The 2013-2014 Budget tabled on November 20th, 2012 in the Québec National Assembly is a reflection of the Parti Québécois' promise to "get back on the three-way path that will enable us to move forward again". Accordingly, Finance Minister, Nicolas Marceau, introduced the 2013-2014 Budget that announced a series of measures aimed at promoting and accelerating Québec's economic development. The Budget provides for a shift of a portion of the fiscal burden from the less fortunate to the more affluent. "The State will require the more affluent among us to do more. We will also ask the banks and other financial institutions to de more". Below is a summary of some of the most notable measures:

To Tax or to Contribute

Beginning in 2013 the health contribution, first introduced in 2010, will be calculated on a per individual basis as opposed to an individual's family income. The health contribution per adult as of 2013 will be calculated as a function of each adult's income for the year. An individual whose income does not exceed $40,000 will be subject to a contribution of either $100 or 5% on income exceeding $18,000, whichever is lower. An individual whose income does not exceed $130,000 will be subject to a contribution of either $200 or the aggregate of $100 plus 5% on income exceeding $40,000, whichever is lower. Finally, the select few whose income exceeds $130,000 will be subject to a contribution of either $1,000 or the aggregate of $200 plus 4% on income exceeding $130,000, whichever is lower. Therefore, an individual earning $150,000 of income or more will be subject to the maximum contribution of $1,000. In order to ensure collection of this health contribution, the legislation will ensure that said contribution will be subject to a source deduction.

The Fourth Tax Bracket

At least the Minister decided to name this one a "tax". Perhaps more friendly language such as "the new fourth support bracket" could have been suggested. As of the 2013 taxation year, a new personal income tax bracket has been added for individuals earning more than $100,000 of taxable income. A new rate of 25.75% will apply to this new bracket. The top combined bracket federally and provincially for Québec residents will be 49.97%.

Furthermore, in order to maintain integration, the following changes in rates will be introduced as of January 2013:

  • The tax rate for an inter vivos trust will increase from 24% to 25.75%;
  • The capital gain inclusion rate for minimum tax calculation purposes will be raised from 75% to 80%;
  • The withholding rate with respect to disposition of taxable Québec property will be raised from 12% to 12.875%;
  • Rental income earned in Québec by an inter vivos trust not resident in Canada will be taxed at 7.05%, up from 5.3%. With the 48% gross-up in the federal rate, this will ensure that rental income earned in Québec by said trust will be subject to the top rate of 49.97%. Such trusts must now file an income tax return;
  • The tax rate on income split with children (Kiddie tax) will be increased by 1.75% to 25.75%.

One would assume that an addition to the top bracket would result in a corresponding increase in the donation tax credit rate for donations exceeding $200; one would be wrong. The previous tax credit rate of 24% is maintained.

Tax Holiday for Investments ("THI")

Following the Budget Speech a corporation that carries out a large investment project in Québec may, under certain conditions, benefit from a tax holiday on the income from its eligible activities relating to such project and from a holiday from employer contributions to the Health Service Fund regarding the portion of wages paid to its employees that is attributable to the time they spend on such activities. This tax holiday will last for ten years and may not exceed 15% of the total eligible investment expenditures relating to such project. Briefly, to qualify for a large investment project, the project must concern activities in the manufacturing, data processing, hosting and related services, wholesale trade or warehousing sectors and will require a minimum investment of $300 million. To receive the THI the corporation will have to obtain an initial certificate as well as annual certificates issued by the Minister of Finance and the Economy. The initial certificate must be submitted before November 21, 2015 and before the project begins. Accordingly, projects currently underway will not qualify. The $300 million investment threshold must be reached no later than the end of the 48 - month period starting on the date of the initial certificate and will not include expenditures relating to the purchase or use of land nor those relating to the acquisition of a business already carried on in Québec.

With the introduction of the THI, the tax holiday previously announced in the March 14, 2000 Budget Speech which was placed under moratorium in the June 12, 2003 Budget Speech will be eliminated.

Temporary Increase in Tax Incentives for the Biopharmaceutical Industry

A taxpayer who carries on a business in Canada and carries out scientific research and experimental development work in Québec can claim a refundable tax credit commonly known as "R&D salary". The rate of the tax credit is 17.5% and it can be increased up to 37.5% for a Canadian controlled private corporation that qualifies as a small-to-medium sized enterprise ("SME").

The Budget announced that the tax legislation will be amended so that an eligible biopharmaceutical corporation may receive a refundable tax credit for R&D salary equal to 27.5% of its eligible R&D expenditures (an increase from the 17.5% rate). To benefit from the higher rate, the corporation will need to obtain an eligibility certificate from Investissement Québec.

An eligible biopharmaceutical that is also a SME that benefits from the 37.5% tax credit rate will see its rate reduced linearly to 27.5% instead of 17.5% where its assets increase in range from $50M to $75M. This temporary increase to the 27.5% rate will cease for expenditures incurred and carried out after December 31, 2017.

Conclusion

Members of the Opposition feel that "the budget will chase away investors" and ultimately that “this budget is the equivalent of an economic-development plan … for Ontario". The Opposition may be right. If the minority government succeeds in introducing initiatives designed to tax the "rich", there very well may be less rather than more affluent taxpayers in Québec at the time of the next Budget.

Author

Joseph (Hovsep) Takhmizdjian 
JTakhmizdjian@blg.com
514.954.2538

Expertise

Tax