Quebec corporate tax - Guide T2inc.ca

Given the complexity of Quebec business taxation, you may be wondering how to effectively navigate tax rates, identify taxable income and avoid common mistakes.

This guide is here to give you clear answers and help you understand the tax issues that are critical to your business. Are you ready to demystify how your business is taxed in Quebec?

Reporting obligations

Navigating Quebec's tax landscape requires a thorough understanding of the obligations imposed on businesses. Whether you're a start-up or an established business, complying with federal and provincial requirements is critical to your company's success and compliance.

Here's an overview of the main tax responsibilities facing Quebec businesses, from initial registration to final tax payment.

Register your company with Revenu Québec

Any company wishing to conduct business in Quebec must register with the Registre des entreprises. This obligation applies to various legal forms, including corporations, partnerships, and trusts that carry on commercial activities.

For corporations incorporated in Quebec, registration is automatic upon filing of the articles of incorporation. Although registration fees are usually charged, there are some exceptions, notably for companies incorporated in Ontario, which may be exempt from these fees.

Filing your income tax return

Once registered, businesses must declare their income to Revenu Québec and the Canada Revenue Agency, providing all the information necessary to calculate the taxes due. This return includes business income, capital gains and other types of income.

A company's choice of legal form affects its tax obligations, particularly with respect to corporate income tax and withholding.

Collection of sales taxes (GST and QST)

In Quebec, companies with revenues in excess of $30,000 are required to register for GST/QST. This registration is essential for the proper management of the collection and payment of these taxes on transactions carried out.

Online platforms are available to simplify these procedures and related tax responsibilities.

Withholding taxes

Companies are also responsible for withholding taxes, particularly for employees (income tax, employment insurance and Canada/Quebec pension plan contributions). To make these deductions legally, you must be registered in the appropriate files.

Paying taxes and sales tax

Finally, paying taxes is a crucial step in a company's financial year. This includes corporate income tax, collected sales taxes (GST/QST), and withholding taxes on employee salaries.

Respecting payment deadlines is essential to avoid late payment penalties and interest. To avoid the risk of late payment and penalties, T2inc.ca is the perfect partner for your Canadian business taxes. We specialize in corporate tax filing to help entrepreneurs meet their tax obligations and save on taxes.

Corporate tax rates

In Quebec, corporations are taxed according to a system that combines federal and provincial rates to provide an integrated tax framework. Unlike the progressive tax rates for individuals, corporate tax rates in Canada are generally fixed and do not vary with taxable income. This system is designed to encourage economic growth of businesses by providing a stable, predictable tax system.

The corporate tax rate in Quebec is structured as follows:

• The basic federal corporate income tax rate is 15%.
• The Quebec provincial corporate income tax rate is 11.5%, regardless of income.

Thus, the combined tax rate for businesses in Quebec is 26.5%, applicable on taxable income. This rate is uniform and does not adjust according to income levels, unlike personal income tax.

It is essential to emphasize that eligible small businesses benefit from reduced tax rates, designed to stimulate their development. This preferential rate, at both federal and provincial level, is significantly lower for these SMEs, subject to their taxable income and specific eligibility criteria.

Reduced rate on the first $500,000 of taxable income

Companies incorporated in Quebec are subject to a reduced tax rate of approximately 20.5% on the first $500,000 of taxable income.

This tax regime, known as the Small Business Tax Deduction (SDB), is designed to encourage the development of small businesses. By offering this advantageous rate, the objective is to promote the expansion and prosperity of SMEs in Quebec territory.

Higher rate for taxable income above $500,000

Above the $500,000 taxable income threshold, corporations are subject to a different tax rate. Taxable income above this amount is taxed at a combined rate of 26.5%. This increase is designed to differentiate between small and large businesses.

Want to learn more about tax rates? See our article "How to calculate your tax rate in Quebec" for up-to-date information.

The different types of business income

In Quebec, the tax rate applicable to your company depends on the different types of income reported for the last fiscal year. Understanding the specific nature of this income is crucial to determining the precise tax rate.

