Tax considerations

I. Quebec taxation of a branch

Under the QTA, every corporation carrying on a business through an establishment in Quebec is liable for Quebec provincial  income  tax  on  the  portion  of  its  taxable income  attributable  to  that  establishment.  Income taxable in Quebec also includes taxable capital gains from dispositions of “taxable Quebec property”. A foreign corporation’s  income  from  sources  outside Quebec  and not  attributable  to  an  establishment  in  Quebec  will  not be subject to Quebec provincial income tax. Furthermore, unlike the ITA, the QTA does not impose a branch tax on foreign corporations.

The QTA defines an “establishment” as a fixed place of business and specifically includes, inter alia, branches and factories. Revenu Quebec has further stated that an establishment is basically “a place which is stable, permanent or of a fairly long duration, which the taxpayer currently or regularly uses in carrying on his business”. A place where only administrative functions are carried on, such as bookkeeping or debt collection, would not normally qualify as an establishment unless other factors are present. An establishment may also result from an extended physical presence of employees in Quebec.

The general rate of income tax currently imposed by the province of Quebec on a corporation’s business income is 11.5%. A foreign corporation that carries on an active business in Quebec is thus currently subject to a combined Canadian federal and provincial tax rate of 26.5%. In comparison, Alberta is currently the Canadian province with the lowest combined Canadian federal and provincial tax rate (23%), while Prince Edward Island is the Canadian province with the highest combined Canadian federal and provincial tax rate (31%).

II. Quebec taxation of subsidiary

Foreign corporations often establish a sole-purpose Canadian subsidiary corporation to carry on business in Quebec.

A Quebec subsidiary is subject to the same combined tax rates applicable to foreign corporations carrying on business in Quebec through a branch.

Although it does not impose withholding tax on payments such as dividends, interest, royalties, rent or technical know-how to non-residents of Canada, the QTA, like the ITA, still contains rules restricting the capitalization of subsidiaries by non- residents of Canada.

a) “Thin capitalization” rules and interest deductibility

Generally, in computing its income, a corporation resident in Canada may deduct interest paid or payable by it pursuant to a legal obligation to pay interest on borrowed money, provided that the borrowed money is used to gain or produce income from a business or property and the amount of interest is reasonable in the circumstances. However, the “thin capitalization” rules may restrict this ability to deduct interest. Generally, when the corporation’s “outstanding debts to specified non-residents” exceed one-and-a-half times the corporation’s “equity”, a prorated portion of the interest paid or payable in the year to such non-residents is not allowed as a deduction in computing the income of the corporation. This restriction also applies to branches of non-resident corporations. Supporting rules also ensure that the thin capitalization rules cannot be circumvented through the use of certain back-to-back lending arrangements involving intermediaries.

Included in a corporation’s outstanding debts to specified non-residents are debts owed to such specified non-residents by partnerships of which the corporation is a member. The partnership’s debt obligations are allocated to its members based on their proportionate interest in the partnership.

Where a corporate partner’s permitted debt-to-equity ratio is exceeded, the partnership’s interest deduction is not denied but rather included in the corporate partner’s income.

In order to avoid double taxation, such rules do not apply where an amount of interest, the deductibility of which would otherwise be denied or that is required to be included in income as mentioned in the preceding paragraph, as applicable, is included in the corporation’s income pursuant to foreign accrual property income rules. These rules generally provide that passive income, which includes certain interest income, earned by a Canadian-resident corporation’s foreign affiliate is taxed in the hands of its Canadian-resident parent.

Readers should also be aware that the Federal Government released in November 2022 revised draft legislation introducing a new earnings-stripping rule, which will apply in conjunction with the existing federal “thin capitalization” rules. To date, the Quebec government has not announced if corresponding proposals will be introduced in the Quebec legislation. Very generally, under the proposed federal provisions, the “net interest expense” that a corporation (and various other entities) may deduct will be capped to no more than a fixed percentage of the “tax EBITDA.”  The “tax EBITDA,” in general, would be a corporation’s taxable income before taking into account net interest expense and interest income, income tax, and deductions for depreciation – each of these items as determined for income tax purposes. Under the proposals, the allowed “tax EBITDA” percentage has decreased to 30% for taxation years beginning on or after January 1, 2024.

b) Withholding tax for services rendered in Quebec

Under the QTA, a person who makes a payment for services (other than employment) rendered in Quebec by a non-resident of Canada must deduct 9% from that payment (in addition to the 15% federal withholding tax) and remit the amount deducted to Revenu Quebec, unless the non-resident has obtained a waiver from Revenu Quebec. This withholding requirement does not apply to certain non-resident corporations that operate an insurance or a banking business in Quebec. A waiver may generally be obtained by a non-resident who does not have an establishment in Quebec.

