On March 25, 2021, the Québec government released its 2021 budget. The following are highlights of the key tax measures.

Personal tax measures

No personal income tax rate changes were announced for 2021 in this year’s budget. The current personal combined income tax rates for 2021 are outlined below:

*The tax rate for other-than-eligible dividends for 2022 is proposed to be 48.70 per cent.

Change in the rate of the dividend tax credit for non-eligible dividends

The percentage rate of the tax credit for non-eligible dividends, which is currently 4.01 per cent of the grossed-up dividend amount, will be reduced to 3.42 per cent of the grossed-up dividend amount of a dividend received or deemed received after December 31, 2021. No change is made to the non-eligible dividend gross-up percentage rate.

Enhancement to the refundable tax credit for home-support services for seniors

In order to augment tax assistance for seniors, there will be an incremental enhancement of the tax credit for home support services by one percentage point per year starting in 2022.

Revisions to tax credit reduction based on family income

To further recognize the needs of seniors and ensure greater consideration is given to overall family income, changes to the mechanism for reducing the established tax credit for home-support services based on seniors' family income will be introduced. These changes relate to dependent seniors and non-dependent seniors and will apply starting in 2022.

Increase in eligible expenses for seniors living in a rental apartment building

The maximum amount of rent used to calculate eligible expenses for the tax credit will be raised from $600 to $1,200 a month starting in 2022.  

Corporate tax measures

In this year’s budget, a decrease to the small business deduction rate was announced. The corporate income tax rates as of March 25, 2021 are outlined below:

Small business deduction rate decrease

The small business deduction (SBD) rate will be decreased from 4 per cent to 3.2 per cent for corporations that have a taxation year ending after March 25, 2021.  The other terms and conditions pertaining to the SBD will remain unchanged. As was previously announced prior to the budget, temporary relief is being provided for the linear reduction of the SBD rate resulting from lower-than-expected remunerated hours because of COVID-19.

Temporary increase in the tax credit relating to investment and innovation

On March 10, 2020, the tax credit relating to investment and innovation was introduced to encourage productivity gains for businesses in all regions of Québec, while further promoting investments in regions where the economic vitality index is low.

In order to encourage the carrying out of these investment projects and to stimulate Québec's economic recovery, the tax credit relating to investment and innovation will be temporarily doubled to the following rates:

1. 40 per cent (previously 20 per cent) for a specified property acquired to be used mainly in the low economic vitality zone.
2. 30 per cent (previously 15 per cent) for a specified property acquired to be used mainly in the intermediate zone.
3. 20 per cent (previously 10 per cent) for a specified property acquired to be used mainly in the high economic vitality zone.

These temporary rates will be in effect from March 26, 2021 to December 31, 2022 with the return of the previous rates from January 1, 2023 to December 31, 2024.

Changes to the tax holiday for large investment projects

In order to support Québec businesses in carrying out their investment project and to make the tax holiday for large investment projects more appealing, the following three changes will be made:

1. The start-up period for certain investment projects will be extended.
2. The addition of a choice for a corporation or a partnership with respect to the date of the beginning of the tax-free period for its investment project.
3. The possibility for a project that modernizes a business through digital transformation to be recognized as a large investment project.

These changes will apply to investment projects that begin to be carried out after March 25, 2021.

Temporary enhancement of the refundable tax credit for on-the-job training periods

The purpose of the refundable tax credit for on-the-job training periods is to support the efforts of businesses that contribute to the development of the professional competence of students and apprentices.

To facilitate labour market integration of students and apprentices, while encouraging businesses to contribute to the development of young people's skills, the tax credit rates – other than the enhanced rates applicable to eligible trainees enrolled in an education program or a prescribed program – will be increased by 25 per cent. As a result, this temporary increase in select tax credit rates will be as follows:

1. The basic rate of the tax credit is increased from 24 per cent to 30 per cent where the eligible taxpayer is a corporation.
2. The basic rate of the tax credit is increased from 12 per cent to 15 per cent where the eligible taxpayer is an individual.
3. Where the eligible trainee is a disabled person, an immigrant, an Aboriginal person or where the on-the-job training takes place in an eligible region:
   • the tax credit rate is increased from 32 per cent to 40 per cent where the eligible taxpayer is a corporation and
   • the tax credit rate is increased from 16 per cent to 20 per cent where the eligible taxpayer is an individual.