Active business income

In most cases, active business income is derived from a commercial source. The company must then apply a tax rate of approximately 20.5% to its taxable income. This includes both federal (9%) and provincial (11.5% in QC) taxes.

Dividend income

The Refundable Dividend Tax on Hand (RDTOH), the Refundable Dividend Refund (RDR) and the Part IV tax are tax mechanisms applied to corporations (SPA) to maintain the principle of tax integration.

Here's how these mechanisms work:

1. APSs earning capital income pay a high tax rate of 50%. This rate includes a refundable portion of 30.67% that will be refunded at a later date.
2. When an SPA receives dividends from an unrelated corporation, it pays a Part IV tax of 33.33% of the dividend, which is added to the RDTOH account.
3. When an ABP receives dividends from a related corporation, it pays a tax equal to its share of the RTD received by the paying corporation, which is also credited to the RDTOH account.
4. When an ABP pays taxable dividends, it is entitled to an STTR equal to $1 for every $3 of dividends paid, up to the amount in the RDTOH account.

In short, these mechanisms are designed to limit the use of APSs to generate capital gains and dividends. The RDTOH can be thought of as an interest-free loan to the federal government that is repaid when the SPA pays taxable dividends.

Investment income

Investment income includes all interest income, plus the taxable portion of capital gains, rents, royalties and all other property income.

In 2023, investment income will be taxed at a rate of approximately 38% at the federal level, plus 11.5% at the provincial level. For Quebec, this means a tax rate of approximately 50%.

Capital gains income

Capital gains income is similar to investment income, with one difference. When a corporation realizes capital gains, it increases its capital account. This account is a cumulative balance that allows for the payment of tax-free capital dividends.

It's another way for corporations to reduce their taxes.

Tax credits and deductions in Quebec

In Quebec, businesses can take advantage of a wide range of tax credits and deductions designed to reduce their tax burden. By taking advantage of these tax benefits, businesses can not only reduce their taxes, but also redirect the funds saved to key growth initiatives.

Here are some examples of possible credits and deductions, depending on your company's eligibility. We invite you to learn more about these credits and deductions from a professional.

Refundable tax credits

Refundable tax credits can reduce the amount of tax owed and, in cases where the amount of the credit exceeds the tax payable, give rise to a refund.

Here are a few examples of refundable tax credits:

Research and Development Tax Credit (SR&ED): This tax credit is a tax initiative designed to encourage companies of all sizes and in all sectors to conduct research and development (R&D) activities in Canada.

Investment and Innovation Tax Credit (ITC): This tax credit is designed to stimulate productive investment by businesses by reducing the net cost of acquiring eligible assets. This credit supports innovation, operational efficiency and market competitiveness.

Retention of Experienced Workers Tax Credit: This tax credit is a tax measure introduced in some jurisdictions, notably Quebec, to encourage employers to retain or hire older workers. This initiative is designed to recognize the value of the work experience acquired by older workers and to encourage their continued participation in the labor market.

Nonrefundable tax credits

A non-refundable tax credit reduces the amount of tax you owe. Unlike refundable tax credits, non-refundable tax credits do not entitle you to a refund if the amount of the credit exceeds the tax due.

The following are examples of such credits for businesses located in Quebec:

• The dividend tax credit: This credit is a tax measure designed to mitigate the double taxation of income distributed by corporations to their shareholders in the form of dividends. When a corporation makes a profit, it pays taxes on that profit. If the corporation then decides to distribute a portion of that after-tax profit to its shareholders in the form of dividends, the shareholders must also include those dividends in their personal taxable income. The purpose of the dividend tax credit is to reduce personal income tax by the amount of tax already paid at the corporate level.
• Tax credit for the purchase of electric vehicles: This credit is an initiative introduced by the Quebec government to encourage companies to opt for less polluting vehicles and to support the transition to sustainable mobility. This tax credit aims to reduce greenhouse gas emissions by encouraging the purchase of new electric vehicles (EVs) or rechargeable hybrid vehicles.

