version finale-simplification fiscalité-anglais

Simplification of the Tax System

ISBN 2-550-42908-7Legal depositBibliothèque nationale du Québec, 2004Publication date: July 2004© Gouvernement du Québec, 2004

SIMPLIFICATION OF THE TAX SYSTEM

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SUMMARYThis paper presents the views of the ministère des Finances on thecomplexity of the income tax system. Briefly, it provides answers to thefollowing questions: Why is income tax so complex? Why simplify it?How can it be simplified?

A number of factors can be invoked to explain why income tax hasbecome increasingly complex, such as the difficulty inherent in definingthe tax base and a desire to satisfy the principles of horizontal andvertical equity. Furthermore, Québec has complicated the rules bymaking abundant use of the tax system to carry out developmentalmeasures in the economy. Lastly, the duplication of taxation powers inCanada forces taxpayers to file two tax returns.

Despite the benefits that flow from a number of these features, it maynevertheless be desirable to simplify the income tax system, chieflybecause of the high cost of compliance with fiscal obligations for thepublic administration and for taxpayers. The question then is: How canQuébec’s tax system be simplified?

Because of fiscal federalism, a better understanding of the tax system ofthe other provinces may provide possibilities for simplification.Currently, the other provinces leave it to the federal government,through tax collection agreements, to administer their personal incometax and, accordingly, they agree to bind their tax system to the federaltax system, essentially by using the federal definition of taxable income.

Accordingly, one possibility for simplifying Québec’s income taxsystem could be to determine the taxable income of a Québec taxpayersimply by using the taxable income calculated for federal income taxpurposes.

However, such a major simplification of the tax system wouldnecessitate a consideration of the problems associated with transitionrules. This transition could raise substantial difficulties with respect tothe introduction of fair, efficient and neutral transition rules. In thiscontext, the desired simplification effect and the resulting costs fortaxpayers and the government would depend on the choices made.


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Furthermore, while the simplification options that could be identifiedwould present advantages in terms of greater simplicity, they would beachieved at the cost of a significant loss of fiscal autonomy. Québec hasused its fiscal autonomy to wield the tax system as an instrument ofsocial and economic policy and the fiscal policy choices made to datereflect the many benefits that stem from such autonomy.

However, the complexity of Québec’s tax system must remain a concernfor those who are responsible for fiscal policy. In this regard, concretesteps to simplify the tax system were taken in the June 12, 2003 BudgetSpeech and the March 30, 2004 Budget Speech, out of a real concern tomake the personal and corporate tax systems more efficient and simplerto apply. The ministère des Finances also examined therecommendations of the Joint Task Force on Tax Administration and theAdvisory Panel on Regulatory Relief in this spirit.


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TABLE OF CONTENTSSUMMARY ...................................................................................I

INTRODUCTION .........................................................................1

1. THOUGHTS ON THE NOTION OF COMPLEXITY...........3

1.1 Why income tax is complex...................................................... 4

1.1.1 Difficulties associated with the definition of thetax base............................................................................ 4

1.1.2 Tax fairness..................................................................... 4

1.1.3 Integrity rules .................................................................. 6

1.1.4 Developmental measures for the economy ..................... 6

1.1.5 Fiscal federalism ............................................................. 7

1.1.6 Conclusion ...................................................................... 9

1.2 Why simplify............................................................................ 10

1.2.1 Many types of costs ...................................................... 10

1.2.2 Improved transparency.................................................. 11

1.3 How to simplify ....................................................................... 12

1.3.1 Less complexity: the example of the otherprovinces ....................................................................... 13

1.3.2 More complexity: Québec’s tax system........................ 14

1.3.3 Middle solutions............................................................ 14

1.3.4 Common consequences of each simplificationoption ............................................................................ 20

1.3.5 Problems associated with transition rules ..................... 21

1.3.6 Fiscal autonomy considerations.................................... 24


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2. SIMPLIFICATION STEPS TAKEN .................................31

2.1 June 12, 2003 Budget Speech ................................................. 32

2.2 March 30, 2004 Budget Speech.............................................. 33

2.3 Recommendations of the Groupe de travail conjoint surl’administration de la fiscalité ................................................. 35

2.4 Recommendations of the Advisory Panel on RegulatoryReform ...................................................................................... 36

CONCLUSION...........................................................................39


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INTRODUCTIONIn recent months, the Québec government has initiated research andanalysis into various solutions to achieve its objective of modernizinggovernment.

The exercise has been divided into six major areas, leading to thecreation of an equal number of committees, including one on reducingthe tax burden and simplifying the personal and corporate tax system,which is under the responsibility of the Minister of Finance.

In addition to the work of this committee, the ministère des Financeshas looked into the complexity of the income tax system and examinedoptions for simplifying it.

This is not the first time that government has considered the question ofthe complexity of Québec’s tax system. Two task forces with essentiallythe same simplification objective, in addition to that of regulatory relief,were formed in 2002.

The Advisory Panel on Regulatory Reform (Advisory Panel), formed inApril 2002,1 was charged with following up on the recommendationsmade in the June 2000 and May 2001 reports of an initial advisorygroup2 and with examining, in that context, the administrativesimplification measures proposed by the government, without callinginto question the basis of existing regulations. The Advisory Paneltabled its final report on August 5, 2003.

In addition, the Groupe de travail conjoint sur l’administration de lafiscalité (Groupe de travail) was formed in June 2002 to follow up onone of the recommendations of the May 2001 report of the first advisorygroup. Its mandate consisted in proposing practical measures to simplifythe application of Québec’s corporate tax system, giving priority to therecommendations formulated in the advisory group’s 2000 and 2001reports as a starting point.3 The Groupe de travail tabled its final report,written by the ministère du Revenu, on October 3, 2003.

_______________1 Order in council 468-2002, April 24, 2002.2 An initial advisory panel, formed in 1997 and whose mandate was renewed on

April 28, 1999 for an additional two years, had already submitted three reports,i.e. in June 1998, June 2000 and May 2001.

3 Conseil des ministres decision of March 20, 2002.


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Accordingly, this paper brings together the views of the ministère desFinances on the simplification of Québec’s income tax system. Morespecifically, it suggests answers to the following questions: Why isincome tax so complex? Why simplify it? How can it be simplified?

The first part provides a brief description of the factors that addcomplexity to an income tax system, the reasons why simplification isdesirable, possible options for simplification as well as some of thepitfalls that may hamper attempts to simplify an income tax system.

The second part describes the concrete simplification measures taken todate and their benefits for Québec’s taxpayers.


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1. THOUGHTS ON THE NOTION OFCOMPLEXITY

The primary objective of a tax system is to generate revenue that willallow government to fund public expenditures. The taxes paid byindividuals and corporations fund, in particular, the health system, theeducation system and assistance of last resort.

However, taxation is also a policy tool (social, economic, cultural andso on) and an instrument for reducing inequalities by redistributingwealth. In this way, it reflects society’s values and socio-economicobjectives.

In pursuit of these objectives, fiscal policy decisions are taken in light ofthe three basic principles of any tax system: fairness, neutrality andsimplicity.

More specifically, under the principle of horizontal equity, taxpayerswith the same ability to pay bear a similar tax burden.

The principle of vertical equity holds that a taxpayer with greater abilityto pay pays more tax. In reality, this principle is reflected essentially inthe progressive structure of tax rates by taxable income bracket.4

The neutrality principle seeks to ensure that taxpayers’ decisions arebased on factors other than tax considerations. A neutral tax system hasno influence on the behaviour of economic agents and allows the freemarket to operate efficiently.

Lastly, the principle of tax simplicity is based on the premise that asystem that is simple to understand and administer is easier to complywith and less costly in every regard. While the objective of thisprinciple is just as important, its achievement is often hampered in theinterests of fairness and neutrality, as well as other considerations thatare just as legitimate.

Accordingly, a good understanding of the causes of complexity of a taxsystem based on income is crucial.

