Under the Auspices of the Quebec Order of Chartered Professional Accountants, I am pleased to provide a copy of the 2016-2017 Québec Budget Summary / 2016-2017-Résumé du budget du Québec. I will also place a link on the Tax Links Page, and they will remain there, along with future federal and Quebec budget summaries for future reference.
The sale of real property in Quebec is never something that should be undertaken without regard to all the tax consequences. There are income tax issues, as well as sales taxes that should be considered. Furthermore, you should never ignore the application of Land Transfer taxes on any transaction.
Land Transfer taxes are imposed under the Act Respecting Duties on Transfers of Immoveables (“the Act”) and are invoiced to the purchaser by the relevant municipality after the registration of the deed of transfer. The rates range from 0.5% to 1.5%, but Montreal’s highest rate is 2%, applying on transfers of more than $500,000.
The question I most often have to deal with in my practice is whether any of the exemptions for land transfer taxes will apply to a given transaction. Transfers among parents and children and between spouses are generally exempt under section 20 of the Act. Transfers among siblings are not exempt.
Exemptions involving corporations are found in section 19 of the Act, and are applicable, inter alia, under the following situations:
- where the transferee is a new corporation resulting from the amalgamation of several corporations;
- where the transfer is made by an individual to a corporation of which at least 90% of the issued voting stock is owned by such transferor immediately after the transfer;
- where the transfer is made by a corporation to an individual, if such person is, immediately before the transfer, the owner of at least 90% of the voting stock of the transferor;
- where the transfer is made between two closely related corporations. For the purposes of this exemption, two corporations are closely related where there is at least a 90% ownership of voting shares between the two corporations or their subsidiaries. For example, this opens the door for exemptions between sister corporations where they are both owned by a single holding company.
Notably, sister corporations owned by individual shareholders would not qualify for the exemption.
There is a provision directly relating to the above that is (weirdly) not contained in the above Act, but rather in section 1129.29 the Quebec Taxation Act. Essentially, it is an anti-avoidance provision that prevents taxpayers from simply issuing 90% voting shares to the transferor of property to avoid the land transfer taxes and then immediately thereafter extinguishing the shares.
It provides that any time control has been acquired within 24 months after the transfer of property to a corporation, and where it may reasonably be considered that the property was transferred in contemplation of the acquisition of control , then the corporation will be liable for 125% of the land transfer taxes that would have been payable.
It should be noted that there is no exemption in the Act for transfers to partnerships. However, in the case of Statour v. Bromont, the courts went beyond the precise letter of the law. This case involved the transfer of property between two partnerships, both of which were controlled by the same company. In effect, the court viewed the partnerships as corporations and, because the ultimate parent corporation remained the at all times the beneficial owner of the property, allowed the exemption.
In the case of Productions Merveilles Inc. v. Montreal, the court did not stretch the law any further. This case involved the transfer of property between a corporation owned by one spouse and a partnership with both spouses as its partners. The court refused to view the two companies as being closely related under the law.
As we can see, the rules governing these tax exemptions appear strict, and in some ways illogical, but the courts seem to make an effort at times to infuse them with some common sense. No transfer of real property in Quebec should be made without considering these rules.
Under the Auspices of the Quebec Order of Chartered Professional Accountants, I am pleased to provide a copy of the Québec Budget Summary 2014-2015 / Résumé du budget du Québec 2014-2015. I will also place a link on the Tax Links Page, and they will remain there, along with future federal and Quebec budget summaries for future reference.
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?
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.
One year ago, Quebec released its proposals to fight aggressive tax planning and The Tax Issue was there to explain it all.
This week, Revenu Québec has released the form to be used to report your questionable series of transactions.
Form TP-1079.DI is a comprehensive form of no less than 11 pages, designed to allow the government full access to every aspect of your tax plan.
For corporations established in Quebec, the form must be completed in French (or at least the French version of the form must be used).
The form sets out the criteria required for mandatory reporting, which should be reviewed by anyone promoting a tax shelter.
Then comes all of the information reporting, and it is exhaustive, to say the least. Your are asked for the names of all parties involved, identification of your tax advisors, dates, tax consequences and a separate section asking for a detailed step-by-step analysis of the series of transactions (add attachments if the room provided is not sufficient).
The form goes on to ask you to identify specifically what taxes you avoided through this series of transactions. (Frankly, I’m surprised it doesn’t feature a remittance slip to allow you to immediately pay back the taxes plus interest.)
