its worldwide income
•
Anomalous result arises from the fact Reg. 771R43 of the QTA
Regulations only applies for the purposes of determining the
proportion in Reg. 771R4 and not taxable income
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
2. General Concepts Regarding the Taxation of Business
Associations Under the QTA (cont’d)
b)
Anomalies Created by the Definition of “Establishment” Under the QTA
(cont’d)
•
•
Revenu Québec has acknowledged that textual application of Regs.
771R4 and 771R43 of the QTA Regulations leads to an unfair result
In Interpretation Bulletin IMP. 771-1/R2 “Foreign corporation —Business
carried on in Québec and in Canada”, Revenue Québec stated:
“Even though [Reg. 771R43] seems to have been made for the sole purpose of
determining the proportion that the business carried on in Québec is of the aggregate
of the business carried on in Canada by a foreign corporation, the Ministère du Revenu
du Québec is nonetheless of the opinion that the principle on which this rule is based
implies that the income tax payable by such a corporation under Part I of the [QTA]
must be computed on its taxable income determined by taking into account only the
business attributable to its establishments in Canada as though the business
conducted by the corporation in Canada were a distinct business carried on by a
distinct person.” [Emphasis added]
•
11
Accordingly, non-resident corporation would only be subject to tax in
Québec on Canadian-source income
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
3. Taxable Québec Property (“TQP”)
a) What is TQP?
•
•
•
•
12
Functional equivalent of regime under the ITA applicable to
dispositions of taxable Canadian property (“TCP”)
Non-resident corporation that does not have an establishment in
Québec at any time in a taxation year is subject to tax in
Québec on gains from the disposition of TQP (27(1) QTA)
Property included in definition of TQP essentially identical to
that which is caught under the TCP definition, mutatis mutandis
TQP includes private corporation shares that, at any time during
the 60-month period that ends on the date of disposition, derive
directly or indirectly, more than 50% of their fair market from,
inter alia, real or immoveable property situated in Québec or
Canadian resource property (1094(c)(ii) QTA)
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
3. TQP (Cont’d)
b)
Anomalies With Respect to the Definition of TQP
•
In a 2007 Technical Interpretation, Revenu Québec was asked to opine
on the following hypothetical scenario:
USCo1
TQP?
•
A corporation resident of the U.S.A. (“USCo1”) owns all of the
issued and outstanding shares of another corporation resident of
the U.S.A. (“USCo2”)
•
USCo1 and USCo2 do not carry on, nor have an establishment in
Canada
•
The only assets of USCo1 are the shares of USCo2
•
USCo2, in turn, owns all of the issued and outstanding shares of a
corporation resident in Canada (“Canco”)
•
The only assets of USCo2 are the shares of Canco
•
For the purposes of the QTA, Canco does not carry on, nor have an
establishment in Québec
•
The only assets of Canco are Canadian resource properties (none
of which are situated in Québec)
USCo2
Canco
Canadian Resource
Properties
13
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
3. TQP (Cont’d)
b) Anomalies With Respect to the Definition of TQP (cont’d)
•
•
•
•
•
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Given that the shares of USCo2 indirectly derived their value
from Canadian resource properties, Revenu Québec confirmed
that such shares would constitute TQP
Despite the absence of any nexus to Québec, the definition of
TQP would therefore operate so as to bring the disposition of
the shares of USCo2 within Québec’s tax net under 27(1) QTA
This result demonstrates the extraterritorial reach of 1094(c)(ii)
QTA - but 92(2) of the Constitution Act limits a province’s
taxation powers to direct taxation within the province
Case law - a province may only levy tax on persons, property,
transactions or benefits situated in the province
1094(c)(ii) QTA ultra vires?