_______________4 The Québec sales tax (QST) credit is another example of the application of this

principle since its objective is to make the QST less regressive.


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1.1 Why income tax is complexMany factors, which at times are in conflict with each other, can beinvoked to explain why tax legislation based on income tax can growincreasingly complex.

1.1.1 Difficulties associated with the definition of thetax base

The complexity of a tax system based on income tax is largelyattributable to the inherent difficulty in defining the system’s tax base.The tax base is the amount on which tax is payable.

In the case of income tax, the base is taxable income or profit.Accordingly, the notion of tax base encompasses not only what isconsidered income, but also all the deductions and exemptionsstipulated in the course of determining such income. When costs areincurred to earn income, they must be taken into account to determinethe portion of such income that must actually be taxed.

At times, it can be difficult to adequately determine a tax base thatallows for the nature of various sources of income, while making thespecific and necessary adjustments to take account of the economicrealities underlying the production of a given type of income.

Moreover, the growing complexity of commercial operations has aneffect on tax rules. Globalization and technical advances have radicallytransformed how business is done. New questions are thus raised andthe tax base is inevitably and recurrently adjusted to reflect newcommercial realities.

1.1.2 Tax fairnessTwo of the basic principles of a tax system, fairness and simplicity,have objectives that are essentially contradictory. The principle of taxfairness is often the primary obstacle to the principle of simplicity.


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Accordingly, many initiatives that make a tax system more complex arein fact simply the result of a desire to make allowance for variouseconomic realities in the distribution of the tax burden. “La théorieéconomique en politique de taxation nous apprend rapidement que leprincipe d’équité fiscale s’oppose très souvent à ceux d’une simplicitédes lois et à leur respect au moindre coût pour les contribuables.”5

Fairness regarding personal income tax

One of the main sources of complexity of a personal income tax systemis the variety of items to consider in establishing ability to pay tax, inparticular with regard to the characteristics of a taxpayer, his familysituation or financial situation. For example, a single person with asmaller income than a head of family whose spouse has no incomecould nonetheless pay tax similar to the latter because existing rulestake into account the fact that the head of family bears a greaterfinancial burden to meet the essential needs of his family (housing,food, clothing).

In general, fair treatment regarding personal income tax is achievedthrough tax credits and tax deductions that help evaluate a taxpayer’strue ability to pay.

Such is the case in Québec in particular for the basic personal tax creditand the amounts granted for dependent children who are students andfor a person living alone. Such is also the case for deductions forcontributions to a registered retirement savings plan (RRSP) or aregistered pension plan (RPP), which allow taxpayers to defer, untiltheir retirement, payment of tax payable on these amounts.

Fairness regarding corporate income tax

Turning to corporate income tax, adjustments are allowed to subtract thecosts assumed to earn income so that only the economic gain, i.e. theprofit, is subject to tax. In addition, the system takes account ofoperating losses sustained in prior or subsequent years in order to bettermatch income and losses within a business cycle. Furthermore,integration rules are specifically designed to avoid double taxation ofthe same income. One example is the exemption of dividends receivedfrom another corporation.

_______________5 R. Lachance, “Fiscalité des entreprises à l’aube de l’an 2000 : Entre le rêve et la

réalité”, in Congrès 1996, APFF, Montréal, October 1996, p.1-10.


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Accordingly, like the personal income tax system, the corporate incometax system estimates corporation’s true ability to pay so that they aremade to bear a tax that is fair.

Consequently, if income tax is complex, it is partly because it tries toachieve fairness for all taxpayers. Through the application of its specificrules, it attempts to adequately measure taxable income by taking ataxpayer’s real situation into account, thus effectively affording fairtreatment.

From many points of view, substantial simplification of the tax ruleswould be at the cost of a loss of tax fairness or justice.

1.1.3 Integrity rulesOver the years, many measures have been implemented to protect thetax base. To eliminate loopholes that would allow tax avoidance, thegovernment made the applicable rules more complex so that eachtaxpayer assumes his fair share of the overall tax burden. Indeed, it canbe said that the more hermetic and fair a tax system, the more complexit is.

Furthermore, while it is acknowledged that a taxpayer can organize hisaffairs to pay only his fair share of tax in a given jurisdiction, it followsthat in the absence of any integrity rules, it would be possible for ataxpayer to avoid income tax through tax planning that is completelylegal.

Although legitimate because of their objective, provisions protecting theintegrity of the tax base make the tax system more complex. In Québec,rules relating to affiliated foreign corporations, non-resident trusts andtransfer pricing, as well as the general anti-avoidance rule, are allexamples of complex measures designed to protect the integrity ofQuébec’s tax system.

Furthermore, since tax evasion is a problem that is constantly changing,the proliferation of integrity rules helps limit the negative effects of theunderground economy but, once again, at the expense of the simplicityof the tax system.

1.1.4 Developmental measures for the economyAs part of its role of supporting economic policy, the tax system enablesgovernment to carry out developmental measures for the economy tofoster beneficial economic activities or behaviour, for instance byencouraging a type of initiative. Such incentive measures are importantfor the development of certain economic sectors.


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In Québec, the most striking example in this regard is clearly thegovernment’s support for scientific research and experimentaldevelopment (R&D) activities. The government supports research andinnovation carried out on its territory because it considers that the directand indirect spin-offs of R&D activities are beneficial for persons,businesses and every sector of the economy. Apart from the actualconduct of research, its results are enjoyed by all of Québec society:creation of high-quality jobs, growth of the knowledge-based economy,attraction of foreign capital, improvements in business productivitythrough the integration of innovations, etc.

Support for R&D is necessary because of the higher risks assumed bycompanies that invest in such activities compared to companies thatinstead invest in commercialization activities. Without incentives,companies would necessarily do less R&D, and Québec’s economicperformance would suffer accordingly.

Hence, R&D activities are essential to technological progress, one ofthe key factors of productivity growth. Many studies have confirmedthis and shown that innovation has significant effects on productivity.6

A tax system can play a key role in the growth of an economy and jobcreation. By means of developmental measures, it can encouragesaving, stimulate investment, attract foreign capital and sustain both thecreation of new businesses and the expansion of existing ones.Consequently, while the many refundable tax credits for businessesmake the corporate tax system more complex, their economic objectiveoften justifies the fiscal policy choices made.

1.1.5 Fiscal federalismThe duplication of taxation powers in Canada has a direct influence onthe complexity of Québec’s tax legislation.

To the degree that Québec fully assumes its fiscal autonomy, the directresult of Québec’s initiatives is to add considerably to the complexity ofthe rules applicable to taxpayers, because they are subject to twodifferent tax systems.

_______________6 See in particular, D. Guellec and B. Van Pottelsberghe de la Potterie,

“Recherche-développement et croissance de la productivité : analyse desdonnées d’un panel de 16 pays de l’OCDE”, OECD Economic Review, n° 33,2001/2; Also, OECD (2000), “Enquête sur l’innovation; les leçons del’expérience des pays de l’OCDE”, STI Review, N° 27, Volume 2000-2, p. 85 to112.


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Differences from the federal tax system have historically been createdby the introduction of numerous features specific to Québec that havemade it possible to intervene in various sectors to achieve specificobjectives.

Furthermore, despite its significant degree of harmonization with thebasic federal tax system, Québec’s tax system has differences,especially regarding the wording of legislative texts, interpretations andforms.