Tax shelter promoters who fall into the mandatory filing requirements will have no choice but to comply. I would be very curious, however, to see how many taxpayers will be voluntarily reporting their tax planning transactions as a protective measure. It’s a catch-22, of course. If a transaction is questionable enough to consider filing the form, then you can bet that Revenu Québec will be predisposed to applying the GAAR if they receive the information. If, on the other hand you decide not report, then you escape automatic and immediate scrutiny, but become exposed to the 25% additional penalty as well as the extended reassessment period.
One thing is for certain. Clients and their advisors must be made aware of this law and its inherent risks and the cost of implementing a complex tax plan will rise as a result of these onerous reporting obligations. (OK, that was at least two things 🙂 )
The Tax Issue:
If I were to be a Canadian non-resident living in the Caribbean and I have rental property in Quebec, besides filing a federal tax return for Electing under Section 216, do I have to file anything for Quebec?
Part XIII of the Canadian Income Tax Act provides for a 25% withholding tax on rents paid to non-residents. As explained in an earlier post, an election under section 216 can be made whereby the non-resident pays tax under Part I, effectively replacing the 25% withholding tax with the normal income tax on rental income, net of expenses.
Quebec, which collects and administers its own income tax, does not levy withholding tax on rents paid to non-residents. Therefore, no Quebec tax return is required during the time you own the property and collect rents.
However, property situated in Quebec is considered to be “Taxable Quebec Property”, and is subject to withholding tax upon the sale of the property. Similar to the rules under section 116 of the Canadian law, the Quebec Taxation Act (Section 1097) provides for a 12.875% withholding tax on gains derived from property situated in Quebec. If a clearance certificate is not obtained (Form TP-1097), the 12.875% is levied on the full sale price.
In the year of sale, you will have to file both federal and Quebec income tax returns in order to report the sale and (possibly) recover a portion of the withholding tax.
Is it safe? Maybe Sir Lawrence Olivier’s demented sadist was simply a frustrated Quebec dentist, driven crazy over the years by government restrictions preventing him from incorporating his practice. OK, maybe not, but he could have been :-).
Are you also a member of one of Quebec’s 45 professional orders? Did you know that you can finally start thinking about running your business through a corporation? It’s been a couple of years now, but Quebec has joined the rest of Canada and now allows professionals such as pharmacists, lawyers and dentists to incorporate their practices.
I’m A Dermatologist. Surely I Can’t Incorporate, Can I?
Yes you can. Any business can incorporate as long as there are no legal restrictions to doing so. A member of a profession governed by the professional code of Quebec has, until recently been restricted legally from incorporating due to concerns for the protection of the public. But that has all changed now and the tax benefits of incorporation are now available to all professionals, including physicians.
Tax Benefits? What Tax Benefits?
There are essentially 3 main tax advantages to incorporating your practice. Let’s discuss them in order of importance.
Tax Deferral: If you are a high income earner in Quebec, your top personal tax rate is 48.22%. Corporate tax rates for small business income are 19%. So, if you make enough money to save in your corporation, you will defer close to 30% in taxes. This leaves that much more money in your hands to invest until you need the funds personally.
Income Splitting: Generally, anyone can own shares in a corporation. If you have family members with low income, you could pay out those low-taxed dollars from your corporation to them as dividends. This strategy turns a deferral into a permanent tax savings!
Capital Gains Exemption: If you run your business through a corporation and then sell your practice, the capital gain on the sale might wind up being tax-free. Every individual in Canada is allowed an exemption for up to $750,000 in capital gains on certain shares of small companies. What’s more, those family members of yours each have the same access to the exemption, so this amount could be multiplied with the proper planning.
What about the Public? Don’t we care about them anymore?
Sure we do. The main reason why professionals were restricted from incorporating in the past was that we didn’t want them hiding behind the “corporate veil” in terms of their professional liability. Under the new regulations, any professional who incorporates must still acquire professional liability insurance within their corporation. There are also restrictions on who can run the company and who can hold voting shares. Any professional thinking about incorporating must carefully examine the regulations governing the incorporation of their practice to ensure they comply with all the restrictions.
OK, I’m ready. What Now?
