Quebec harmonizes with 2023 federal budget measures and more

Quebec announced new harmonization measures and other changes to certain Quebec business income tax measures. Specifically, Quebec will harmonize its rules with several proposed federal changes to the general anti-avoidance rule (GAAR), changes to broaden the alternative minimum tax (AMT) and adjustments to the intergenerational business transfer rules, among other harmonization measures. The Quebec tax measures are intended to align with federal tax measures announced in the 2023 federal budget and certain previously announced measures included in Bill C-47 (which received Royal Assent on June 22, 2023). Quebec also announced amendments to the small business deduction (SBD) rules for new corporations resulting from amalgamations. Quebec announced these changes in an information bulletin published on June 27, 2023.

Quebec stated that the provincial harmonization changes will only be adopted after the federal measures receive Royal Assent (or related federal Regulations are adopted). In addition, these measures will have the same effective dates as the related federal measures.

GAAR measures

Quebec will harmonize with the federal measure to amend the GAAR by introducing a preamble, changing the avoidance transaction standard and introducing an economic substance test. In addition, for purposes of applying the existing GAAR penalty in Quebec (i.e., 50% of the amount of the tax benefit), the amount of the benefit will be considered nil where the tax benefit includes a tax attribute that has not yet been used to reduce tax. Under current Quebec rules, the province can already assess under GAAR three years beyond the normal assessment period in most cases.

Other business income tax measures

Quebec will harmonize with various other federal corporate tax measures announced in the 2023 federal budget, including measures to deny the dividend received deduction for dividends received by financial institutions on shares that are mark-to-market property, after 2023, and amend the definition of “credit union”. Quebec will also harmonize with several previously announced tax technical amendments from 2022 included in federal Bill C-47, including changes to Canadian exploration expenses, clarifications to amounts deductible for mining taxes and certain international tax changes, among others.

For details on these measures, see TaxNewsFlash-Canada 2023-17,  "2023 Federal Budget Highlights" and TaxNewsNow, “Federal Budget Bill #1 Now Law”.

Regarding the expanded federal mandatory disclosure rules (included in Bill C-47), Quebec did not announce any further harmonization measures since Quebec has its own mandatory disclosure regime. Also note that Quebec previously announced that it would harmonize with the federal reporting requirements for uncertain tax treatments, subject to certain adjustments, in an information bulletin published on June 9, 2022. For details, see TaxNewsNow, “Quebec Harmonizes with Federal Budget Measures and More”.

Personal tax measures

• Modify the AMT rules, as well as to:
  • Increase the AMT rate to 19% (instead of the proposed federal 20.5% AMT rate)
  • Increase the basic exemption to $175,000 (from $40,000) for the 2024 taxation year and indexed automatically as of 2025
• Adjust the intergenerational business transfer rules, subject to certain modifications
• Introduce new rules to establish and facilitate employee ownership trusts
• Increase the deduction for tradespeople’s tool expenses to $1,000 (from $500)
• Introduce changes related to Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs).

Other measures

Quebec will harmonize with certain federal administrative tax measures from the 2022 federal budget, including measures related to:

• Electronic filing and certification of tax and information returns
• Fixing contribution errors in defined contribution pension plans
• Electronic payment requirements.

Quebec will not harmonize with the following 2023 budget measures:

• The 2% tax on the net value of equity repurchases by certain Canadian-resident publicly listed entities that occur on or after January 1, 2024
• The new Clean Hydrogen Investment Tax Credit
• The new Clean Technology Investment Tax Credit
• The new Clean Technology Manufacturing Investment Tax Credit
• Enhancement of the corporate income tax rate reductions for zero-emission technology manufacturing profits
• The Investment Tax Credit for Carbon Capture, Utilization and Storage (CCUS)
• Changes to include lithium from brines as a “mineral resource” (to enhance the flow-through share rules) and expand the eligibility of the Critical Mineral Exploration Tax Credit (CMETC) to include lithium from brines.

Quebec will also make changes to certain provincial business income tax measures, including measures to:

• Amend the SBD rules to introduce a special rule related to the number of remunerated hours for the first taxation year of a new corporation resulting from an amalgamation, for taxation years that end after June 27, 2023
• Modify the list of territories with low economic vitality for the purpose of the tax credit relating to investment and innovation (C3i) and the new tax holiday (which was previously announced in Quebec’s 2023 budget).

Quebec will make changes to the QST rebate mechanism for the Quebec government and its entities. These changes will be effective on the day the bill that includes these changes receives Assent.

For more information, contact your KPMG adviser.