Quebec Finance has announced that it will expand certain relieving tax provisions.
Information Bulletin 2017-03, which was published on February 21, 2017, extends an existing law that, in certain situations, permits transfers of family businesses without triggering the Quebec anti-surplus stripping rules. The bulletin also contains measures that propose a new deferral of payment of Quebec tax on income from certain deemed dispositions of qualified shares and harmonizes the Quebec and federal rules regarding deductions for certain stock options.
Transfer of a family business
Under this measure, family businesses in all sectors will be able to complete certain non-arm's length share transfers without triggering Quebec anti-surplus stripping rules in sections 517.1 to 517.3 (the equivalent of the federal section 84.1) if a capital gains deduction was previously claimed by the taxpayer (or non-arms' length person) on those shares. Previously, this relief was only available for a qualified small business corporation share in the primary and manufacturing sectors. The measure will apply to dispositions of qualifying small business corporation shares occurring after March 17, 2016.
Deferral of tax on deemed disposition of qualified public corporations
A new tax measure provides relief to the tax applicable on the deemed disposition of property, in certain circumstances (i.e., on a person's death and upon the 21st anniversary of a trust). Individuals and trusts may elect to defer payment of Quebec income tax attributable to the deemed disposition of qualified shares for a maximum period of 20 years, so long as the qualifying corporation's shares are not actually sold, among other conditions.
Individuals and trusts may defer their tax payment beyond the 20th anniversary of the deemed disposition of the qualified shares, if the value of the qualified shares decreases between the time of the initial deemed disposition and the time the tax payment is required (i.e., the 20th anniversary of the deemed disposition). The amount of the new Quebec income tax that would be deferred after 20 years would be calculated according to the value of the shares on the 20th anniversary. The value of the qualified shares will be tested every two years and taxes will become payable if the value of the qualified shares increase, but total taxes should not exceed the taxes at the time of the initial deferral (i.e., at the time of the deemed disposition).
To qualify for this tax deferral, individuals or trusts must hold shares carrying more than one-third of the voting rights of a qualified public corporation or shares of a private corporation more than 95% of the fair market value of which is attributable to such shares of a qualified public corporation. A holding by an individual or trust of less than one-third will qualify where the individual or trust is a member of a related group that meets the one-third threshold. The payment of the tax is deferred for as long as the shares continue to qualify as public corporation shares and are not actually sold.
A corporation is a qualified public corporation if it:
To benefit from this measure, an individual or trust must furnish security representing at least 120% of the amount of the deferred tax. No interest or penalty will be payable on the income tax deferred, as long as such security remains valid.
Harmonization of stock options taxation
In order to harmonize with the federal legislation, employees in Quebec will now be able to enjoy an increase in the amount they can claim as a stock option deduction to 50% (from 25%) for shares of publicly traded companies having a strong presence in Quebec. This increase will apply to stock options that are granted by a corporation that agrees to sell or issue capital stock of a qualified corporation listed on a recognized stock exchange after February 21, 2017. A corporation will be considered a qualified corporation where its aggregate wages in Quebec is at least $10 million for the calendar year when the stock option is granted or the shares were acquired.
For more information, contact your KPMG adviser.
Information is current to February 28, 2017. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500