The withholding does not constitute a final tax. Rather, it is on account of the final tax liability of the non-resident. If, ultimately, the non-resident does not have any tax payable, the non-resident may recover the amount withheld by filing an income tax return in Quebec and claiming a refund.

III. Transfer pricing

Whether a branch or a subsidiary is used, consideration should be given to the issue of transfer pricing. Transfer pricing, sometimes referred to as inter-entity pricing, is the pricing for goods or services transferred between related parties. Particular areas of concern include management and administration fees, development charges, royalties and interest.

Like the ITA, the QTA contains provisions requiring prices charged in related parties and other non-arm’s length transactions to conform to prices charged in comparable arm’s length transactions. The purpose of these provisions is to ensure that a reasonable profit is being earned by the entity transferring goods or services and that only reasonable deductions are claimed for tax purposes by the entity paying for the goods or services.

IV. Income tax administration matters

A foreign corporation that carries on a business in Quebec through a branch is required to file federal and provincial income tax returns within six months of the end of its taxation year. After the return has been received by Revenu Quebec, an assessment is sent to the taxpayer. Income taxes are payable in monthly instalments which are calculated by reference to the previous taxation year and the balance is generally payable within two months after the year-end. No instalments are due in the first year of operation.

V. Capital tax

Quebec capital tax was abolished on January 1, 2011.

VI. Quebec Sales Tax (QST)

a) General information

The QST is a value-added tax that is generally harmonized with the federal goods and services tax (GST) and similar to the sales and value-added taxes imposed by many European countries. It is a multi-stage tax that applies to almost all “supplies” of goods and services made in Quebec throughout the chain of production and distribution. Even the transfer of real property situated in Quebec is considered to be a “supply of goods”. All purchasers of taxable supplies must pay QST at a rate of 9.975% on the value of the consideration paid or payable in respect of the supply, excluding GST. However, if the payer of the QST is engaged in a commercial activity and is registered as a supplier for QST purposes, it is entitled to recover some or all of the QST it has paid through the input tax refund (ITR) mechanism. Thus, effectively only consumers and certain providers of exempt supplies (including, for instance, financial service providers) bear the final incidence of the QST.

Every person carrying on business in Quebec (whether a resident of Canada or not) whose worldwide taxable supplies exceed $30,000 per year must register as a supplier for QST purposes at the latest on the day of the person’s first taxable supply in Quebec. Revenu Quebec administers both the GST and QST in Quebec.

Except for certain sales of real property, the supplier is required to collect QST and remit the QST collected net of their ITRs to Revenu Quebec. Registrants must file a QST return and remit the QST on a monthly, quarterly or annual basis depending on their level of sales. If the ITRs claimed for a particular period exceed the QST collected for that period, a refund can be claimed from Revenu Quebec.

Except for certain non-taxable importations, an importer is required to self-assess QST on the duty paid value of goods brought into Quebec, whether from outside or within Canada. An exception is, however, available for certain goods and services brought into Quebec in the course of commercial activities by a person who is a QST registrant. Exports of goods and services from Quebec are not subject to QST. This means that non-residents will not have to pay QST on goods or services acquired in Quebec when those goods or services are not considered to be consumed in Quebec. Generally, if the goods are purchased and exported from Quebec or delivered outside of Quebec, the supply of the goods will be “zero-rated” (i.e., taxed at a rate of 0%).

As described above, QST will be payable on all taxable supplies made in Quebec. A supply of goods is deemed to be made in Quebec if the goods are located in or are to be delivered in Quebec to the recipient. With respect to services, a supply is generally deemed to be made in Quebec if the supplier obtains, in the ordinary course of business, an address in Quebec and, as the case may be: (i) the supplier  has obtained only one business or residential address of the recipient in Canada and that address is in Quebec, (ii) the supplier has obtained more than one business or residential address of the recipient in Canada and the business or residential address that is most closely connected with the supply is in Quebec, or (iii) the Quebec address is  neither a business nor residential address of the recipient but is the address of the recipient that is most closely connected with the supply. Where, in the ordinary course of business of the supplier, no Canadian address is obtained for the recipient, a service is deemed to be made in Quebec if the service is performed principally in Quebec. Special rules beyond the scope of this summary are applicable where the supply is of services in relation to real property, services in relation to tangible personal property, certain services rendered in the presence of the recipient, services rendered entirely outside of Canada, transportation services or telecommunications services.