In reality, the differences between Québec’s tax system and the federaltax system are attributable chiefly to the following four sources:

— fiscal policy: disparities arising from a government decision onobjectives;

— legislation: disparities arising from the wording of legislativetexts. This source divides itself into two sub-groups:

– structural disparities,7 resulting from the existence of a civillaw system in Québec and a common law system elsewherein Canada;

– disparities in wording, resulting from the writing styleadopted by the writers, or from linguistic demands;

_______________7 With respect to structural legislative disparities, it should be mentioned that tax

law is consequential law in the sense that it is not a source of law betweenpersons but applies after the fact, whose legal consequences are established, inQuébec, by the civil law. Until the end of the 1970s, the Income Tax Act waswritten in English in a common law context, with the French version being but atranslation of the English text. As a result, some provisions of the law werepoorly adapted to Québec’s civil law context and differences were unavoidable.Beginning in 1978, federal methods of drafting legislation were changed so thatthe French version of the new provisions of the Income Tax Act were no longer asimple translation of the English version, but were a French adaptation of theconcepts developed for a common law legal system. While this was animprovement for the purposes of adapting the Income Tax Act to the Québeccontext, some disparities between the Income Tax Act and the Taxation Actremained unavoidable because each statute sought to govern the taxconsequences arising from two different legal systems.Lastly, in 1995, the federal government adopted a method of drafting legislationbased on the principle of bijuralism, i.e. a method of drafting legislation in whichthe texts can apply indiscriminately to a common law context or a civil lawcontext. As a result, the provisions of the Income Tax Act drafted using thismethod are theoretically applicable to the Québec civil law context with nospecial adaptation. This drafting method may not settle all the structurallegislative differences between the two laws but can certainly help eliminatemost of them.


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— interpretation: disparities resulting from differing opinions of theministère du Revenu or the Québec courts as to the appreciationof facts regarding a specific situation, or diverging views of thetax authorities concerning the scope of a given measure;

— forms: disparities attributable in part to the above sources (fiscalpolicy, legislation, interpretation) and in part to the style of thedesigners for whom harmonization with federal forms is notalways the primary concern.

Accordingly, although the conceptual bases of Québec’s income taxsystem are similar for the most part to the federal tax system, its legaland administrative requirements make it different from the federalsystem.

In other words, the specific features of Québec’s tax system and thedisparities resulting from legislative and administrative differencesincrease its complexity, in spite of a long-standing policy of conceptualharmonization with the federal tax system.

Consequently, at the practical level, such conceptual harmonization isnot always reflected in greater simplicity in the administration andmanagement of Québec’s tax system.

However, simple “fiscal duplication”, i.e. a Québec taxpayer’sobligation to file two tax returns each year, one for each order ofgovernment, is not necessarily a source of complexity in itself – thoughsome taxpayers may perceive it that way – if the details of Québec’s taxsystem are not different from the federal tax system, both in conceptualand legislative terms.

1.1.6 ConclusionThe list of factors contributing to the complexity of the tax systemdescribed above is not exhaustive. The rules applicable in aninter-provincial and international taxation context, frequent amendmentsmade to the legislation, transition measures and the time between theannouncement of a new tax measure and the availability of the relevantlegislation and forms are all examples of other factors that generatecomplexity.

In short, like any tax system based on income, Québec’s tax system is ademonstration of the ongoing opposition of a number of principles.Achieving a significant reduction in the complexity of Québec’s taxsystem raises major problems of consistency, fairness, integrity andefficiency of Québec’s fiscal policy.


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Moreover, there is nothing exceptional about the complexity ofQuébec’s tax system compared with other member jurisdictions of theOrganization for Economic Cooperation and Development (OECD),especially the United States.8 In addition, the other two provinces thatformulate and administer their own corporate income tax, namelyAlberta and Ontario, have a tax system that is more complex that that ofthe provinces that rely exclusively on tax collection agreements.Consequently, the degree of complexity of Québec’s tax system isrelative, although the presence of many factors adding complexity mustbe acknowledged.

1.2 Why simplifyIn many ways, some of the complexity factors noted above producebenefits and many reasons can be invoked to justify the level ofcomplexity of a tax system. However, the government must also beconcerned with reducing the compliance burden on taxpayers and so itis useful to see why a simpler system is desirable.

1.2.1 Many types of costsEssentially, the need for simplification arises from the high cost ofcompliance with tax obligations, both for taxpayers and the publicadministration. The cost of complying with tax obligations, in particularbecause of the large number of forms to complete to satisfy therequirements of the tax laws, has a negative impact on the efficiency ofa tax system.

For taxpayers, this cost is calculated in the time and labour needed tocomply with the various tax obligations, particularly regarding the filingof tax returns and prescribed forms. For many taxpayers, this cost isincreased by the expenses associated with the services of tax advisers tounderstand how the legislation applies to their specific situation, toensure that they comply with the various tax rules, while assuming nomore than their fair share of the tax burden.

_______________8 OECD (2001), “Increasing Efficiency and Reducing Complexity in the Tax

System in the United States”, OECD Economics Department Working Papers,N° 313. See also Bronchi B. and R. Herd (2001), “Improving to U.S. TaxSystem”, OECD Observer, Paris.


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In the specific case of businesses, the financial and human resourcesdevoted to tax compliance are a relatively unproductive use of capitaland labour, which limits production capacity accordingly. The cost oftax complexity for businesses is reflected in reduced productivity. Inthis context, simplifying the tax system and reducing the administrativeburden on businesses would be a positive factor encouraging bettereconomic performance.

For the public administration, the complexity of the tax systemgenerates costs relating to the effort invested in drafting legislation thatis constantly evolving, correctly interpreting and applying it, andexplaining the rules to taxpayers through a variety of customer servicesand the production and publication of forms and related explanatory andinformation documents.

The complexity of the tax system also requires that substantial resourcesbe allocated to entering information sent by taxpayers and mandataries,auditing and revising it, when considered necessary, to ensure that thetax legislation is applied fairly and evenly. Simplifying the rules couldresult in less need for audits and the resulting disputes, which wouldgenerate greater security for taxpayers with regard to compliance withtheir obligations.

To sum up, when a tax system is simple and understandable,compliance and administration are easier.

1.2.2 Improved transparencyThe need for simplification also arises when the volume of legislation issuch that it compromises the transparency of the tax system.

Taxpayers need to know and understand the tax legislation if they are toapply it correctly, with legal certainty. However, the vast majority oftaxpayers do not always find the tax legislation easy to understand orgrasp. Simplifying the tax system to reduce the body of legislationwould contribute to transparency and make Québec’s tax system moreaccessible.

Furthermore, the lack of transparency has a direct effect on taxpayers’confidence in the fairness and efficiency of the tax system. When a taxsystem is based on self-assessment, it is essential that a taxpayer feelsure that he is bearing no more than his fair share of the overall taxburden. Otherwise, the underground economy grows and taxpayers endup accepting behaviour designed to circumvent their tax obligations asnormal.


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A simpler tax system would entail greater transparency, accessibilityand confidence in the system’s fairness and efficiency.

1.3 How to simplifySimplification of a tax system based on income tax raises variousexpectations that depend on the various users of the system.

For taxpayers, simplifying income tax should result in betterunderstanding of the rules so that it becomes easier to file their taxreturn.

For the ministère du Revenu, simplifying income tax should result inmore efficient and less costly administration.

For tax advisers, a simpler income tax would mean greater certainty inthe application of the tax rules, which would facilitate their advisoryrole.

For the courts, simplifying income tax would promote greater legalsecurity, based on the clarity of the tax legislation.

For government, a simpler income tax should, in addition to the effectsexpected by all users of the system, enable it to achieve its financial andeconomic objectives without prejudicing the guiding principles offairness and neutrality.

Accordingly, the appropriate simplification approach should beconsidered in relation to the results sought by each player.

It is not easy to simplify income tax in a way that satisfies themultiplicity and variety of expectations. Indeed, just simplifying the taxsystem without doing away with its basic principles is in itself acomplex undertaking. Adding the achievement of tangible andmeasurable results for each user may require substantial effort.

The other provinces currently have a different tax system thanQuébec’s. In this context, in view of the fiscal federalism that iscommon to all the provinces, an understanding of the main features ofthe tax system of the other provinces could point to options forsimplifying Québec’s tax system.


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1.3.1 Less complexity: the example of the otherprovinces

The federal government and the provincial governments collect apersonal income tax and a corporate income tax.

