If implemented, recommendations would mean big changes for payroll
A government-appointed committee studying tax reform in Quebec recommends the provincial government make wide-ranging changes to the province’s tax system, including a number of payroll-related taxes.
The Quebec government set up the committee last June to find ways to improve the province’s tax system. After months of study, the Québec Taxation Review Committee recently released its final report, Focusing on Québec’s Future. The six-volume report makes 71 recommendations, touching on most, if not all, provincial taxes, including personal income tax, payroll tax and sales tax.
"We sought to define an equitable tax reform both for individuals and for businesses. It was important for us to propose a simpler, more transparent, more coherent taxation system that addresses key concerns such as tax competition or the erosion of the tax base," Committee Chair Luc Godbout said in the report.
The overarching theme running through the report is the need to change the structure of the province’s tax system to make it "more competitive, efficient and equitable." The committee suggests the government do this by shifting the focus from income tax, corporate tax and the province’s payroll tax (Health Services Fund) to consumption taxes and user fees, as well as (in the long run) fundamentally changing the way individuals are taxed.
The committee says some of its recommendations can be put in place right away, while others will require more consultation, including discussions with the federal and other provincial governments, before being implemented.
Many of the recommendations would affect payroll, including the following proposals:
• More tax brackets and tax rates: The report recommends changing the personal income tax system to make it more progressive by increasing the number of tax brackets and tax rates from four to nine:
The report also recommends the maximum marginal tax rate for personal income taxes, including federal taxes, be no more than 50 per cent.
"During the public consultations, several interveners requested that the number of rates in the tax table be increased and that the progressivity of the tax rate schedule be enhanced," the report says.
• Eliminate the mandatory health contribution: The report recommends that the government do away with a mandatory health contribution that provincial residents aged 18 and over are required to pay (unless exempted) if their income exceeds a specified threshold. Employees pay it through income tax source deductions.
• Increase basic personal amount: The report recommends increasing the basic personal amount claimed on a Source Deductions Return (TP-1015.3-V) to $18,000. It is currently $11,425.
• Eliminate a number of tax credits and deductions: The report recommends abolishing a number of tax credits and deductions that would affect some employees and volunteers, including: tax credit for volunteer firefighters; non-taxation of certain amounts paid to emergency services volunteers; deduction for home relocation loans; deduction for moving expenses; non-taxation of public transit benefits for employees; deduction for employment outside Canada; non-taxation of death benefits up to $10,000; and tax holidays for various foreign workers (e.g., professors, researchers, experts, specialists etc.).
• Increase the QST rate: As part of the plan to shift revenue from income tax to consumption taxes, the report recommends the province increase the rate for the Quebec Sales Tax (QST) from 9.975 per cent to 11 per cent.
• Reduce HSF contribution rate for SMEs: The report recommends reducing the contribution rate for the Health Services Fund (HSF) for all small and medium-size enterprises (SMEs) from 2.7 per cent to 1.6 per cent. The government has already reduced the rate to 1.6 per cent for SMEs in the primary and manufacturing sectors whose annual payroll is less than $5 million. The report says other SMEs should benefit from a reduced rate.
Quebec is one of four provinces that currently levies a health-related payroll tax. The others are Manitoba, Ontario and Newfoundland and Labrador. The rate an employer pays for Quebec’s HSF depends on the size of its payroll. Employers whose annual payroll is no more than $1 million have a 2.7 per cent rate. Those with payrolls between $1 million and $5 million, pay 2.31 per cent plus 0.39 per cent times their annual payroll divided by $1 million. For payroll at $5 million or more, the rate is 4.26 per cent.
"The Quebec taxation system is noteworthy for its heavy payroll tax in relation to the other three provinces in which such a tax exists. The payroll tax is a fixed charge that is more of a burden for SMEs than for large businesses. The fixed charge also imposes additional constraints respecting liquid assets for SMEs. Differential treatment is, therefore, warranted between small and large businesses in this instance," the report says.
• Raise the rate of the tax on insurance premiums: The report recommends that the tax on insurance premiums, which applies to group term life insurance taxable benefits, be raised from nine per cent to 11 per cent.
• Abolish stock option deductions: The report recommends the government abolish what it calls "preferential treatment" for stock options granted to employees. Under Quebec tax law, employees who receive a taxable benefit from stock options for a public or a Canadian-controlled private corporation may be entitled to a deduction of 25 per cent of the taxable benefit amount (or 50 per cent for businesses with assets of less than $50 million that are entitled to tax credits for scientific research and experimental development) if certain conditions apply. Under federal income tax rules, the deduction is 50 per cent.
The committee proposes the government work with Ottawa and the other provinces to eliminate both the Quebec and the federal deductions. It calls this a medium-term recommendation that should be made in conjunction with changes to capital gains rules. In the meantime (or later, if talks fail to produce an agreement), the committee suggests that for public corporations, the Quebec government increase the deduction to 50 per cent to harmonize it with the federal deduction. For Canadian-controlled private corporations, the committee recommends that in the short term (or if there is no agreement in talks with the other governments in the future), Quebec continue with its current rules.
• Set up a dual income tax system: The committee proposes that the government examine a long-term objective of implementing a dual income tax system as Scandinavian countries have done. Under such a system, the report says, there would be two types of taxation, a progressive tax rate schedule for work income and a single tax rate for capital and corporate income.
Work income would be taxed at a much higher rate than capital income, but the tax base for capital income would be very broad. The report says a number of tax experts appearing before the committee recommended a dual system.
"The current personal income tax and corporate income tax systems hinge essentially on ideas developed in the 1960s. The economic setting and knowledge of tax-related questions have changed vastly since then," the report says.
"In particular, we now have a much deeper understanding of the impact of methods of taxation and improper resource allocation that each method of taxation can engender. The committee believes that the time has come to initiate thorough reflection on the relevance of maintaining the current paradigm or gradually shifting to a new income tax system."
The report notes that although a dual income tax system could simplify the province’s tax regime, there are many challenges in moving to such a system, including getting public support for it and establishing strict rules to prevent individuals from trying to shift work income to capital income to avoid tax. It says "thorough reflection" with the federal and provincial governments will be needed before making changes.
In response to the report, Quebec Finance Minister Carlos Leitão says the government incorporated 28 of the recommendations into this year’s budget, including plans to gradually eliminate the mandatory health contribution and to gradually reduce the HSF contribution rate for small and medium-size businesses in the service and construction sector whose annual payroll is less than $5 million.
He says the report’s other recommendations, including many of the payroll-related suggestions, will require more study.
Leitão has announced that the government is setting up a roundtable of "key players in civil society" to help it come to a decision on how to change the tax system. He says he will also set up a working committee to begin discussions with the federal government and other provinces on potential tax changes.
The Canadian Payroll Association (CPA) praised the government for trying to come up with ways to simplify the tax system and for seeing the importance of working with other governments in the country to try to bring about change together.
"We commend the Quebec government for their simplification measures and aiming for harmonization with other jurisdictions and the federal government through joint task forces," said Rachel De Grâce, the CPA’s manager of advocacy and legislative content, in a news release.
"This supports the Association’s advocacy mandate to increase the effectiveness and efficiency of payroll-related legislation, regulations and administration for all stakeholders: employers, government and employees."
To read the report, go to www.examenfiscalite.gouv.qc.ca/publications/versions-anglaises/.