There is an “override rule” which applies to supplies made by non-residents. Subject to the new QST registration regime for non-residents selling into Quebec, any supply of personal property or a service made by a non-resident of Quebec is deemed to be made outside of Quebec, unless:

• the supply is made in the course of a business carried on in Quebec;
• at the time the supply is made, the non-resident is registered for the QST; or
• the supply is an admission to a place of amusement, a seminar, an activity or an event where the non-resident person did not acquire the admission from another person.

This override rule does not apply to the supply of real property in Quebec. Such a supply will be subject to QST whether the supplier is a resident or non-resident.

If a non-resident has paid QST, it will not be entitled to claim ITRs unless it is registered for QST. However, an unregistered non-resident is entitled to a rebate of QST it has paid in certain limited circumstances.

b) Registration system for non-residents selling into Quebec 

The following persons are required to register under the new registration system to collect and remit the QST on all taxable supplies of digital products and services made to “specified Quebec consumers” (i.e., a recipient of a supply that is not registered for QST purposes and whose usual place of residence is located in Quebec) to the extent the total of such taxable supplies exceeds $30,000 over a 12-month period:

• a “specified supplier” (i.e., a person not resident in Quebec that does not make supplies in the course of a business carried on in Quebec and that is not registered under the regular QST regime);

• a “distribution platform operator” (i.e., a person other than the supplier or an excluded operator that controls or sets the essential elements of the transaction between the supplier and the recipient, such as billing, terms and conditions and delivery, in respect of a supply of property or a service made through a “specified distribution platform”); or
• an “accommodation platform operator” (i.e., a person other than the supplier or an excluded operator that controls or sets the essential elements of the transaction between the supplier and the recipient, such as billing, terms and conditions and delivery, in respect of a supply of short term accommodation service made through an accommodation platform).

The specified distribution platform rules will override the specified supplier rules such that a specified supplier using a specified distribution platform for the supply of digital products or services in Quebec to Quebec consumers will generally not be required to register or collect tax on its supplies. However, if a specified supplier also supplies digital products or services outside of a specified distribution platform, a registration and collection requirement may be triggered (determined pursuant to the threshold set above).

Similar registration requirements also apply to the aforementioned persons in respect of a taxable supply made to a “specified Canadian recipient” (i.e.: a recipient of a supply that is not registered for GST purposes and whose usual place of residence is located in Canada). This regime will also ensure the collection of QST on the supply of digital products and services made to Quebec consumers. The supply of digital products and services will therefore also be considered for the purpose of the $30,000 threshold test applicable to registration.

This special regime does not allow registrants to recover ITR with respect to QST paid on business expenses. However, suppliers may voluntarily register under the regular QST regime (if the general conditions are met) in order to claim ITRs.

VII. Payroll taxes

Employers in Quebec are required to deduct income tax and employee contributions to certain social programs at source and to remit such amounts to the tax authorities on behalf of their employees. Employers are also required to make contributions for the benefit of their employees in accordance with certain social programs. For a new employer, both the employee’s and employer’s contributions must be received by Revenu Quebec in monthly instalments on the 15th day of the month following the month in which the remuneration was paid.

VIII. Quebec tax incentives

The Quebec government offers a broad range of tax incentives to businesses operating in Quebec, generally in the form of tax credits (some of these incentives are discussed below). It is worth mentioning that in certain instances, such incentives are only available to taxpayers which are incorporated businesses, Canadian-controlled corporations or Canadian-controlled private corporations. Furthermore, in order to avail themselves of such incentives, taxpayers must, in some cases, file prescribed information and/or obtain certificates or attestations from the relevant Quebec authorities.

a) Tax credit for investment and innovation

A corporation carrying on a business through an establishment in Quebec that is not: (i) a corporation that is exempt from tax, (ii) a Crown corporation or a wholly-controlled subsidiary of such a corporation, (iii) an aluminum producing corporation, or (iv) an oil refining corporation, that acquires manufacturing or processing equipment, general-purpose electronic data processing equipment or certain management software packages between March 10, 2020, and January 1, 2025, may obtain a tax credit of 15%, 20% or 25%, depending on the region in which the investment is made for equipment acquired after December 31, 2023.