All the provinces, with the exception of Québec, leave it to the federalgovernment to collect their personal income tax, through tax collectionagreements (TCA). All the provinces other than Québec, Ontario andAlberta have also entered into TCAs for corporate income tax.

Under the TCAs, the federal government applies various fiscalmeasures on behalf of the provinces, collects the assessed income taxand remits it to the provinces.

More specifically, the provinces can collect personal income tax eitheron the basis of a tax base represented by taxable income determined forfederal income tax purposes, or on the basic federal tax.

In so doing, provinces who are party to these TCAs (agreeingprovinces) agree to tie their tax system to the federal tax system, bymaintaining a high degree of harmonization with it to reduce thecomplexity and administration costs of this collection mechanism.Essentially, this harmonization of the tax base is reflected in the use ofthe federal definition of taxable income so that the federal governmentdoes not have to administer a separate tax system for each province thathas signed a TCA.

Thus, agreeing provinces incorporate their own specific fiscal policycomponents in the calculation of tax payable, through the tax table, taxcredits, tax reductions and surtaxes.

While using the federal tax base has the advantage of simplifying theadministration by federal authorities of provincial tax systems, throughthe fact that there is only one calculation of taxable income, the TCAsallow the participating provinces only a relative autonomy regardingtheir fiscal policy.

Furthermore, while these provinces theoretically have the possibility ofthemselves administering a specific tax measure, this is generallydifficult for them because they do not have the administrative structuresfor income tax.

Accordingly, while a TCA offers definite advantages with respect tosimplicity and administration costs of a province’s tax system, there isalso a loss of fiscal policy autonomy.


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1.3.2 More complexity: Québec’s tax systemAt the other end of the spectrum, the Québec government fullyexercises its power to design and administer all the taxes it wants,within the Canadian constitutional framework.

In exercising this power, the Québec government has historically madefiscal policy choices. One by one, rules have thus been added to theinitial tax system to form the current body of rules.

Accordingly, Québec now has an original, innovative and autonomoustax system that incorporates social and economic concerns that arespecific to Québec society. While drawing to a large degree from thefederal tax system, Québec’s tax system is notably different.

For example, regarding the personal income tax, taxpayers have had thechoice, since 1998, between the general tax system and a simplifiedincome tax system. By choosing the simplified tax system, taxpayerselected a flat amount in place of many tax credits and deductionsoffered in the general system. Taxpayers who made extensive use of thetax benefits offered in the general system used the general tax system.

Agreement on the simplicity offered by this choice was not unanimousand the simplified tax system was eliminated in the March 30, 2004Budget Speech.9 While the simplified system reduced complexityrelating to filing the tax return for those who used it,10 it made Québec’stax system more complex overall. Accordingly, the existence of two taxsystems caused the volume of legislation to increase, led to a degree ofanxiety regarding optimization of the choices available, and an increasein the number of forms adapted to each specific situation.

1.3.3 Middle solutionsBetween these two examples of tax system design, development andadministration, a range of middle systems could be developed with aspecific concern to simplify Québec’s tax system. It is worth examininga number of these.

_______________9 2004-2005 Budget, Additional Information on the Budgetary Measures,

section 1, subsection 1.4.10 This simplification consisted in replacing many tax credits and deductions by the

flat amount, and filing a single tax return form for the two spouses who sowished.


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Using federal taxable income

The first simplification option could be to determine a taxpayer’staxable income simply by using the taxable income calculated forfederal income tax purposes.

For the purposes of tax credits and transfers determined or reduceddepending on net income, the net income used would also be the onecalculated for federal income tax purposes.

— Advantages of this option

Essentially, the simplification gains resulting from using taxable incomecalculated for federal income tax purposes would consist of asubstantial reduction in the:

— number of forms;

— volume of legislation;

— number of interpretation bulletins;

— audit activities of the ministère du Revenu;

— activities relating to the entry of tax information by the ministèredu Revenu;

— ongoing training requirements of ministère du Revenu staff.

More specifically, a count was undertaken of the current provisions ofthe Taxation Act and the Taxation Regulations concerned with thecalculation of income, calculation of taxable income, profit-sharingplans and other special arrangements relating to income, as well as therelated administrative documents.

This exercise provided an estimate of the number of provisions thatcould be repealed and the number of documents that could bewithdrawn under this option, as indicated in the following table.

Act RegulationsInterpretation

bulletinsForms,

statements, guides

Number 2 350 676 232 126


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Moreover, since the Canada Revenue Agency would then be the soleauthority for determining the reference taxable income for Québecincome tax purposes, the ministère du Revenu would only haveauthority over features specific to Québec. However, the ministère duRevenu would continue to administer Québec’s tax system, though theextent of the activities needed to efficiently carry out this mandatewould be considerably reduced. Lastly, any objections by taxpayersconcerning Québec tax would only concern features specific to Québec,which would reduce the number of disputes considerably.

In this context, simplifying income tax by making use of taxable incomedetermined for federal income tax purposes could be an attractiveoption.

— Disadvantages of this option

The disadvantages of simplifying the tax system by making use oftaxable income calculated for federal income tax purpose would besignificant.

First, at the technical level, to avoid penalizing or conferring anadvantage on certain taxpayers, implementation of this option wouldrequire a transition system,11 or perhaps even an Application legislation,as was the case with the 1972 tax reform.

Briefly, a transition system would be necessary to take account ofdisparities created over the years because of differences in the Québecand federal tax systems, between the Québec and federal tax values ofmany items: historical accounts (depreciation, losses, etc.), costs andcapital costs of certain assets, for instance.

The rules that would have to be introduced to ensure a fair transitionbetween the two tax systems would substantially reduce, for manyyears, the simplification effect that is the objective of this option. And ifa simple transition were implemented, it could have a major, thoughone-time, financial impact.

Moreover, some may see an automatic reference to federal legislation asa surrender by the Québec government of its fiscal autonomy.12

_______________11 For an analysis of considerations relating to transition rules, see the

sub-section 1.3.5 of this paper that deals with this subject.12 For an analysis of the considerations concerning fiscal autonomy, see the

sub-section 1.3.6 of this paper dealing specifically with this subject.


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Use of federal net income

In the same vein, another simplification option could be to determine ataxpayer’s net income for Québec income tax purposes by simply usingnet income calculated for federal income tax purposes.


The advantages of this option would be much the same as for the use offederal taxable income as far as the reduction in the number oflegislative and regulatory provisions, interpretation bulletins, forms,statements and guides is concerned.


The main disadvantage of this option would be the difficulty indetermining the balance of certain cumulative accounts affecting ataxpayer’s taxable income, in particular the amount of his losses to becarried over.

Since the amount of losses to be carried over is established fromamounts (income and deductions) otherwise considered in thecalculation of net income, using federal net income would limit theaccess and competence of the ministère du Revenu regarding taxinformation required in the course of determining a taxpayer’s losses.Moreover, in view of the measures specific to Québec’s tax system anddiscretionary deductions,13 the balance of Québec losses to be carriedover could be different from federal losses, which would eliminate thepossibility of using the federal amount established in this regard withoutstipulating a transition system to eliminate disparities created over theyears.14

In addition, since using federal net income would maintain therequirement of a separate calculation for determining taxable incomesubject to Québec income tax, the simplification gains resulting fromthis option would be less than those resulting from using taxable incomedetermined for federal income tax purposes.

_______________13 Such discretionary deductions include deductions for depreciation, for an amount

relating to eligible capital property, for doubtful debts, etc.14 See note 11.


18

Using basic federal tax

To achieve even greater simplification, it could be decided to make useof basic federal tax. That would mean that Québec’s tax would bedetermined as a percentage of the basic federal tax (tax-on-tax system).

While the Québec government would continue to collect its taxes, thefederal government would be the sole competent authority fordetermining sources of income subject to tax, allowable deductions andexemptions, marginal tax rates and income brackets used to calculatetax. Once basic federal tax is calculated, the Québec government wouldapply a tax rate to this amount to determine Québec tax payable.