My best advice is – don’t try this at home! I strongly suggest that you consult your tax advisor, but the basic steps are as follows:
- First, check with your professional order to ensure that they have adopted the necessary regulations to allow their members to practice through a corporation. While the province has opened the door to all professions some have been slow to step across the threshold.
- Set up a new company: You can create a company under the Canada Business Corporations Act or under the laws of the province in which you practice.
- Inform your professional order: Again, check the regulations – your professional order will likely require a signed declaration and a fee before they will approve your change in status.
- Transfer your business assets: An established professional practice will have to be transferred, or sold from you personally to your corporation. This will normally require transfer documentation and special tax election forms for the CRA and Revenue Quebec to ensure that you don’t inadvertently trigger any tax on the transfer of the practice.
Thanks. But I’m Still Confused. Where can I get more information?
Your professional order should have a website with a special section on incorporating your practice. Check it out or give them a call. They will likely have someone on staff in charge of incorporating your practice.
The Tax Issue:
I sold my home in 2009 and I want to claim the exemption for a principal residence. If the full amount is exempt, must I fill out and file the designation form?
You’d be shocked at how often I get this question during tax time – that’s twice today so far! Let’s put it to rest once and for all. Briefly, the exemption provides relief from any tax on a gain on the sale of property if it was designated as your principal residence. First, your gain is calculated. Then you must determine the number of years that you occupied the property and wish to designate it as your principal residence.
In some cases, with multiple properties, it can get complicated, but in the simplest case, where you have sold your home and it was your only residence, then you will be designating all the years you owned the property, and your gain will be fully exempt.
In such a case, even though the law technically states that you must file a designation form T2091 to calculate the exemption, the CRA has stated that you don’t have to report the disposition and you don’t need to file the form as long as the full gain is exempt, and you did not make a capital gains exemption election on the property in 1994 (that’s a whole other blog – don’t ask 🙂 ). If you want to be super cautious, though, I would still file the form, because the CRA has been known to renege on their administrative concessions from time to time.
If you live in Quebec, although you don’t have to report a fully exempt sale of a principal residence on your tax return, you must still complete and file form TP-274 with your income tax return. No administrative concession is given here.
The Minister of Finance of Quebec has announced major new rules in the fight against “Aggressive Tax Planning” (“ATP”).
Remember the “Quebec Shuffle”? How about the Alberta-Resident Trust? These and other tax-planning strategies were once all the rage, saving tax dollars by exploiting differences among provincial tax rules. Before they became well-known, they were marketed by tax planners as “confidential” or “proprietary” tax plans, and clients would have to sign non-disclosure agreements before gaining access to these strategies. Often, the fees charged by tax advisors were contingent – based on the value of the taxes saved.
Although the provinces took steps to eliminate many of these plans by introducing specific legislation over the years, and despite the existence of the General Anti-Avoidance Rule (“GAAR”), last January the government of Quebec issued a discussion paper to float proposed rules to further combat ATP transactions.
On October 15, 2009, the Minister of Finance released Information Bulletin 2009-5, which outlines the final version of new rules that will immediately apply to Quebec taxpayers and their advisors.
The centerpiece of the proposed legislation is the new reporting regime. These rules are largely based on the U.S. model of “Reportable Transactions”, which has been in place for some years.
In certain instances, taxpayers will now be required to report the details of a transaction (or series of transactions) to Revenue Quebec by the due date for filing their returns. Taxpayers will have to report a complete and detailed description of the facts and the tax consequences relating to the transaction.
There are two categories of transactions that must be reported:
- Confidential transaction – where the tax advisor has demanded secrecy from the taxpayer regarding the plan; and
- Transaction with conditional remuneration – where the tax advisor is being compensated based on some form of contingency arrangement. (this would exclude contracts for R&D and other tax credits)
The mandatory disclosure will apply to either of the above types of transactions; however, they will not apply unless the transaction in question results in a tax benefit of at least $25,000 or a deduction of at least $100,000.
Failure to file the information will result in onerous consequences – a penalty of $10,000 plus $1,000 per day up to a maximum of $100,000, as well as suspension of the limitation period for reassessment until the disclosure is filed.
New Punitive Rules Where GAAR Applies
The Minister proposes to extend the limitation period and assess penalties where a transaction is found to be subject to the GAAR.
Firstly, the normal reassessment period (currently 3 or 4 years) will be extended by a full three years. Furthermore, a penalty of 25% of the additional tax will be levied on the taxpayer; and finally, in all cases where GAAR applies, a promoter who markets the plan will be subject to a penalty of 12.5% of the consideration he receives.