The tax credit is fully refundable where the corporation’s assets and gross income for the taxation year do not exceed $50 million. It is, however, partially refundable where the corporation’s assets and gross income for the taxation year exceed $50 million but do not exceed $100 million. The tax credit is not refundable where the corporation’s assets and gross income exceed $100 million for the applicable taxation year. The non-refundable portion of the tax credit may be carried-back for
three years and carried-forward for 20 years.

The tax credit is calculated on the portion of the specified expenses incurred to acquire the equipment which are in excess of $5,000 (for management software packages) or in excess of $12,500 (for any other specified property). However, the specified expenses in respect of which a qualified corporation may claim the tax credit may not exceed a cumulative limit of $100 million on a five-year period.

b) Scientific Research and Experimental Development (SR&ED)

A taxpayer which carries on a business in Canada and carries out SR&ED in Quebec on its own behalf or on behalf of another person, or has such research and development carried out on its behalf, may be entitled to a refundable tax credit. This tax credit is refundable in the sense that the taxpayer will be paid the amount of the tax credit even if the taxpayer does not have any income tax payable.

In order for the taxpayer to be considered to be carrying out SR&ED, the objective of its project must be to acquire knowledge that advances the understanding of the underlying scientific relations or technologies and the probability of achieving a given objective or result must not be known or determined in advance on the basis of generally available scientific or technological knowledge or experience.

Furthermore, the taxpayer’s SR&ED must also incorporate a systematic investigation, meaning that it must begin with the formulation of a hypothesis followed by testing through experiment or analysis and finishing with the drawing of logical conclusions. The Quebec government offers four SR&ED programs which are discussed below under separate headings.

i) Salary and wages

This tax credit is computed as a percentage of salaries and wages paid to employees of an establishment located in Quebec who are undertaking SR&ED, as well as the portion of any consideration paid to a subcontractor that may reasonably be attributed to salaries and wages paid to an employee in Quebec. In circumstances where the taxpayer is dealing at arm’s length with the subcontractor, only half of such portion is included in computing this tax credit.

In order to determine the salary eligible for such credit, a taxpayer is allowed to use one of the following two methods: (1) the proxy method or (2) the traditional method. The proxy method is simpler but more restrictive, as it takes into account only expenditures that are generally readily associated with SR&ED activities, whereas the traditional method takes into consideration only salaries and wages paid in order to undertake work related to the project. Eligible salaries and wages must be reduced by the amount of any governmental assistance and non-governmental assistance attributable thereto (other than the federal investment tax credit). Other specific rules pertaining to contract payments and contributions may also reduce the amount eligible to the tax credit.

As for the rate of the tax credit, in the case of a corporation that is not a Canadian-controlled private corporation, the rate of the credit will be 14%. If the corporation is a Canadian-controlled private corporation and has no more than $50 million in assets, the tax credit will be computed at a rate of 30% on the first $3 million paid in eligible salaries and wages in a taxation year. However, the rate of the credit on the first $3 million paid in eligible salaries and wages is gradually reduced from 30% to 14% in cases where the assets of a small or medium-sized business range between $50 million and $75 million. Businesses at or over the $75 million threshold are limited to a tax credit of 14% on the first $3 million paid in eligible salaries and wages. As for the eligible salaries that exceed $3 million, the tax credit is computed at a 14% rate, regardless of the assets held by the taxpayer’s business.

ii) SR&ED under a university research contract

Where a taxpayer has entered into a research contract with an eligible Quebec university or an eligible research centre, a tax credit is available on 80% of the payments made to the university. The rate of the credit is the same as and varies on the same basis as that for salary and wages described above.

iii) Private partnership pre-competitive research

A tax credit is available on eligible SR&ED expenditures to groups of private businesses doing precompetitive research which exclusively involves a “private-private” partnership. In circumstances where the taxpayer is dealing at arm’s length with the subcontractor, 80% of the amount paid to the subcontractor is considered in computing such tax credit. The rate of the credit is the same as and varies on the same basis as that for salary and wages described above.

iv) Dues and fees paid to a research consortium

A taxpayer which is a member of a recognized research consortium may avail itself of a tax credit on dues and fees attributable to SR&ED carried on by the research consortium in Quebec. An eligible research consortium means a body in respect of which the relevant Quebec authority has issued a certificate recognizing it as a research consortium. The rate of the credit is the same as and varies on the same basis as that for salary and wages described above.