It is worth mentioning in this regard that until 2000, the personalincome tax system of the other provinces was exclusively a tax-on-taxsystem.


The main advantage of this option is its extreme simplicity. Taxpayerswould have just one additional calculation to carry out to determinetheir provincial tax payable.

Of course, the other advantages would be largely the same as thoseprovided by using federal tax payable regarding, among others, thereduction in the number of legislative provisions, interpretation bulletinsand forms.


The major and unavoidable irritant of such a system would be that anytax cut by the federal government would directly reduce Québec’s taxbase and, consequently, its revenue. Since Québec’s tax base wouldconsist of the basic federal tax, any change made by the federalgovernment that reduces basic federal tax would also reduce Québec’stax base.

Essentially, this system would make the Québec government’s revenuefrom income tax dependent on that of the federal government.

In addition, adopting such a tax-on-tax system would automatically tieQuébec’s fiscal policy to that of the federal government, in particularregarding non-refundable tax credits, the tax thresholds, the number oftax brackets and the rates applicable to them. In other words, theQuébec government would give up the power to control theprogressivity of its tax system.


19

Lastly, simplifying Québec’s tax system by introducing a tax-on-taxsystem would mean the Québec government would almost completelysurrender its fiscal autonomy.15

However, it is precisely to end such dependence and provide theprovinces participating in TCAs with more autonomy that thegovernments of those provinces and the federal government agreed toreplace provincial tax-on-tax systems with the current system underwhich tax is calculated on taxable income. While the other provincesstill have the option to choose a tax-on-tax system under the currentTCAs, they all now use a system of tax calculated on taxable income.

In this context, the experience of the other provinces indicates the limitsof such a tax system.

Mirror legislation

Another simplification option would be to first eliminate all the featuresspecific to Québec currently stipulated in the calculation of net incomeand taxable income for Québec income tax purposes, and then adoptQuébec legislation that mirrors federal legislation regarding thedetermination of taxable income.

This simplification option could lead to an overhaul of the TaxationAct.

Such an operation ultimately would allow Québec to join, at theconceptual level, the other provinces, without referring, in its ownlegislation, to taxable income calculated for federal income taxpurposes.

In concrete terms, federal and Québec legislation would be identical andQuébec taxpayers would have to carry out just one calculation todetermine their taxable income for Québec and federal income taxpurposes.


This simplification option would make it possible to deal directly withthe complexity factor arising from fiscal federalism by eliminatingalmost all the existing disparities in this regard. Taxpayers would thenhave a better understanding of Québec’s tax system since, for Canadianincome tax purposes, there would be only one taxable income.

_______________15 See note 12.


20


The greatest disadvantage of this option is the amount of time thatwould be needed to implement it. Such a legislative overhaul would belong and would require a great deal of effort since, in the case of theTaxation Act, it would imply rewriting over 2 000 pages of legislation.This option would also require reassessing the relevance of manyaspects of Québec’s fiscal policy, evaluating the scope of all therequired changes and coordinating the action of all the stakeholdersconcerned.

While passing mirror legislation would eliminate all the fiscal policydisparities and most legislative disparities, the simple coexistence oftwo pieces of legislation, however similar they may be, would alwayscarry a risk of distortion because of the different interpretations that theministère du Revenu or the Québec courts may have.

In this context, the success of this option would depend onimplementing an administrative policy under which, barring notice tothe contrary, the ministère du Revenu would recognize interpretationsof federal legislation regarding concordant Québec legislation,16 and oncarrying out a wide-ranging operation to harmonize Québec forms withfederal forms with the ultimate objective of allowing these forms to beinterchangeable.17

1.3.4 Common consequences of each simplificationoption

In all the options examined, there would be a risk of loss regarding taxstatistics. The Québec public administration would no longer collect agood deal of tax information.

In the course of formulating Québec fiscal policy, the availability of taxdata enables the government to make informed decisions and to confirmthe relevance or appropriateness of a given initiative.

_______________16 This administrative policy would enable the ministère du Revenu to adopt federal

interpretation bulletins, avoid duplication of work and concentrate itsinterpretation efforts on features specific to Québec that would remain in thecalculation of tax payable.

17 Such harmonization would optimize the practical advantages, such as theelimination of certain Québec forms that would be replaced with recognition ofcertain federal forms.


21

Furthermore, since the federal government would be responsible for asignificant share of the interpretation and application of existing Québectax legislation, simplification of Québec income tax would inevitablyresult, in the medium and long term, in a loss of technical expertise inthe Québec public service in the personal income taxation field.

1.3.5 Problems associated with transition rulesAny major simplification of a tax system requires a consideration of theproblems associated with unavoidable transition rules18 to assess theirconsequences on the simplification objective and the possible costs fortaxpayers and the government.

For example, moving from the current system to one based on usingtaxable income determined for federal income tax purposes would causetransition problems chiefly attributable to the existence of disparitiesbetween existing federal and Québec’s tax values relating to numeroustax concepts.

Currently, a taxpayer may hold an asset that is completely depreciatedin the federal system but for which he claimed no depreciationdeduction under the Québec system. Accordingly, using the amount ofthe federal depreciation balance regarding such asset for Québec taxpurposes would take away the benefit of Québec depreciation withregard to such asset.

Concepts likely to show disparities include historical accounts, such asdepreciation balances and loss carryovers, allowances and the R&Dexpense account, or the costs and capital costs of certain assets.

To illustrate the source of disparities and their impact in the context of apossible move from the current situation to a system based on usingtaxable income determined for federal income tax purposes, theexample of depreciation balances is given.

Depreciation balances

The most common disparities between existing Québec’s and federaltax values, and generally the most significant, are those that concerndepreciation balances.

_______________18 The analysis in this sub-section assumes that a new system is implemented based

on using taxable income determined for federal income tax purposes.


22

More specifically, the disparity between the amount of theundepreciated portion of capital cost (UPCC) of an asset under theQuébec system and the amount of the undepreciated capital cost (UCC)of the same asset under the federal system may stem from specificQuébec features pertaining to the inclusion rules for various classes ofassets, or from the election a taxpayer may make to claim an amount asa depreciation deduction that is different for each order of government,since depreciation is a discretionary deduction.

Moreover, certain tax relief measures in Québec’s income tax systemmay encourage some taxpayers to claim, as a depreciation deduction,amounts that are considerably different for each order of government.

For these reasons, the Québec and federal depreciation balances relatingto the same asset can be different.

The lack of a transition rule to recognize such disparities when a newsystem is introduced could penalize taxpayers and, in a way, would beequivalent to retroactively changing the conditions under which certainmeasures stipulated by the existing tax system apply.19

Transition system options

A transition system that makes perfect allowance for disparities betweenprovincial and federal tax values could be complex.

Accordingly, the choice of transition rules would directly influence thedegree to which the simplification objective is achieved.

— Simple transition

The simplest transition mechanism between the current Québec taxsystem and a given simplification option would be one under whichimmediately following the coming into effect of the reform simplifyingQuébec’s tax system, taxpayers disregard the historical Québec datacovered by the reform and instead use the figures determined for federaltax purposes.

In doing so, existing disparities would simply be cancelled for thepurposes of the new Québec tax system, with no compensation fortaxpayers or for the Québec government, as the case may be.

_______________19 For example, the provisions relating to the five-year tax holiday for new

corporations did not require an eligible corporation to deduct depreciation duringthe period it benefited from the tax holiday.


23

Consequently, some taxpayers, because of their specific situation,would benefit from this kind of transition while in other cases, thegovernment might benefit from the cancellation of the disparities.

— One-year transition period

To keep the transition simple, yet still allow the tax recognition ofdisparities, a short transition period, extending over a single taxationyear, could be considered. During such taxation year, Québec taxpayerswould have to recognize the tax consequences arising from thedisparities.