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
3. TQP (Cont’d)
c) Distinctions in Reporting Requirements
•
•
•
Under 116(3) ITA, every non-resident (including an
individual) who disposes of TCP must send the Minister
notice of such disposition within ten (10) days
Under QTA, however, non-resident individuals not
required to comply with the reporting requirements of
1097 and 1099 QTA in respect of the disposition of TQP
described in 1094(c) QTA (i.e. TQP consisting of
shares)
Exemption does not apply to corporations (1097 QTA)
67th Annual Tax Conference
67e Conférence fiscale annuelle
15
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
4. SR&ED Tax Credits
a) Overview
•
Most significant distinction between ITA and QTA – number of
Quebec specific tax incentives contained in QTA
•
According to Revenu Quebec, in 2012-2013 there were at least
192 credits or deductions that were Quebec specific
Examples of Quebec specific tax incentives include:
• Tax credit for the development of e-business
• Tax credit for the integration of IT in manufacturing and
primary sector SMBs
• International financial centres (IFCs)
• Numerous tax incentives for training and job creation
• Deduction for transportation costs for remote manufacturing
SMBs
•
16
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
4. SR&ED Tax Credits
a) Overview (cont’d)
•
•
17
Definition of what constitutes SR&ED essentially the same for
Federal and Quebec purposes
Deduction of SR&ED expenses - only current SR&ED
expenditures that are related to a business of the taxpayer – if
SR&ED conducted by a third party on behalf of the taxpayer, the
taxpayer must be entitled to exploit the results of the research
• Federal - eligible expenses reduced by any tax credits,
other forms of government assistance (i.e., grants,
forgivable loans and certain tax credits, including Quebec
ITCs) and non-governmental assistance received
• Québec - eligible expenses reduced by any government
assistance and federal ITCs received but not the amount of
any Québec ITCs
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
4. SR&ED Tax Credits (cont’d)
ITCs
Federal
Quebec
Basic Rate
15%
14%
Enhanced Rate
35%
30%
Eligibility for
Enhanced Rate
CCPC
Corporation eligible to
ITCs at basic rate, and:
- not de facto controlled
by non-residents
- assets less than $75
million
Enhanced Rate
Ceiling
$3,000,000
$3,000,000
18
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
4. SR&ED Tax Credits (cont’d)
ITCs
Federal
Qualified expenditures
19
Quebec
All current SR&ED
- Salaries and wages paid
expenditures (incl. 80%
to employees carrying on
of contract payments to
SR&ED activities at an
unrelated contractors)
establishment in Quebec
- 100% of contract
Or
payments to related
contractor
All qualifying salaries,
- 50% of contract payments
80% of contract
to unrelated contractors
payments to unrelated - 80% of SR&ED expenses
contractors and
incurred pursuant to
materials + Proxy
certain qualifying research
amount (55% of all
contracts with prescribed
qualifying salaries)
entities
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
4. SR&ED Tax Credits (cont’d)
ITCs
Clawback
Federal
Quebec
Applies to $3M ceiling
Applies to ITC rate
- $10 reduction in ceiling
for every $1 of taxable
income in previous year
(incl. associated
corporations) in excess
of $500,000
- Enhanced rate fully
available to corporations
with assets less than $50M
- $0.075 reduction in
ceiling for each $1 of
taxable capital
employed in Canada in
excess of $10M
20
67th Annual Tax Conference
67e Conférence fiscale annuelle
- Gradual reduction of rate
from 30% to 14% where
assets are between $50M
and $75M
- Enhanced rate unavailable
where assets greater than
$75M
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
4. SR&ED Tax Credits (cont’d)
ITCs
Federal
Quebec
Based on assets of
corporations:
Minimum eligible
expenditure
thresholds
- Assets less than $50M,
must spend at least
$50,000
N/A
- Assets between $50M and
$75M, linear increase
- Assets of $75M or more,
must spend at least
$225,000
21
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
4. SR&ED Tax Credits (cont’d)
ITCs
Federal
Quebec
Refundable ITCs
Qualifying corporations
- 100% of ITCs on
expenditures up to
ceiling
- 40% of ITCs on
expenditures in excess
of ceiling
100% refundable
Non qualifying
corporations
- ITCs are nonrefundable
Carry-forward
22
20 years
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N/A
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
5. Aggressive Tax Planning
a) What Transactions Must Be Reported: Comparison of ITA and
QTA
•
Triggering events for mandatory reporting are essentially identical,
notably transactions subject to confidentiality agreements or a
transaction involving conditional remuneration (see 237.3(1) and (2)
ITA; 1079.8.5 and 1079.8.6 QTA)
•
However, under QTA monetary thresholds also apply:
•
•
23
Transaction must result, directly or indirectly, in a tax benefit of
$25,000 or more for the taxpayer, or in an impact on the income
of the taxpayer or the partnership of $100,000 or more, for the
year or fiscal period (1079.8.5 and 1079.8.6 QTA)
Contrary to ITA where failure to provide timely and full disclosure of a
reportable transaction would lead to withholding of the tax benefit
sought until return is filed (237.3(6) ITA), similar withholding of tax
benefit not provided for under QTA
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
5. Aggressive Tax Planning (cont’d)