This temporary increase will apply to qualified expenditures incurred after March 25, 2021 and before May 1, 2022 in respect of a qualified training period beginning after March 25, 2021.

Elimination of the requirement to obtain an advance ruling for R&D tax credits

In order to reduce the administrative procedures for R&D tax credits, the budget eliminates the requirement to obtain a favourable advance ruling from the Minister of Revenue for R&D credits. This permanent measure is effective March 26, 2021.

Addition of restrictions to certain tax incentives

The Québec tax system includes various refundable and non-refundable tax incentives aimed at encouraging certain activities or behaviour. Several tax incentives have specific restrictions in place, such as those on content intended for an adult audience that contains explicit sex scenes. Other tax incentives have restrictions on content that promotes, among other things, discrimination, racism or violence.

As a result of changes in digital technology, the budget is proposing additional restrictions to ensure the tax incentives are not used for certain content, such as sexually explicit scenes, encouragement of violence, racism or other forms of discrimination.

These additional restrictions and adjustments to existing restrictions will affect the following tax incentives:

1. Tax holiday for large investment projects
2. R&D tax credits
3. Tax credits for the development of e-business
4. Tax credits relating to investment and innovation
5. Tax credits for multimedia titles
6. Synergy capital tax credit

Indirect and other tax measures

Coordination of QST and GST/HST related to the digital economy

The federal government proposed a GST/HST simplified registration and remittance framework similar to the regime adopted by Québec related to non-resident vendors and non-resident distribution platform operators who are not registered under the normal GST/HST rules.

The budget confirms that amendments will be made to the Québec sales tax (QST) to avoid any difference in harmonization between the QST and GST/HST systems that may result from the implementation of the federal proposals.

Extension of credit on employer contribution to the health services fund

As the CEWS has been extended by an additional three periods to June 5, 2021, the credit on the employer contribution to the health services fund will also be extended to June 5, 2021.

Harmonization with federal beneficial ownership trust reporting rules

Québec tax legislation and regulations will be amended to harmonize with the federal legislation and regulations regarding beneficial ownership reporting rules for trusts. The only exception will be the amount of the penalty. The Québec tax system penalty will be equal to $1,000 with an additional penalty of $100 per day calculated as of the second day that the omission or default lasts, up to a maximum of $5,000.

The collection of beneficial ownership information with respect to trusts will apply to taxation years of trusts ending after December 30, 2021.

Change in requirement for a trust to file an information return

Changes will be made to Québec's tax regulations to have testamentary trusts no longer qualify as an “excluded trust.” The same will apply to a succession, with the exception of a succession that is a graduated rate estate.

These amendments to Québec tax regulations will apply to taxation years that end after December 30, 2021.

Requirement to provide a trust's tax identification number

Effective March 26, 2021, a trust's tax identification number will become mandatory identification information. Thus, a trust will have to obtain its tax identification number from the Minister of Revenue if it does not have one. In addition, it will have to indicate its tax identification number in any return, report or other document it must file under a tax law.

Autonomous application of the penalty for promoters of aggressive tax planning

The budget proposes to amend the tax legislation so that the penalty applicable to a promoter of a transaction or series of transactions that includes the transaction reviewed under GAAR will apply autonomously, regardless of whether there is a penalty applied beforehand on the taxpayer who is subject to the GAAR-based assessment. However, for greater clarity, the penalty will only be applied to a promoter once the Minister of Revenue has established a GAAR-based assessment against a taxpayer. This amendment will apply as of the date the bill giving effect thereto is assented to.

Next steps

Contact your Baker Tilly advisor to learn more about how we can help navigate the complexities of the Canadian tax system.