The Quebec Taxation Review Committee, better known as the Godbout Commission, tabled its report on Thursday, March 19, 2015 at 2:30 pm. The report was previously submitted to Carlos Leitão, Quebec’s Finance Minister, on February 6. In fact, employees in Quebec’s Ministry of Finance were involved in the Commission’s work. In a press release on March 19, the Minister indicated that some elements of the Godbout report will be reflected in the provincial budget to be tabled on March 26.
The report is a voluminous document that provides a relatively comprehensive analysis of the tax system. In it, the Committee proposes a ‘zero cost’ tax reform (no impact on public finances), intended to stimulate growth and savings. The purpose of this article is to identify measures that could affect businesses and individuals.
Key proposals
For corporations, tue committee recommends that :
- The corporate income tax rate be reduced from 11.9% to 10%
- The small business deduction be replaced by a growth premium for private corporations with paid-up capital of less than $15 million and at least five employees: on taxable income between $100,000 and $500,000, SMEs would pay a marginal rate of 4%.
- The payroll tax rate for SMEs be reduced from 2.7% to 1.6%.
- The fuel tax rate with respect to gasoline and diesel be increased.
- An additional registration fee apply to vehicles whose value exceeds $50,000.
- The rate of tax on insurance premiums be raised to 11% to harmonize it with the QST.
- The investment tax credit be abolished completely by 2018 (let the sunset as set).
- Budget measures be introduced to support commercialization by SMEs of R&D results.
For individuals, the committee recommends that :
- The health contribution be abolished.
- The income level shielded from taxation be increased from $14,281 to $18,000.
- The income tax rate schedule be split by increasing the number of tax brackets, and that the combined Québec-federal rate be capped at 50%.
- The Quebec Sales Tax (QST) be increased from the current 9.975% to 11%.
- The specific tax on tobacco products and on alcoholic beverages applicable to beer be increased.
- The increase of fees for public services: mainly that the price of electricity be raised and a new tax on overconsumption of electricity in the household sector be implemented.
- Tax measures regarding work premiums be enhanced, including the introduction of a tax credit or other measure to act as a tax shield for families who are currently penalized for increasing their work income, with respect to certain benefits and credits.
- A single rate of $35, indexed for reduced-contribution childcare services be established, along with an increase in the Quebec refundable tax credit for childcare expenses.
- The solidarity tax credit be enhanced.
- A penalty be implemented for any withdrawal of funds from an RRSP before the age of 55, except under specific circumstances, and source deductions be increased to the maximum tax rate.
The report also contains other less immediate proposals requiring more extensive analysis and, in some cases, national coordination.
Key measures where analysis or coordination is recommended
- Introduce measures to make non-arm’s length sales of businesses eligible for the lifetime capital gains exemption, either by reaching an agreement with the federal government, or by the province intervening independently and remedying the situation solely in respect of Quebec through a tax credit or, otherwise, under specific conditions designed to prevent abuse.
- Completely revise capital gains taxation, including 100% taxation of the gain, less an adjustment for inflation and modulation depending of the length of the holding period.
- Abolish the preferential treatment given to stock options held by employees in public corporations.
- Replace the lifetime capital gains exemption with an additional RRSP contribution.
- Some questionings about the lifetime capital gains exemption for principal residences.
- Consider replacing the taxation system with an adapted version of the Scandinavian tax model.
- Conduct a complete overhaul of all tax measures that reduce tax revenues.
- Rigourous oversight of provisions respecting trusts in order to limit interprovincial tax planning schemes, particularly with respect to revenues from businesses operated in Quebec but allocated as property revenue to beneficiaries residing in another province, circumvention of the concept of associated companies, opportunities for income-splitting and the multiplication of lifetime capital gains exemptions.
- Take a concerted approach to combat loss of public revenues linked to interprovincial trade, globalization of trade, e-commerce transactions and Canadian investments in countries with favourable taxation policies such as Barbados, the Cayman Islands and Luxembourg.
- Integrate the polluter pays principle and put in place eco-taxation measures by implementing tolls on roads and installing water meters in buildings.
To conclude, this is an insightful report on Quebec taxation that sets laudable objectives what aims to set a very cohesive framework. Coordination with the federal government appears to be a prerequisite to full and effective implementation of the proposed measures. All in all, this reform would then have a significant impact on all taxpayers. However, regardless of the report’s recommendations, it is the current Quebec government that has the final say, and by the voice of the province’s Minister of Finance, Carlos Leitão, tell the way forward, say which measures are to be implemented and may or may not choose to enter into talks with federal and provincial counterparts.
Do not hesitate to contact your FBL expert.