Tax deductions

• Capital allowances (CCA): Companies can deduct the depreciation of assets such as buildings, equipment and vehicles through capital allowance (CCA). This spreads the cost of an asset over its useful life and reduces taxable income.
• Employee Training Deductions: The costs associated with employee training can often be deducted, which can encourage companies to invest in developing the skills of their workforce.
• Employee Paid Hours Deduction (ECD Criteria): Companies with a total of 5,500 or more paid employee hours during the tax year can claim the higher ECD rate. This measure is designed to encourage companies to maintain or increase their employment levels in order to benefit from a reduced tax rate.
• Deductions for RRSP Contributions: Although this deduction primarily applies to individuals, entrepreneurs and the self-employed can deduct their RRSP contributions, which can be particularly advantageous for sole proprietors.

How to prepare your Quebec corporate income tax return

Preparing a Quebec corporate income tax return requires a methodical and rigorous approach to ensure tax compliance and optimize your company's tax position.

This preparation begins in the first days of your fiscal year by ensuring that all transactions are properly reported and documented. The goal is to simplify data collection and review as tax season approaches.

Gather financial records: Carefully gather all necessary documents, such as annual financial statements, bank statements, receipts for expenses incurred during the year, and documentation of significant transactions.

This fundamental step forms the basis of your tax return.

Detailed business review: Review all income received and expenses incurred. Make sure each expense item qualifies and that all income is correctly reported.

This includes analyzing potential tax credits and verifying their applicability to your situation.

What documents are required?

• Financial statements: balance sheet, income statement and cash flow statement.
• Bank statements: to justify the movement of funds.
• Expense receipts: to support eligible expenses.
• Tax credit documentation: Proof of payment and supporting documentation required to claim tax credits.

What are the mistakes to avoid?

• Omission of income: Be sure to report all income received to avoid tax adjustments.
• Deducting ineligible expenses: Only expenses that are directly related to the business can be deducted.
• Miscalculating tax credits: Make sure you understand the eligibility criteria for the various tax credits in order to claim them correctly.

When to file a corporate income tax return

The deadline for filing a corporate income tax return in Quebec is six months after the end of the fiscal year. This date is determined when your business is incorporated.

It is therefore important to know this date in order to meet the deadline and avoid receiving an arbitrary notice of assessment. Failure to meet this deadline or to respond to reminders may result in significant penalties.

How do I file my return?

Businesses can file their returns online through the electronic services of the Canada Revenue Agency and Revenu Québec. Alternatively, returns can be filed by mail using the official forms provided and addressed to the appropriate offices.

By outsourcing your corporate tax preparation to T2inc.ca, we take care of filing your corporate tax returns with the appropriate tax authorities. This way, you can be sure that you won't receive an arbitrary notice of assessment.

Payment income tax

Although the income tax return must be filed within six months of the end of the tax year, payment of the tax due often must be made before this deadline. For corporations, the final payment of income tax is generally due within two months of the end of the tax year, or you may be subject to late payment penalties.

Corporations that meet the definition of a "Canadian-controlled private corporation" (CCPC) benefit from an extended three-month deadline, provided that all of their taxable income is active and from Canadian sources.

Intermediate payments

Corporations should also be aware of intermediate payment obligations on a monthly or quarterly basis. These payments are based on the tax due for the current or previous year and must be made to avoid interest and penalties for late payment.

Rely on T2inc.ca for your Quebec corporate income tax filing

Navigating the Quebec tax landscape can be complex, reflecting the province's many policies, varying tax rates and incentives. This complexity underscores the importance of sound tax management and understanding for businesses operating in Quebec.            

With T2inc.ca, you can take advantage of an online corporate tax filing solution. Our tax expertise will provide you with the best advice and assistance to ensure that your company benefits from all available deductions and credits, while meeting its tax obligations.

Contact our team for your corporate tax filing needs.