For instance, a taxpayer with assets whose Québec’s undepreciatedbalance would be less than that established at the federal level wouldhave to pay tax on the difference between the two balances in thetransition year.

A short transition period could also prove restrictive for some taxpayers,or generate costs for the government, as the case may be. However, thecost would be non-recurring.

— Transition with retention of disparities

A transition mechanism that would retain the disparities created prior tothe reform could also be considered.

Under this assumption, all the disparities that exist at the end of the lasttaxation year of a taxpayer, for the purposes of the current tax system,would be defined.

Temporary disparities could be grouped within an account and reversed,over a given period, by an addition to or a deduction from federaltaxable income.20 Other types of disparities, such as those attributable tothe cost and capital cost of assets of a taxpayer, would be recorded andtaken into consideration at the appropriate time, upon disposal forinstance.

The rules relating to the application of a transition system with retentionof disparities could be extremely complex at the technical level.Accordingly, the consequences of such a transition system wouldconsiderably reduce, and for many years, the desired simplification.

_______________20 Temporary disparities are those attributable to discretionary deductions.


24

Conclusion

These thoughts provide some reasons why simplifying income tax byusing federal taxable income would raise significant problems regardingthe introduction of fair, efficient and neutral transition rules.

The complexity of the transition from the existing tax system to a newone and the cost of the transition, for taxpayers and the government,would essentially depend on the choices made concerning the transitionrules.

While the ultimate objective of simplification should, in principle, guidethe choices made in the course of implementing a given simplificationoption, including those relating to the transition rules, cost and fairnessconsiderations should also influence the decision to opt for one of thetransition options.

1.3.6 Fiscal autonomy considerations

Legal and historical bases

The Constitution Act, 1867 stipulates the legislative competences andresponsibilities of the federal parliament and the provincial legislatures.

More specifically, sections 91 and 92 of the Constitution Act, 1867 setout the respective competences of the federal Parliament and theprovincial legislatures regarding taxation. Under the Act, the federalParliament has jurisdiction to legislate to collect taxes using any methodof taxation.21 The provinces have the power to levy direct taxes, withintheir territorial limits, to collect revenue for provincial purposes.22

This constitutional division of taxation powers in Canada is the legalbasis of Québec’s fiscal autonomy.

Autonomy is essentially the right to govern oneself through one’s ownlaws. It is the prerogative of self-organization and independence in theexercise of one’s powers. Fiscal autonomy is the ability to formulateand administer one’s own tax system and the power to collect therevenues it generates.

Québec’s fiscal autonomy was soon reflected in the exercise of itsability to collect its taxes within the established constitutional field.

_______________21 Paragraph 91(3) of the Constitution Act, 1867.22 Paragraph 92(2) of the Constitution Act, 1867.


25

Québec was the leader in fiscal autonomy among the provinces.Historically, it has fiercely defended its independence regardingtaxation and tax collection and, in 1954, the National Assembly passeda law creating a provincial personal income tax and introduced its owncollection system.23

Since then Québec has been, and still is today, the only province thatadministers and collects personal income tax. All the other provinceshave left collection of this tax to the federal government.

Moreover, Québec has had its own corporate income tax system sincethe end of the 19th century. Like Québec, Alberta and Ontarioadminister their own corporate tax system and collect the taxes.

Advantages of fiscal autonomy

Québec’s fiscal autonomy makes it possible to use taxation as aninstrument of economic and social policy.

Over the years, many preferential measures have been added to theincome tax system to grant tax relief to certain groups of individualsand certain types of corporations, in pursuit of specific social oreconomic objectives.

The fiscal policy choices made by the Québec government areindicative of the advantages of fiscal autonomy.

— A tool for economic development and job creation

Fiscal autonomy enables intervention to encourage investment, thedevelopment of activity sectors considered promising, and to stimulatejob creation.

Preferential tax treatment can be granted to generate economic activityin certain sectors. Developmental measures were introduced toencourage innovation (R&D and new economy), promote investment inthe regions, support the financial and resource sectors, and fosterculture.

_______________23 In 1940, Québec claimed the right to tax personal income, but the tax was a

percentage of the federal tax and was collected by the government of Canada.This was Québec’s first personal income tax and applied from 1939 to the end of1940.


26

Québec’s tax system has developed from a simple tax collection tool toan economic policy mechanism. For instance, the particularlyadvantageous tax incentives that apply to R&D are the method theQuébec government has used since 1983 to achieve its objective ofboosting domestic R&D spending as a proportion of GDP. To do so,these preferential measures include many features that distinguish themfrom the incentives introduced by the federal government and thegovernments of the other provinces, to attract economic activity andjob-creating investment to Québec.

Fiscal autonomy also enables intervention to encourage activities withboth social and economic effects. For instance, the tax system is used toencourage the growth of the cooperative movement in Québec throughthe Cooperative Investment Plan (CIP) and the eligible rebatededuction. These incentives for the participation of members andworkers in the development of Québec cooperatives enable them toimprove their capitalization and become more competitive. In so doing,the tax system recognizes the importance of the social role ofcooperatives and their contribution to the regional economy and to jobcreation.

Fiscal autonomy also allows the government to introduce targetedjob-creation stimulation measures that can influence the labour market.Accordingly, for example, the various tax credits based on increase inpayroll encourage hiring of employees by reducing the payroll costsassumed by businesses. By using such measures, the government canhelp reduce Québec’s unemployment rate.

Lastly, some measures can directly influence individual behaviour. Taxincentives for retirement saving and investment encourage individualsto accumulate funds for their retirement so that they have an adequateincome at that time. For instance, concerning the accumulation ofcapital for retirement, fiscal autonomy allowed the government tointroduce a capital gains exemption regarding fishing assets torecognize the particular situation of fishers at the time of theirretirement, in addition to encouraging young people to enter thefisheries sector.

— Integration between taxation and transfers

Over the last 30 years, Québec has implemented various programs toimprove the socio-economic conditions of low-income individuals.Assistance of last resort, the refundable tax credit for the QST and theproperty tax refund are a few examples.


27

The Québec government specifically seeks to encourage individuals toremain on the labour market or leave assistance of last resort by offeringthem a work premium.

In general, the government assistance provided under transfer programsdeclines as the income of the low-income household receiving suchassistance rises. However, such reduction in assistance could discouragelabour market re-entry efforts if it were not taken into consideration inthe personal income tax system.

In this context, Québec’s social and fiscal policies tend to integrate toavoid an accumulation of tax rates and the reduction of amounts ofassistance provided under transfer programs. To do so, the governmentconsiders the personal income tax system and Québec transfer programsas a whole.

Accordingly, Québec’s fiscal autonomy makes it possible to integratesocial transfers and taxation more easily.

— Conclusion

These fiscal policy choices show that to a substantial degree, thecomplexity of Québec’s tax system results directly from the Québecgovernment fully exercising its fiscal autonomy. Consequently,Québec’s tax system should not be simplified at the cost of losing suchautonomy and the advantages it provides.

Simplification and autonomy

By fully exercising its fiscal autonomy, Québec government has set uptax systems that effectively meet is social and economic objectives. Ithas also developed an administrative structure that enables it to collectthe revenues arising from its taxation powers.

However, the introduction of numerous features specific to Québec hasmade Québec’s tax system more complex. The complexity that is beingcriticized is the direct consequence of Québec’s fiscal autonomy and thepossibilities regarding fiscal policy choices it affords.

In view of the significant advantages arising from fiscal autonomy, itshould not be sacrificed for the sake of a simpler tax system. Anysimplification option that implies lack of flexibility in fiscal policychoices cannot be justified. Accordingly, an ideal simplification wouldboth reduce costs and improve transparency, while fully maintaining theQuébec government’s freedom to formulate fiscal policy and collect itsown taxes.


28

In the latter regard, few would argue that the simplification of Québec’stax system could be achieved by relinquishing the capacity of Québec tocollect its own tax revenues to the federal government, as is the casewith the governments of the other provinces regarding personal incometax.

