After the tabling of the federal budget on March 22, it was Québec’s turn to present its budget on March 28. Here is our analysis of the combined impact of these two budgets on professionals.
More good news from the provincial government
Among the measures affecting individuals, the following are noteworthy:
- Greater fiscal coherence: All tax credits will be harmonized and calculated at a rate of 16%.
- Increase in the basic personal amount credit ($14,890 at a rate of 16% versus $11,635 at a rate of 20%), which is equivalent to a savings of $55.
- Refund of the health contribution paid in 2016 for taxpayers earning less than $134,905 and elimination of the health contribution in 2017. Note: no changes need be made on the tax return. The notice of assessment will be adjusted to take into account the health contribution refund.
- No change in terms of eligibility for the age tax credit: it remains age 65.
- Extension of the RénoVert refundable tax credit to March 31, 2018 for people who want to make renovations that improve the energy efficiency of their home.
For incorporated professionals:
Improvement in the 5,500-hour rule
Since January 1, 2017, corporations whose employees combined work fewer than 5,500 hours per year can no longer fully benefit from the Small Business Deduction (SBD) in Québec. This means higher taxes for many corporations owned by incorporated professionals.
Good news for many of these professionals: the latest provincial budget simplifies the rule. The hours considered in the calculation will now be paid hours, regardless of the hours actually worked, which means that you can now include, among other things, statutory holidays and paid vacations. Note that this measure does not affect the shareholder, who can choose their form of compensation (salary or dividends), since the rule applies only to employees.
Summary of the federal and provincial tax measures:
A break for professionals
Overall, the 2017 budgets seem to give a tax break to professionals. Bear in mind, however, the federal tax measure affecting the billed-basis accounting method, which proposes to eliminate the ability for designated professionals to elect to use this accounting method and to exclude the value of work in progress in computing their income. We analyzed this measure with MultiD, an accounting management and medical billing firm of which the Financial is a shareholder. In our view, the professionals most affected will undoubtedly be doctors who do medical research or who prepare medical expertise reports, as well as dentists. In the case of certain dental specialities like orthodontics, the value of work in progress can be very substantial.
At the end of a fiscal year that began after the date of the budget, all work in progress for which a professional has not been paid will have to be included in their taxable income for that year, which advances the payment of tax on this income.
To assess the impact of this measure on your practice, we recommend that you discuss it with your accountant.
A Plan to Strengthen the Quebec Economy as an Executive-Driven Economy
Apart from the recent budgets, the Quebec government tabled a document in February 2017 that announced a series of measures to strengthen the economy. Two of these measures will certainly have a significant impact on incorporated professionals:
- Tax relief on the transfer of shares of a family business – A professional who sells their corporation to another corporation not dealing at arm’s length with them (for example, a corporation owned by the professional’s child) will now benefit from advantageous tax treatment of the capital gain (previously limited to sales between arm’s length corporations). This measure is retroactive to March 18, 2016.
- Harmonization of taxation of stock options – The stock option deduction rate increases from 25% to 50% for corporations listed on the stock exchange with payroll in Québec of $10 million or more.
For professionals, these two budgets will in most cases result in the status quo in terms of both their personal taxation and taxation of their corporation. Our tax specialists continue to monitor the situation very closely and we will notify you of any changes that could impact your finances.
For any questions concerning the latest budget measures, don’t hesitate to consult your advisor.
Benoit Chaurette, M. Fisc., Pl. Fin
Tax Specialist and Financial Planner