v) Tax holiday for foreign researchers and specialists

Researchers and specialists who are not resident in Canada and who have expertise in certain specialized areas of activity are entitled to a tax holiday when they settle in Quebec. The tax holiday targets researchers specialized in pure or applied sciences and specialists in management, financing and marketing in certain fields of innovation activities or technology who work for a person carrying on a business and performing R&D activities in Quebec. The tax holiday takes the form of a deduction which allows the individual to deduct a portion of their salary in the computation of their income for a maximum of five consecutive years. For the first and second years, the individual may deduct 100% of their salary, for the third year, 75%, for the fourth year, 50%, and 25% for the fifth year.

vi) Government assistance and contract payment

Taxpayers claiming SR&ED expenses in the context of contracts entered into with a government (federal or provincial), a municipality or a public authority should be mindful that SR&ED expenses can be reduced in certain circumstances where the taxpayer is considered to have received government assistance or a contract payment. Government assistance includes grants and subsidies as well as forgivable loans and deductions for taxes. A contract payment is an amount payable by a government to a taxpayer for SR&ED to be performed for it or on its behalf.

c) Incentive deduction for the commercialization of innovations in Quebec

A corporation carrying on a business through an establishment in Quebec and from which it derives income from the commercialization of a qualified intellectual property asset to which it holds the rights may be eligible to a deduction on the qualified portion of its taxable income attributable to that asset at an effective taxation rate of 2%.

A “qualified intellectual property asset” is defined as an incorporeal property that results from SR&ED activities carried on in whole or in part in Quebec and that is either (i) a protected invention of the corporation, (ii) a protected plant variety of the corporation, or (iii) a protected software of the corporation.

The amount a corporation can deduct is calculated by applying a formula, which can be broken down into three elements, namely (i) the qualified profits from a qualified intellectual property asset of the corporation, (ii) the Quebec nexus, which refers to the relative extent of SR&ED activities carried out in the province of Quebec by the corporation, and (iii) the rate of the tax benefit.

d) Synergy capital tax credit

A “qualified investor” (i.e., a corporation other than an excluded investor for the year that carries on a business in Quebec and has an establishment in Quebec) may claim a non-refundable tax credit equal to 30% of the total amounts invested in the capital stock of an innovative growth-stage corporation (up to a maximum of $225,000), if the qualified corporation (i) is a Canadian-controlled private corporation whose paid-up capital, for its most recent taxation year at the time of filing its application for an authorized placement certificate, is less than $15 million and (ii) it has been carrying on business through an establishment in Quebec for at least 12 months in one of the following eligible sectors:

• life sciences;
• manufacturing or processing;
• green technologies;
• artificial intelligence; or
• information technologies.

Certain conditions must be met to benefit from this tax credit, including (i) the corporation’s main business must not consist in financing or investing, (ii) it must deal at arm’s length with the qualified corporation and (ii) it must hold the shares for a minimum of five years.

e) Tax credit for technological adaptation services

A qualified corporation that enters into a contract with an eligible liaison and transfer center (LTC) or an eligible college center for technology transfer (CCTT) may claim a tax credit equal to 40% of its qualified expenditures it has incurred in the year and in connection with such contract, for the purpose of obtaining one of the following eligible liaison and transfer services:

• locating and brokering research results;
• assessing the needs of businesses;
• bringing together stakeholders;
• carrying out technical feasibility studies and studies assessing the commercial potential of innovation projects;
• supporting businesses through the various stages of realizing innovation projects; and
• conducting software certification tests.

In order for an expenditure to be eligible for the Tax Credit for Technological Adaptation Services, it must not be eligible for certain SR&ED tax credits.

f) Refundable tax credit for the development of e-business

A qualifying corporation may claim a refundable tax credit  equal to 24% of eligible salaries paid (to a maximum annual salary of $83,333 per employee), in addition to a non-refundable tax credit equal to 6% of such salaries (subject to the same maximum salary), where it carries on one of the following e-business activities through an establishment in Quebec:

• information technologies consulting services relating to technology, systems development, e-business processes and solutions;
• development, integration, maintenance and evolution of information systems and technology infrastructure;
• design and development of e-commerce solutions, for instance, portals, search engines and transactional websites; or
• development of security and identification services relating to e-commerce activities.