However, exercising the capacity to collect its taxes is the concretedemonstration of the Québec government’s complete fiscal autonomy.In addition, the administrative structure allows the collection ofstatistical data needed for the formulation of fiscal policy.Consequently, simplification at the cost of foregoing the exercise of thecapacity to collect its taxes would not be an option that upholdsQuébec’s fiscal autonomy.

Moreover, of all the simplification options described above, the oneconsisting in determining a taxpayer’s taxable income simply by usingtaxable income calculated for federal income tax purposes couldsimplify the existing tax system without infringing too much on theprinciple of Québec’s fiscal autonomy.

Even if it were decided to use taxable income determined for federalincome tax purposes in the course of determining a reference Québectaxable income,24 the Québec government would still retain full andexclusive authority to make any change it considers appropriate to thecalculation of taxable income determined for the Québec tax purposes.

Québec’s fiscal autonomy would thus be fully maintained since theQuébec government would continue to collect and administer its taxesand would continue to have the power to break with the decisions of thefederal government to set its own tax base.

However, to avoid adding complexity to a new tax system and thusjeopardize the simplification objective, Québec government shouldhenceforth hold its interventions affecting the calculation of taxableincome. The very fact of changing taxable income determined forfederal income tax purposes would undermine the simplificationobjective and offset the effects. Accordingly, each disparity maintainedbetween federal and Québec taxable income would, to some degree,move the primary simplification objective further away.

_______________24 For the purposes of socio-fiscal programs, net income determined for federal

income tax purposes would be used instead.


29

The past is the best indicator of the future, so it is easy to foresee themany justifications that could be invoked for maintaining some featuresthat currently distinguish the calculation of Québec taxable income (andaccordingly the various sources of income that make it up) from thatcarried out for federal tax purposes.

Moreover, it is difficult to consider that all the items that distinguish thecurrent Québec tax base would be withdrawn. It is to be expected and,in fact, is desirable that features specific to Québec will be maintainedin the calculation of taxable income.

Accordingly, the application of the existing rules (tax rates and taxcredits) to the amount of federal taxable income would, if Québecgovernment made no adjustment to this amount, cause a significant lossof tax revenue,25 chiefly attributable to the fact that health insurancepremiums paid by the employer are not taxable under the federal systemand child care expenses are deductible in calculating net income. Inaddition, using federal net income for the purposes of Québecsocio-fiscal programs would increase the cost of these programs forQuébec government since federal net income is lower than net incomedetermined for Québec tax purposes.

Consequently, adjustments to taxable income determined for federal taxpurposes would be necessary to limit the loss of tax revenues arisingfrom using such income.

Moreover, the appropriateness of introducing new Québec measuresshould henceforth be studied from the point of view of the complexitysuch features would add in the context of using taxable incomedetermined for federal income tax purposes.

For example, the following measures, announced in the March 30, 2004Budget Speech, would have been examined from the standpoint of theirpotential complexity effect:

— averaging of income from artistic activities (measure 1.8);26

— further reduction of the amount of the deduction for securitiesoptions (measure 1.12);

— limit on the deductibility of investment expenses (measure 2.16).

_______________25 More than $400 million annually.26 References in parentheses refer to the measure announced in section 1 of the

Additional Information on the Budgetary Measures tabled in the NationalAssembly on March 30, 2004.


30

While currently justified by a valid objective of economic support orfairness, these measures may not have been considered sufficientlyimportant to warrant making the calculation of the reference taxableincome more complex.


31

2. SIMPLIFICATION STEPS TAKENQuébec’s tax system indicates the importance Québec places on itsfiscal autonomy. Over the years, Québec has exercised this autonomy insuch a way that the current tax system has become a preferredinstrument of social and economic intervention.

Nonetheless, the complexity of the tax system raises notable drawbacksfor users. The costs of compliance with tax obligations, the lack oftransparency attributable to complex and voluminous legislation, andthe administrative burden generated by existing rules are all factors thatargue in favour for practical simplification efforts.

In this context, a specific concern for simplification may guide thegovernment’s consideration of the fiscal policy choices available to it.Accordingly, without necessarily overhauling the personal andcorporate tax systems, concrete simplification steps can still be taken toachieve effects that will be noticed by the users of the system.

More specifically, simplification can be achieved by introducingcalculations that are easier for taxpayers to carry out. It can also resultfrom reducing the number of calculations to be carried out. Both thenature and the number of the calculations affect the actual complexity ofthe rules applicable to taxpayers.

The tax system can also be simplified by eliminating fiscal measurestargeting a small number of taxpayers and replacing them with generalapplication measures. Simplification would also result from reducingthe number of forms needed and by making the applicable rules clearer.It can also be achieved by streamlining obligations relating to sendingtax data to the public administration.

Lastly, harmonization of the rules specific to various pieces oflegislation, so that the same concepts have the same meaning regardlessof the law in which they are found, also has a simplifying effect.

To achieve these results, concrete simplification steps were taken in theJune 12, 2003 Budget Speech and the March 30, 2004 Budget Speech.


32

2.1 June 12, 2003 Budget SpeechThe government eliminated many tax expenditures as part of theJune 12, 2003 Budget Speech.27 These can be divided into four groups:

— elimination of many measures relating to a designated site, whichconsisted of tax credits or holidays;28

— elimination of certain fiscal measures for investment;29

— elimination of exemptions granted to financial institutions andinvestment funds;30

— non-incorporation in the tax legislation and regulations of certainmeasures announced as part of the March 11, 2003 BudgetSpeech.31

These fiscal policy choices put an end to the multiplicity of assistancemeasures targeting businesses operating in certain sectors, so that thegovernment could subsequently restore priority to general applicationfiscal measures.

General application tax measures have the advantage of being simplerto administer and they uphold the tax neutrality principle. Tax benefitsand exemptions accessible to only some taxpayers were also withdrawnto satisfy this principle. For instance, a reduction in the tax burden of alltaxpayers by lowering the tax rate would be simpler and more neutralthan a specific tax exemption on a specific type of income.

_______________27 “Tax expenditures” are revenues the government agrees to forego in order to

reduce the tax load on taxpayers, businesses or individuals, by exempting themfrom certain provisions of the common tax system. Tax expenditures can takemany forms: exemptions, deductions in calculating income, and tax credits.

28 2003-2004 Budget, Additional Information on the Fiscal Measures, section 1,sub-section 1.2.

29 2003-2004 Budget, Additional Information on the Fiscal Measures, section 1,sub-sections 1.6.2, 1.8.2 and 1.9.2.

30 2003-2004 Budget, Additional Information on the Fiscal Measures, section 1,sub-sections 1.8.3, 1.9.3 and 1.9.4.

31 2003-2004 Budget, Additional Information on the Fiscal Measures, section 3.


33

Accordingly, the many fiscal measures relating to a designated siteimposed a significant and costly administrative burden on mostauthorities responsible for issuing eligibility certificates and for theministère du Revenu. Consequently, the elimination of these measuresshould also result in savings on the costs tied to the administration ofthe corporate tax system, and a better allocation of resources for alltaxpayers.

In short, the government was concerned, in the June 12, 2003 BudgetSpeech, to reduce the number of tax expenditures relating to businessesin order to undertake a comprehensive review of the tax systems andrestore priority to general application fiscal measures.

2.2 March 30, 2004 Budget SpeechA noteworthy simplification effort was undertaken in the March 30,2004 Budget Speech, especially regarding personal income tax.

To begin with, the implementation of the child assistance payment willreduce the complexity of the tax rules applicable to Québec families.32

This general application measure replaces the tax credits for dependentchildren under age 18 and the tax reduction for families.

The amount of the child assistance payment an individual is entitled towill be determined by the Régie des rentes du Québec. That means thatindividuals, in preparing their tax return, will no longer have to carryout the calculations required to take account of the presence ofdependent children for the purposes of determining tax payable.