b) Voluntary Disclosure of Transactions Involving the Potential
Application of GAAR
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•
24
Contrary to ITA, QTA provides for pre-emptive voluntary disclosure
regime
A taxpayer or partnership may disclose any transaction that it began to
carry out in a taxation year or fiscal year on a preventive basis
•
Important to note that the voluntary regime also applies outside of the
context of a confidential transaction or a transaction involving
conditional remuneration
•
Principal benefit of pre-emptively disclosing a transaction is to avoid
penalties in the event the Québec GAAR would apply to the transaction
(1079.8.7 QTA)
•
Preventive disclosure must be made on the same prescribed form and
contain the same detailed information as a mandatory disclosure, and
must be made within the same prescribed period
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
5. Aggressive Tax Planning (cont’d)
c) Penalties
•
Québec: penalties apply based on number of days
disclosure is late (1079.8.13 QTA). Should the Québec
GAAR ultimately apply to the transaction, a penalty
equal to 25% of the tax benefit obtained would apply if
a mandatory or voluntary information return is not
timely filed (s. 1079.13.1 QTA)
Federal: penalties based on fee advisor is entitled to
receive either absolutely or contingently in respect of
reportable transaction (237.3(8) ITA)
•
25
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
5. Aggressive Tax Planning (cont’d)
d) Extensions to Reassessment Period
•
Québec:
•
Mandatory Disclosure: reassessment period to assess both tax and
penalties under 1079.8.13 QTA is extended indefinitely, until
compliance with reporting obligations
•
•
26
GAAR: should GAAR apply to the transaction, and a mandatory or
voluntary information return is not filed, the normal reassessment
period can be extended up to three years (1079.15.1 QTA)
Federal:
•
Reassessment period to assess tax is extended indefinitely, until
compliance with reporting obligations. Once mandatory information
return is filed, the Minister has three years to reassess (152(4)(b.1)
ITA)
•
Reassessment period to assess penalties under 237.3(8) ITA is
extended indefinitely (237.3(7) ITA)
67th Annual Tax Conference
67e Conférence fiscale annuelle
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Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
6. Other Notable Differences
a) Stock option deduction
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•
27
Federal – 50% where general conditions are met
Quebec – 25% where general conditions are met, but increased
to 50% for innovative small and medium-sized corporations:
• Corporation must carry on a business and have an
establishment in Québec
• Carrying value of assets at the end of its preceding taxation
year must be less than $50 million, taking into account the
assets of associated corporations
• Corporation is granted a refundable Québec SR&ED tax
credit for its taxation year ended in the year or in one of its
three previous taxation years
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
6. Other Notable Differences (cont’d)
b) Eligibility for small business deduction (SBD) –
Beginning in 2017
•
•
•
28
Corporation must employ more than three full-time employees in
its business throughout the year
A corporation in the primary or manufacturing sector that fails to
meet the employee requirement will nevertheless be able to
claim the SBD according to the proportion of its activities in the
primary or manufacturing sector
• Where proportion of activities is 50% or more - full deduction
available
• Where proportion of activities is between 25% and 50% SBD at a rate that is reduced linearly
Accordingly, corporate tax rate reduced from 11.9% to 8% on
income eligible for SBD.
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
6. Other Notable Differences (cont’d)
c) Additional deduction for small and medium-sized
businesses in the primary and manufacturing sectors
•
•
•
•
29
A corporation whose proportion of activities in the primary
sector or in the manufacturing and transformation sector is
50% or more – additional 4% deduction
Where proportion is between 50% and 25%, the rate of the
additional deduction will be reduced linearly
Primary sector activities are those attributable to agriculture,
forestry, fishing, hunting, mining, quarrying, and oil and gas
extraction, whereas manufacturing sector activities are those
that constitute manufacturing and processing activities
Accordingly, corporate tax rate reduced from 11.9% to 4% on
income eligible for SBD
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger
The Taxation Act (Quebec) vs.
the Income Tax Act (Canada)
6. Other Notable Differences (cont’d)
d) Rental income of a non-resident inter vivos trust subject
to an income tax in Quebec
•
•
•
•
•
30
Applicable rate is 7.05%
Applies to net income derived from the rental of a “specified
immovable” by a “specified trust”
No requirement that non-resident trust make a 216 ITA election
for federal income tax purposes
Tax also applies to a trust's share of such income from a
partnership of which the trust is a member
If NR trust becomes resident in Canada it will be deemed to
have disposed of any specified immovable that it owned at that
time immediately before becoming resident in Canada for
proceeds equal to the fair market value
67th Annual Tax Conference
67e Conférence fiscale annuelle
Christian Meighen
Michel Ranger