Quebec budget proposes further changes to health taxes

Government speeding up plan to eliminate mandatory health contribution, making further cuts to HSF contribution rates

Employers with Quebec payrolls will have to implement changes to provincial income tax tables and formulas for July 1 to incorporate newly announced rate cuts for the mandatory personal health contribution.

Quebec Finance Minister Carlos Leitão announced the rate reductions when he tabled the province’s 2016-17 budget on March 17. The budget also proposes to reduce the rates some employers pay for Quebec’s Health Services Fund (HSF) and to revise some of the tax credits payroll uses when calculating income tax source deductions.

The government plans to lower the rates for the personal health contribution in 2016 and 2017 and to eliminate premiums altogether in 2018. The proposed measure would speed up a planned phase-out of the health contribution announced in last year’s budget. In the 2015-16 budget, Leitão said the government would gradually reduce and eliminate the health contribution between 2017 and 2019.

Currently, provincial residents 18 and over pay the contribution (unless exempted) if their income exceeds $18,570 in 2016. Employees pay the contribution through income tax source deductions at work.

The proposed changes would lower the maximum annual contribution to $50 from $100 for individuals whose annual income is between $18,570 and $41,265. For individuals whose annual income is between $41,265 and $134,095, the maximum annual contribution would be reduced from to $175 from $200. The max yearly contribution would remain $1,000 for those with incomes exceeding $134,095.

The rates would be retroactive to Jan. 1, but Revenu Québec would not implement them until July 1.

For 2017, the budget proposes to exempt net incomes less than $41,265 (all income ranges would be adjusted for indexation). For income between $41,265 and $134,095, the max annual contribution would be reduced to $70. For income exceeding $134,095, the max contribution would drop from to $800 from $1,000. As of Jan. 1, 2018, no one would pay the health contribution.

Beginning next year, the budget also proposes to gradually reduce the HSF contribution rate over five years for all small and medium-size businesses (SMBs) whose total annual payroll is less than $5 million. Employers in Quebec are required to pay into the fund to help support the province’s health care system.

The proposals would replace rate reductions proposed last year that targeted SMBs in industries other than the primary and manufacturing sectors.

The rate reductions would be based on the size of an employer’s payroll and the economic sector in which it operates. The budget divides the economic sectors into two groups: primary and manufacturing sectors and service and construction sectors.

For SMBs in the primary and manufacturing sectors whose total annual payroll is no more than $1 million, the budget proposes to reduce the HSF rate from 1.6 per cent in 2016 to 1.55 per cent in 2017, 1.5 per cent from 2018 to 2020, and to 1.45 per cent in 2021.

For SMBs in the service and construction sectors, the budget proposes to reduce the HSF rate from 2.7 per cent in 2016 to 2.5 per cent in 2017, 2.3 per cent in 2018, 2.15 per cent in 2019, 2.05 per cent in 2020 and to 2.0 per cent in 2021. For SMBs with a total annual payroll of more than $1 million but less than $5 million, partial rate reductions would apply in all sectors.

The HSF contribution rate would remain 4.26 per cent for SMBs whose total annual payroll is $5 million or more. For employers that are not SMBs, the rates would continue to vary from 2.7 per cent to 4.26 per cent, depending on the size of the employer’s payroll.

Business groups said the government needs to make more tax changes to encourage economic growth. The Quebec Employers Council said in a news release that personal and business taxes in Quebec are too high compared to other jurisdictions in North America.

The Board of Trade of Metropolitan Montreal said it was disappointed Leitão did not implement some of the more fundamental changes proposed last year by a government committee studying tax reform.

The committee, chaired by tax professor Luc Godbout, made recommendations to make the tax system "more competitive, efficient and equitable."

In addition to eliminating the personal health contribution and reducing the HSF rate for SMBs, the committee suggested increasing the number of personal income tax rates and brackets from four to nine to make it more progressive.

The report also recommended raising the basic personal amount claimed on a Source Deductions Return (TP-1015.3-V) to $18,000 (it is currently $11,550) and increasing the rate of the Quebec Sales Tax to 11 per cent. In addition, the report recommended the province eliminate a number of payroll-related tax credits and deductions.

Last year, Leitão said the government had already acted on 28 of the committee’s 71 recommendations and it would study and consult on the remainder before deciding whether to proceed.

Other payroll-related measures Leitão proposed include:

• Lowering the age at which individuals can claim a tax credit for experienced workers from 63 to 62, beginning in 2018.

• Keeping the rate of a tax credit for buying Fondaction shares at 20 per cent for the labour-sponsored fund’s next two fiscal years. In last year’s budget, the government announced the rate would be 20 per cent for shares acquired after May 31, 2015, and before June 1, 2016.

• Revenu Québec will take steps to improve its service delivery, including implementing more online services.

The change to the age for claiming the tax credit for experienced workers is designed to encourage older workers to stay in the workforce or re-enter it. The government has proposed various measures to address concerns the province is facing a shrinking pool of workers due to its aging population.

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