Quebec, Canada Sign Sales Tax Agreement

by Mike Godfrey, Tax-News.com, Washington

03 October 2011

After a fifteen year wait, Quebec is to receive compensation for the harmonization of its sales tax regime, after ministers hammered out a deal with the federal government, Prime Minister Stephen Harper has confirmed.

Quebec harmonized its sales tax (the QST) with the federal goods and services tax (GST) on July 1, 1992. According to Québec Finance Minister Raymond Bachand, reforming the tax system enabled Quebec’s economy to grow faster than it otherwise would have. The government believes that the harmonization helped improve the competitiveness of the business tax system, promote job creation and increase the standard of living of Quebecers, and by extension, that of Canadians.

The Quebec government has claimed financial compensation from Canada's federal administration for the past fifteen years, but, has, until now, been unsuccessful in that claim. Transition payments were granted to those other provinces harmonizing their sales taxes, although following a recent referendum result, British Columbia must reimburse the federal government to the tune of CAD1.6bn (USD1.5bn), having scrapped its harmonized sales tax (HST).

The Memorandum of Agreement (MOA), signed on September 30, provides that Canada will make payments totalling CAD2.2bn to Quebec. This follows on from a commitment made in Finance Minister Jim Flaherty's recent Budget, setting aside this amount to ensure the conclusion of an appropriate deal. The money will be supplied in two tranches: CAD733m upon implementation of the amendments Quebec is required to make to the QST on January 1, 2013, and CAD1.467bn on January 1, 2014.

The key features of the MOA are as follows:

• Quebec will ensure that the QST tax base, as well as its associated administrative, structural and definitional parameters, produce results that are identical to those under the GST/HST, and are administered in a manner that produces identical results (subject to exceptions).
• Quebec will undertake to remove the GST from the QST base (meaning no more “tax on tax”).
• Quebec commits to replicate under the QST legislation any change that Canada makes under the GST legislation. The change will generally apply on the same date as the corresponding GST change but, in any event, no later than 60 days from the coming-into-force date for the GST change.
• The tax treatment of financial services in Quebec will be harmonized with that of the GST.
• Quebec will undertake to mirror, under the QST legislation, the place of supply rules under the GST/HST legislation so as to avoid instances of non-taxation and double taxation. (Place of supply rules specify whether suppliers charge QST on their taxable supplies).
• Quebec will undertake to phase out its existing restrictions on input tax refunds over a transitional period of no more than eight years.
• Quebec will adopt the GST administrative, structural and definitional parameters for municipal rebates, as of January 1, 2014.
• Canada and Quebec agree to pay GST/HST and QST on government purchases, as of April 1, 2013, to simplify compliance for businesses. Where inter-jurisdictional immunity applies, tax paid will be recovered through a rebate mechanism.
• Quebec will continue to determine the QST rate and will be able to maintain a limited number of existing measures. This takes into account the existence of the QST since July 1, 1992.
• As for other provinces, the QST base will be allowed to deviate by up to 5% from the GST base.
• Canada and Quebec will make best efforts to enter into a Comprehensive Integrated Tax Coordination Agreement (CITCA) by April 1, 2012. The CITCA is a detailed agreement that spells out the rights and obligations of the Parties under the agreement.

The Premier of Quebec, Jean Chares, said: “For the past 15 years, Quebec has claimed financial compensation from the federal government, similar to other provinces. I want to point out that Quebec was the first province to recognize the benefits of a value-added tax and joined the federal government in harmonizing its sales tax with the GST on July 1, 1992...I thank Mr. Harper for keeping his commitment to reach a satisfactory agreement with Quebec. The federal government has acknowledged, in the agreement, the basic principles put forward by Quebec, i.e. to retain its own legislation and the administration of both taxes."

Bachand added: “Today, with the signing of this agreement, Quebec and Canada are making significant gains: businesses will be even more competitive and they will find it easier to administer the taxes.”

Federal Prime Minister Stephen Harper concluded: "Our government is committed to working closely with provinces and territories on their priorities. Quebec wanted a harmonization agreement, we worked together to make it happen, and it is now in place. This is a fine example of federalism working as it should.”

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