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.

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