For taxation years beginning after December 31, 2024, an exclusion threshold per eligible employee will be introduced in respect to the qualified wages for the year. As such, the current limit of $83,333 per employee will be removed. Additionally, the non-refundable tax credit of 6% will be increased by one percentage point annually until it reaches 10% in 2028. Correspondingly, the refundable tax credit of 24% will be decreased by one percentage point annually until it reaches 20% in 2028. The rates applicable in 2028 will apply to subsequent years.

g) Refundable tax credit for multimedia productions

A refundable tax credit is available to corporations operating a multimedia productions business through an establishment in Quebec. The tax credit is equal to 30% of qualified labour expenditures incurred in respect of multimedia titles intended for commercialization, other than vocational training titles, or 26.25% for all other multimedia titles. A corporation producing a multimedia title eligible for the 30% rate may benefit from an additional 7.5% where a French version of the title is made available.

To benefit from this tax credit, the taxpayer must ensure that the multimedia production is produced for commercial use on electronic media, is controlled by software that allows interactivity, and includes an appreciable quantity of three of the following four types of data: text, sound, fixed images and animated images. The maximum financial assistance available per eligible job is $100,000. As of January 1, 2025, the limit of $100,000 will be removed and an exclusion threshold per employee will be
introduced in respect to qualified labour expenditure.

Budget 2024 proposes to split the tax credit for multimedia production into a refundable tax credit and a non-refundable tax credit. As such, starting January 1, 2025, a non-refundable tax credit starting at 2.5% will be increased by 2.5% annually until it reaches 10% in 2028. Correspondingly, the refundable tax credit will be decreased by 2.5% annually until 2028. The rates applicable in 2028 will apply to subsequent years. 

h) Refundable tax credit for Quebec film and television productions

An eligible corporation may benefit from a refundable tax credit equal to 28% to 40% of qualified labour expenditures incurred to produce a Quebec film, with the higher rate generally applicable to French language and big-screen productions that are not adapted from a foreign format.

In addition, all productions are eligible to claim an additional tax credit in respect of qualified labour expenditures where conditions relating to special effects and computer animation, regional productions and non-public financial assistance are met. The additional tax credit is equal to 10% of such qualified expenditures attributable to special effects and computer animation, 10% or 20% of expenditures attributable to regional productions (depending on the category of production concerned), and up to 16% of expenditures where public financial assistance is not received or does not exceed a prescribed threshold.

The maximum aggregate tax credit available to eligible corporations is 62% of eligible labour expenditures for films adapted from a foreign format or 66% for all other films.

i) Refundable tax credit for film production services

Eligible corporations producing foreign productions or local productions that do not satisfy Quebec content criteria may claim a refundable tax credit for film production services equal to 25% of the total cost of eligible labour and eligible goods attributable to the various stages of carrying out an eligible production. An additional refundable tax credit equal to 16% of eligible labour costs may be claimed where such costs relate to activities tied to the completion of computer-aided animation and special effects. Broadcasters and corporations which do not deal at arm’s length with broadcasters do not qualify for either credit. However, since May 31, 2024, only 65% of the
cost of a contract related to computer-aided special effects and animation will be considered in calculating the basic tax credit.

Taxpayers claiming the refundable tax credit for film production services may not accumulate the refundable tax credit for Quebec film and television productions, as described above, in respect of the same expenses.

j) Refundable tax credit for the construction or conversion of vessels

The vessel credit consists of a refundable tax credit applicable in respect of certain eligible construction or conversion expenditures incurred by a corporation that has an establishment in Quebec and carries on a shipbuilding business in the province. The expenditures may be in connection with a prototype vessel and up to three vessels constructed or converted as part of a production run. The rate of this tax credit for a prototype vessel is 37.5%, to a maximum of 18.75% of the construction or conversion cost. Eligible expenditures incurred for the first, second, and third vessels of a production run may give rise to a refundable tax credit of 33.75%, 30%, and 26.25%, respectively, to a maximum of 16.875%, 15%, and 13.125%, respectively, of the cost of the units. The rates apply to the cost of plans and specifications produced entirely in Quebec (or the Quebec salaries incurred to produce them), and to the wages incurred with persons employed by the corporation and who work directly on the construction or conversion of an eligible vessel.

k) Refundable tax credit for international financial centres (IFC)

In general, a corporation carrying on qualified international financial transactions (QIFT) or qualified international financial operations (QIFOs) within the urban agglomeration of Montreal may claim a refundable and/or non-refundable tax credit equal to 24% of salaries (up to $75,000 per eligible employee on an annual basis) paid to its employees. A refundable tax credit is available for wages incurred in respect of QIFOs and back office activities relating to QIFTs. A non-refundable tax credit may be claimed by an IFC for wages incurred in respect of QIFT activities other than back office activities.

