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Monday, November 7, 2011

QST Harmonization

Recently, the governments of Canada and Quebec announced the signing of a memorandum of agreement (MOA) to harmonize the Quebec sales tax (QST) and the federal goods and services tax (GST) effective January 1, 2013. The impact of harmonization and some of the transitional issues are expected to be different from those associated with the HST in Ontario. (As a result of last summer's referendum, British Columbia is expected to revert to its PST on April 1, 2013.)
As of January 1, 2012, the rate under the current QST regime will be 9.5 percent, applied to the selling price plus GST. Effective January 1, 2013, the rate of the new "amended QST" will be 9.975 percent applied to the selling price excluding GST. The change is approximately revenue-neutral.
The QST is already partially harmonized and it is expected that the tax base of the amended QST and the GST will continue to be largely the same, although financial services will become exempt and the current QST exemptions (for example, the exemption for books and for infants' diapers) will be maintained.
Interestingly, Quebec will retain its separate legislation (An Act Respecting the Québec Sales Tax) and, as a result, will administer the amended QST rather than an HST levied under the federal Excise Tax Act (as is the case in the other harmonized provinces). Revenu Québec (not the CRA) will continue to administer both the GST and the amended QST; therefore, businesses will be required to prepare separate returns under the amended QST and will be subject to audits by Revenu Québec.
Financial services are currently zero-rated for QST purposes, whereas the GST/HST system treats such services as exempt. As part of harmonization, financial services will become exempt. Although there will be no impact on consumers purchasing financial services (since zero-rated services are taxed at 0 percent), financial institutions will no longer be able to claim input tax refunds (ITRs), the Quebec equivalent of input tax credits, for the QST paid on their inputs relating to the supply of exempt financial services. However, the compensatory tax that was established to partly compensate for the ITRs that financial institutions were receiving will be eliminated over time. Overall, the financial services sector will experience a significant tax increase.
Large businesses (those with taxable sales exceeding $10 million) will gain, in that they will eventually be able to claim full ITRs on all inputs. Currently, the QST system allows ITRs for most inputs but not for certain goods and services (for example, specified road vehicles, energy, telecommunications, and meals and entertainment) acquired by large businesses. As a result of the harmonization, ITRs for the QST paid by large businesses on all inputs will be allowed gradually over a period of three years, beginning in 2018.
One interesting question is the extent to which the requirements for the amended QST can apply to non-residents, given that the requirements are under provincial legislation. Under section 92 of the Constitution Act, 1867, the provinces' legislative authority is limited to direct taxation "within the province" and to property and civil rights "in the province." In contrast, the provincial component of the HST and the collection requirements are imposed under federal legislation, and so are not similarly restricted.
Draft legislation, transitional measures, and additional details are expected to be announced by June 1, 2012.
Jung Ah Kwon, Michael Tsao, and Simon Thang
KPMG LLP, Toronto
jkwon1@kpmg.ca, mtsao@kpmg.ca, and sthang@kpmg.ca


Canadian Tax Focus
Volume 1, Number 3, November 2011
©2011, Canadian Tax Foundation