In order to prevent the possibility of an extended limitation period and the penalties in GAAR cases, taxpayers can choose to disclose any transaction to Revenue Quebec on a voluntary basis. If the transaction is reported by the due date of the taxpayer’s tax return, then the application of the GAAR will not come with the extension of the limitation period for reassessments and the above penalties will not be imposed.
New Administrative Department
I suspect that the government will quickly become inundated with disclosures, especially since now, any over-zealous tax auditor could decide to extend the reassessment period by simply pulling out the “GAAR” card (an over-zealous tax auditor in Quebec? Dave, you can’t be serious!).
To this end, the government has established a division of Revenu Québec, called the Direction principale de la lute contre les planifications fiscales abusifs (hooray! another Quebec bureaucratic department!), where all of the disclosures must be sent, on a prescribed form, separately from tax returns .
Quebec has taken a bold step in the fight against tax avoidance. One wonders how long it will be before the federal rules follow suit.
Like most people, while enjoying a live concert or watching a movie, my mind inevitably begins to wander away from the performers on stage towards the Canadian income tax rules that apply to them. They are truly talented and unique, these non-residents of Canada, and as such, special tax rules apply to them.
General Rule for Services Rendered in Canada
In my August 31 post you will recall that we dealt then with Regulation 105 withholding requirements. When a non-resident enters Canada to perform services, he is subject to a 15% levy (plus an additional 9% in Quebec) on account of income tax payable in Canada. This charge applies similarly to musicians, and other performing artists. According to the CRA, these performers are carrying on business in Canada and are subject to tax on their income earned in this country.
In many cases, however, services rendered by a resident of a treaty country, such as the US would be exempt from Canadian taxes. Business income is exempt under most treaties unless the taxpayer has a “fixed base regularly available to him” in this country.
Artistes and Athletes
A special section found in most of Canada’s treaties deals specifically with “Artistes and Athletes”. This provision essentially provides that the above treaty exemption for business income does not apply to income of more that $15,000 in a year, derived as an entertainer such as a movie, theatre, radio or television artiste, a musician or an athlete. Accordingly, these talented people have to “pay to play”, so to speak.
Requirement to File a Tax Return
Whether or not a person is exempt from Canadian tax under a treaty provision, he must file a Canadian income tax return. The 15% tax withheld does not relieve a non-resident of this duty. If the income is exempt under a treaty, then the full amount withheld would be claimed as a refund. If the taxpayer is not exempt, he must report his net income earned in Canada, and the 15% tax withheld is applied as a credit against taxes owing. Failure to file a Canadian return would result in penalties.
Like Me, Some People Are Not Artistic Enough
The question of whether a taxpayer is an “artiste or athlete” can be difficult to answer at times. In the case of Thomas F. Cheek v. The Queen, Toronto Blue Jays announcer Tom Cheek was held not to be a “radio artiste”, because he was simply reporting on the games and was not attracting his own audience by virtue of his talents as a radio personality. The court found he was exempt under the Canada –US Treaty.
More Issues for Athletes
For athletes, questions can become even more complex. US athletes playing for Canadian sports teams might be considered resident in Canada depending on their circumstances, and vise versa. Non-resident employees of sports teams might benefit from treaty protection if they are not present in Canada for more than 183 days in a year. However, self-employed athletes, such as tennis players would likely have no treaty protection.
Special Rules for Film Actors
Finally, a completely separate set of overriding rules applies to actors who provide acting services in a film or video production. These taxpayers, whether they provide services directly or through a corporation, are subject to a flat 23% withholding tax under Part XIII of the Act. This rate applies to income from acting services, including residuals and contingent compensation. Further, these taxpayers are not required to file Canadian income tax returns.
However, a special election is available to actors who choose to file a tax return. Under this election the 23% withholding tax does not apply, and they will be taxed under Part I on their net income earned in Canada. To be valid, this election must accompany a Canadian income tax return filed by the person’s filing due date.
Note that these special rules do not apply, for example, to stage actors or radio artistes. They do not apply to other income earned by the actor, such as from services as a producer or director. Nor do they apply to other personnel working behind the scenes in the film industry. All these other services are subject to the normal 15% Reg. 105 withholding and the requirement to file a return.