QIFTS include, among other things, trading in outstanding securities, the operation of a clearing house, securities advising and portfolio management, the provision of financial packaging services, and the provision of damage insurance brokerage services, generally for the benefit of non-residents of Canada. QIFOs include the performance of support, analysis, control and management services on behalf of a foreign financial entity such as due diligence, corporate finance and taxation, financial disclosure, and risk management services.

To qualify as an IFC, a corporation must receive a qualification certificate from the Minister of Finance attesting that six or more eligible employees worked for the corporation for all or part of a taxation year, as the case may be. Eligible employees are those who work full-time for the IFC and allocate at least 75% of their time carrying out QIFTs or QIFOs. The corporation’s QIFT and QIFO must be conceived, administered, carried out, managed, governed and centralised in Montreal and the IFC’s management regarding the completion of QIFTs and QIFOs must be located in Montreal.

Moreover, subject to certain detailed conditions, foreign specialists in respect of whom Revenu Quebec has issued a qualification certificate recognizing them as such and who are employed by a corporation qualified as an IFC are entitled to a personal Quebec income tax exemption of 100% for the first two years, 75% the third year, 50% the fourth year and 37.5% the fifth year of the applicable reference period. For this purpose, the reference period begins on the earlier of the day on which the individual begins to perform the duties of their employment and the day on which the individual became resident in Canada to form part of the strategic personnel of an IFC in Canada.

i) Refundable tax credit for new financial services corporations

An eligible corporation may receive a refundable tax credit equal to 24% of the eligible salaries it pays, subject to an annual maximum of $24,000 per employee, and a refundable tax credit equal to 32% of the eligible expenditures it incurs, subject to an annual maximum of $120,000 to be shared with any associated corporations. Both tax credits may be claimed by an eligible corporation over a maximum period of five years.

To be eligible, the corporation’s activities must include one or more of the following activities: analysis, research, management, advisory or securities transactions or distribution services performed by certain types of securities dealers, securities advisory or securities portfolio management services provided by certain types of securities advisers.

Foreign specialists employed by new financial services corporations may also benefit from the tax holiday granted to foreign specialists of IFC described above.

m) Tax holiday for large investment project (THI)

Businesses that invest in large investment projects (i.e., $50 million or more in an eligible region, or $100 million or more in all other regions) in Quebec may benefit from a 10-year tax holiday from corporate income tax and contributions to the Health Services Fund with respect to the project, up to 15% of the project’s total eligible capital investment expenditures. Strategic sectors eligible for large investment projects include: manufacturing, wholesale trade, warehousing, data processing and hosting or any sector where the investment project is to modernize a business of the corporation or partnership through digital transformation.

n) Refundable tax credit for natural resources

A corporation may benefit from a refundable tax credit for exploration, development, and renewable and conservation expenses, provided that such expenses are not flowed through to the corporation’s shareholders. The rate varies between 12% and 38.75% depending on the type of resource, where the expenses are incurred and the corporation’s activities.

IX. Quebec mining tax regime

A mining operator is generally required to pay mining duties corresponding to the greater of its minimum mining tax or its mining tax on its annual profit for the fiscal year.

The minimum mining tax is equal to 1% of the first $80 million of the operator’s, as well as all associated operators’, output value at the mine shaft head in respect of the mines it operates, which is calculated on the basis of the operator’s gross value of annual output from the mine. This includes all of the work relating to the various phases of mineral development and other related activities, up to the disposition of the mineral substance or its use by the operator. A rate of 4% applies to all output value in excess of $80 million.

With respect to the mining tax on annual profit, its amount is computed by applying progressive rates ranging from 16% to 28% to a particular segment of the operator’s annual profit margin. Such profit is calculated on a mine-by-mine basis and is generally equivalent to the operator’s annual earnings, less certain expense allowances attributable to exploration activities and pre-production development work. Where an operator suffers an annual loss rather than earning an annual profit, it may obtain a credit on duties refundable for losses.

