Tax Bulletin

Update on Quebec's Financial and Economic Situation

On December 2, 2014, Quebec’s Minister of Finance, Mr. Carlos J. Leitão, announced several new tax measures designed to assist economic recovery and to achieve and maintain a balanced budget. This update on Quebec’s economic and financial situation is similar to a mini annual budget and includes major changes in various sectors.

Economic Outlook

The Quebec government expects Quebec’s real GDP to grow 1.6% in 2014 after experiencing sluggish growth of 1.0% in the prior year. The gradual economic recovery is forecasted to persist throughout 2015 as Quebec’s real GDP is projected to grow at 1.9%. The growth in real GDP is largely underpinned by a projected rise in exports of 3.1% and 3.5% over 2014 and 2015 respectively. Increased exports, which are further fueled by a weakened Canadian dollar, are expected to stimulate growth in domestic demand. Increased domestic demand and steady consumption are expected to lead to increased job creation, and a slight decrease in the unemployment rate from 7.8% in 2014 to 7.7% in 2015.

The steady recovery of the Quebec economy has allowed the government to move towards its objective of reducing the fiscal deficit in 2014-2015 to $2.35 billion, and to target a return to a balanced budget in 2015-2016. This will be achieved primarily through tighter control of government spending, a reduction in tax expenditures and the use of the contingency reserve. Additional measures have been identified in the December 2014 update, including emphasizing an increase in private investment and supporting Quebec’s commitment to a greener economy.

Tax Measures

Health Services Fund contributions in the primary and manufacturing sectors

In order to assist small and medium-sized enterprises (SMEs) in sectors where competition is especially stiff, the Health Services Fund contribution rate for SMEs in the primary and manufacturing sectors will be reduced as of 2015. Thus, eligible employers whose total payroll is equal to or less than $1 million will see the rate decrease from 2.7% to 1.6%. Eligible
employers whose total payroll is between $1 million and $5 million will be subject to a rate ranging from 1.6% to 4.26%.

Capital gains exemption in the farming and fishing sectors

To further encourage risk taking and investment and to create a climate that is more conducive to capital raising, as of 2015, the $800,000 capital gains exemption applicable to farm and fishing property will be raised to $1 million. As a result, the indexation for inflation of the exemption for these types of properties will be temporarily frozen.

Tax credit for Quebec film and television production

To take into consideration the financing costs that a qualified corporation incurs while waiting to receive tax assistance payments, the Quebec film and television production refundable tax credit, at both the 36% or 28% rate, will now be calculated on an “increased expenditure” equal to the total of the qualified labour expenditure and an amount equal to 2% of the qualified labour expenditure.

This change is applicable to productions for which a claim is filed with the SODEC between December 3, 2014 and December 31, 2016.

Compensation tax on financial institutions

The temporary contribution rates for financial institutions on total payroll will be increased from December 3, 2014 to March 31, 2017. The temporary contribution rates by financial institution category will increase respectively from 2.8% to 4.48%, from 2.2% to 3.52%, from 0.9% to 1.44%, and for insurance premiums and amounts established in respect of an insurance fund from 0.3% to 0.48%. Afterwards, the previous rates will be back in effect from January 1, 2017 to March 31, 2019, as planned in the November 20, 2012 budget.

Tax on capital for insurance corporations

The rate of tax on capital for insurance corporations will increase from 2% to 3%. The new rate will apply to all 12-month periods or taxation years ending after December 2, 2014 and will apply proportionately to any 12-month period or taxation year straddling December 2, 2014.

Scientific Research and Experimental Development (SR&ED)

The legislation has been amended in order to standardize the applicable tax credit rates on SR&ED expenditures incurred for university research, precompetitive research or by a research consortium with the rate applicable to SR&ED wages. Thus, the tax credit rates applicable to all of these research activities will range from 14% to 30%. This measure is applicable for SR&ED expenditures incurred after December 2, 2014 under any contract entered into after that date.

A minimum exclusion threshold is introduced so that the first $50,000 of eligible expenditures claimed is excluded from tax assistance in the form of SR&ED tax credits. This $50,000 threshold gradually increases for corporations with assets between $50 million and $75 million, up to $225,000. This reduction of the Quebec government tax assistance should have a positive impact on the level of SR&ED tax credits available from the federal government. This measure applies to fiscal years beginning after December 2, 2014.

Tax on automobile insurance premiums

As of January 1, 2015, the tax on automobile insurance premiums, which was exceptionally 5%, will increase to 9%. From now on, the 9% general rate will apply to all insurance premiums.

Tax credits for union and professional dues

The non-refundable tax credit on eligible contributions to a recognized professional association, a union or a similar group will decrease from 20% to 10% as of the 2015 tax year.