What’s Your Tax Issue? Quebec Business Income

The Tax Issue

I live in Ontario. I have $130K  of self employment income earned in Ontario and $12K  of  self employment income earned in Quebec. Do I have to file a Quebec return? Will I have any balance of taxes owing given the amount I earned in Quebec?

The Answer

Every self-employed person resident in Canada may have to perform an allocation of income if their income is earned through a permanent establishment (“PE”) in a different province. If you don’t have a PE in another province through which you earn your business income, then no allocation is necessary.

A PE is defined as a “fixed place of business”, and includes an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse. You will also have a PE if:

(a) You have an employee or agent established in the province if he has the general authority to contract on your behalf or if he has a stock of merchandise from which he regularly fills orders; or

(b) You have made use of substantial machinery or equipment in the province at any time during the year.

If you have a PE in another province, you must make an allocation of your income among the provinces in which you do business. There is a specific formula you must use to make the allocation, which is done on form T2203. The allocation you make will affect your provincial tax payable.

And yes, if you have PE in Quebec, which has its own tax return, then you must file a Quebec tax return. Report the full amount of your income on the Quebec return. Then the provincial allocation is made and the Quebec tax payable is apportioned based on the allocation.

So, to answer your question, if you have a PE in Quebec, you will have a Quebec tax return to prepare and you will likely have some Quebec tax to pay, based on the formula.

What’s Your Tax Issue? Quebec Quandry

The Tax Issue:

I have run a part time consulting business out of my home in Ontario for the last three years.  Some of my clients are in Quebec and I do go to their offices sometimes to consult with them.  When I bill them I collect GST and QST as they are from Quebec and I submit it to both governments.  As a resident of Ontario, I have never submitted a tax return to Quebec, only to Canada and Ontario.  Today I received a letter from Revenue Quebec saying I need to file Quebec tax returns for the past three years as I have conducted business in Quebec. Does this sound correct?

The Answer:

You’ve unfortunately become a blip on the radar screen of Revenue Quebec because you have correctly registered and are collecting the Quebec Sales Tax on sales made in that province.

Because of this, the Quebec computers are now wondering where your income tax return is.

As a resident of Ontario, your only obligation for provincial income tax is to that province, unless you are carrying a business in another province through a permanent establishment located there.

Every Canadian doing business through a permanent establishment in multiple provinces must allocate his or her income to each such province based on a formula that takes into account revenues as well as wages for each province.

For this purpose, a permanent establishment in a province is defined as a fixed place of business, and includes an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse.

You will also be deemed to have a permanent establishment if:

(a) You have an employee or agent established in a province, if he has general authority to contract for you, or if he has a stock of you merchandise from which he regularly fills orders he receives; or

(b) You have made use of substantial machinery or equipment in a province at any time in the year.

So, getting back to your question, since you are charging the QST on sales into Quebec, there’s a good chance you are considered to be carrying on business there. However, unless you have a permanent establishment there, Quebec has no right to ask you to file an income tax return.