Finally, where an operator is required to pay mining duties corresponding to its minimum mining tax, the excess of this amount over the mining tax on its annual profit will be included in a cumulative minimum mining tax account, which will enable the operator to reduce the amount of its mining duties payable in subsequent years which are based on annual profit rather than minimum tax.

X. Other tax considerations

a) Disclosure of a nominee agreement

Under the QTA, a taxpayer who is a party or a partnership that is a party to a nominee agreement entered into in the course of a transaction that bears tax consequences has to disclose the agreement and the transaction on or before the 90^th day after the date on which the contract was entered into.

In order to comply with these new mandatory disclosure obligations, one of the parties to the nominee agreement will have to disclose its existence by filing a prescribed form, which must include the following information:

•  the date the nominee agreement was entered into;
• the identity of the parties to the nominee agreement;
• a complete description of the facts of the transaction that is sufficiently detailed to allow Revenu Quebec to analyze it and have a proper understanding of the tax consequences;
• the identity of any other person or entity in respect of which the transaction has tax consequences; and
• such other information as is required by the prescribed form.

Where the nominee agreement is not disclosed by one of the parties within the prescribed time to do so, the parties to a contract may be liable to a minimum penalty of $1,000 and an additional penalty of $100 per day of omission, up to a maximum of $5,000.

The QTA provides that where a taxpayer fails to file the prescribed form in respect of the contract and the transaction, the normal reassessment period is suspended for taxation years in which the taxpayer did not comply with its nominee agreement disclosure obligations. Where a taxpayer makes a late disclosure, the normal reassessment period will begin to run again from the filing date.

b) Disclosure of aggressive tax planning

The Quebec tax legislation contains a series of provisions aimed at fighting aggressive tax planning. In this regard, the QTA provides a list of transactions or agreements that are subject to mandatory disclosure by taxpayers.

A taxpayer who carries out a transaction involving conditional remuneration, a confidential transaction or a transaction with contractual protection or who is a member of a partnership who carries out such transaction has to disclose the transaction to Revenu Quebec where the transaction results in a tax benefit of $25,000 or more for the taxpayer or has an impact on the taxpayer’s income of $100,000 or more for a taxation year. The mandatory disclosure must be filed by the deadline for filing the income tax return for the taxation year in which the taxpayer obtained the tax benefit or for which his income was affected. 

The QTA and the Mandatory Transaction Disclosure Regulation² also provide a list of specified transactions which must be disclosed to Revenu Quebec, including transactions involving payment to a non-treaty country or involving the trading of tax attributes. With respect to payments to a non-treaty country, it applies when one or more payments, totalling $1 million or more during a taxation year, made by a person to an entity which it is not dealing at arm’s length with and which is located in a jurisdiction that has not entered into a tax treaty with Canada, where the conditions prescribed in the regulation are met.

The specified transaction pertaining to the trading of tax attributes generally target tax planning strategies where a taxpayer’s tax attributes are used by another taxpayer that is not affiliated with the taxpayer before the series of transactions or the use, resulting in a loss, of tax attributes by a corporation or trust further to its capitalization by an arm’s length party if there is a connection between the capitalization and the use of the tax attributes, provided that the conditions prescribed by the regulation are met.

Failing to disclose transactions subject to mandatory disclosure can result in severe consequences. Taxpayers who fail to disclose a transaction subject to mandatory disclosure can face penalties up to $100,000 and 50% of the tax benefit derived from the transaction. In addition to monetary penalties, failing to disclose such transaction may also result in becoming ineligible for public contracts for a five-year period and into a longer for reassessment by Revenu Quebec.

XI. Tax disputes

Revenu Quebec administers the application of all Quebec tax laws. Tax audits, assessments and collection measures are conducted by Revenu Quebec on behalf of the Government of Quebec. To do so, Revenu Quebec is granted large and vast powers to audit taxpayers, which have been narrowed by the courts in recent years.

Tax disputes arising out of the application of Quebec tax laws are under the jurisdiction of Quebec Tribunals. Quebec Tribunals follow their own rules of civil procedures and rules of evidence.

Revenu Quebec and the Canada Revenue Agency (CRA), the Canadian taxing authority, have entered into an automatic information exchange agreement pursuant to which taxpayer information will be made available to both authorities, to allow them to replicate audits and assessments, for example. Taxpayers should be mindful that if they receive tax assessments from both Revenu Quebec and CRA, they will need to challenge each assessment separately under the appropriate jurisdiction.