The government also simplified the personal income tax system bycombining the general and simplified tax systems.33 In fact, thesimplified tax system became increasingly difficult to distinguish fromthe general system. In this context, the co-existence of two personalincome tax systems, and the resulting complexity, were no longerjustified.

_______________32 2004-2005 Budget, Additional Information on the Fiscal Measures, section 1,

sub-section 1.1.1.33 See note 9.


34

Combining the general and simplified systems will result in theelimination of a large number of forms adapted to each specificsituation. In addition, the Québec personal tax system will be moretransparent because taxpayers will no longer have to decide which ofthe two systems optimizes their options. Henceforth, a single Québectax system will apply to all individuals.

For the ministère du Revenu, the consolidation of the general andsimplified systems will substantially reduce the duplication tied to theco-existence of two personal income tax systems (separate forms foreach system, internal training needs, information services for taxpayers,etc.), which will generate savings on costs tied to the administration ofthe personal income tax system.

As for the corporate income tax system, the tax assistance relating to thecarrying out of activities in a biotechnology development centre (CDB)has been simplified.34 Briefly, the notion of innovative project has beeneliminated to standardize the rules applicable to all corporations thatcarry out activities in the biotechnology field in a CDB. While thenumber of taxpayers covered is relatively small, granting standardizedassistance to these corporations is not only an improvement, but a majorsimplification of the tax assistance for this activity sector.

In addition, the government eliminated the five-year tax holiday for newcorporations.35 The elimination of this tax holiday will simplify theadministration of the corporate tax system, while making it fairer andmore neutral.

In addition, a number harmonization measures with the federal taxlegislation were announced.36 The Québec government harmonizes itstax legislation as systematically as possible with that of the federalgovernment, particularly regarding measures affecting the basic rules ofthe tax systems.


sub-section 2.4.35 2004-2005 Budget, Additional Information on the Fiscal Measures, section 1,

sub-section 2.14.36 2004-2005 Budget, Additional Information on the Fiscal Measures, section 1,

sub-section 5.


35

Québec’s tax system is harmonized with the federal system essentiallyin the interests of simplicity and efficiency. For example, theharmonization of Québec’s tax legislation to the federal amendmentsrelating to capital cost allowance rates for computers and data networkinfrastructure equipment,37 together with the elimination of tax benefitsspecific to the accelerated depreciation of certain assets, announced inthe June 12, 2003 Budget Speech,38 simplifies that task of taxpayers.

2.3 Recommendations of the Groupe de travailconjoint sur l’administration de la fiscalité

The Groupe de travail conjoint sur l’administration de la fiscalité(Groupe de travail) made recommendations to simplify the applicationof Québec's corporate tax system.39 Some of these recommendationswere also made by the Advisory Panel on Regulatory Reform.

More specifically, the Groupe de travail proposed setting up asimplified method for calculating and administering tax credits for smallbusinesses. Since each tax credit is established on the basis of aparticular group of taxpayers and a specific objective, the mechanismfor obtaining it should be adapted to those taxpayers and that objective.Consequently, it would be difficult to standardize mechanisms forobtaining tax credits introduced for different purposes. Moreover, toreduce the plethora of targeted tax credits for certain businesses, manytax credits were eliminated as part of the June 12, 2003 Budget Speech.

The Groupe de travail also proposed simplifying the calculation of thetax on capital. The calculation of the tax on capital payable is not verycomplicated. First, paid-up capital is determined using known figuresfrom a corporation’s audited financial statements. In addition, thecalculation allows for very few deductions. Moreover, as part of theMarch 30, 2004 Budget Speech, the government raised the basicdeduction in the calculation of paid-up capital to $1 million, so that 75%of Québec corporations will no longer have to pay tax on capital.40


sub-section 5.1.1.38 2003-2004 Budget, Additional Information on the Fiscal Measures, section 1,

sub-section 1.8.2.39 Report of the Groupe de travail conjoint sur l’administration de la fiscalité

tabled October 3, 2003.40 2004-2005 Budget, Additional Information on the Fiscal Measures, section 1,

sub-section 2.1.


36

The Groupe de travail also pointed out that the lack of a standarddefinition of payroll was a major irritant for Québec businesses, sincethey must determine their payroll for each applicable law41 according toformulas that incorporate different items to be included, excluded andexceptional items.

To standardize the definitions of payroll and associated definitionsrelating to withholdings at source and employer contributions, theministère des Finances has undertaken to formulate, in cooperation withthe government departments and organizations concerned, a standarddefinition of basic payroll to be used as the starting point fordetermining the payroll appropriate to each law concerned on the basisof their respective objectives. This basic definition is to be added to theTaxation Act. The ministère du Revenu would be responsible for itsinterpretation thus ensuring its uniform application.

2.4 Recommendations of the Advisory Panel onRegulatory Reform

In the section of its report addressed to the tax authorities, the AdvisoryPanel on Regulatory Reform (Advisory Panel) recommended some70 relief measures, most of them designed to simplify the administrationof the tax system by the ministère du Revenu, with the others requiringchanges to the tax system.

The concerns the Advisory Panel raised show that taxpayers place ahigh value on tax rules that are simple to apply.

More specifically, the Advisory Panel proposed harmonizing Québec’slegislation with federal legislation regarding interest rates on tax debts.The ministère du Revenu systematically calculates this interest, so thatthis calculation adds nothing to the task of taxpayers with respect totheir remittance and self-assessment obligations. In this context, theproposed change would confer no simplification benefits.

_______________41 In particular the Taxation Act, the Act respecting industrial accidents and

occupational diseases, the Act to foster the development of manpower training,the Act respecting labour standards, the Act respecting the Régie de l’assurancemaladie du Québec and the Act respecting the Québec Pension Plan.


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The Advisory Panel also proposed setting up a simplified tax system forsmall companies. However, in the interests of fairness and integrity,implementing such a simplified system does not appear desirable. Inaddition, the addition of a simplified Québec system for smallcompanies would increase disparities between the Québec tax systemand the federal system, and the presence of such disparities is one of themajor complexity factors mentioned by taxpayers. Lastly, such asimplified system existed in the personal tax system and was eliminatedas part of the March 30, 2004 Budget Speech.42

Furthermore, the Advisory Panel recommended that the frequency ofremittance of Québec withholdings at source and employercontributions be harmonized to correspond as closely as possible withthat of the federal government. However, remittance frequency isdetermined on the basis of the amounts employers must remit.Accordingly, for a given employer, the frequency of federal and Québecremittances could differ since average monthly remittances are notcalculated on the basis of the same items.43 In practical terms, thisrecommendation would require that the thresholds for setting thefrequency of remittance of withholdings at source be changed annually,since certain items taken into account in the calculation of thethresholds can change from year to year.44 However, changing thethresholds each year seems to contradict the principle of regulatoryrelief. In addition, such harmonization would add significantly to thetask of the ministère du Revenu.

With regard to the Québec sales tax system, the Advisory Panelrecommended a review of certain thresholds, in particular the smallsupplier threshold. However, given that achieving the simplificationobjective of this recommendation necessarily implies that changes bemade to the goods and services tax system, it was not consideredappropriate to make the proposed changes.

_______________42 See note 9.43 For instance, in Québec, contributions to the Québec Pension Plan are greater

than employment insurance contributions and employers are required to pay acontribution to the Health Services Fund.

44 This change is attributable to the indexing of the tax tables and the fluctuation ofcontributions to the Québec Pension Plan and to employment insurance.


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Lastly, the Advisory Panel recommended that the five-year tax holidayfor new corporations not be lost solely through a change in the legalstatus in the form of operation of the business in question. Since thisfiscal measure was eliminated as part of the March 30, 2004 BudgetSpeech, the recommendation relating to streamlining the rules regardingbusiness continuation is no longer relevant.45

_______________45 See note 35.


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CONCLUSIONThe review of the simplification efforts made to date indicates thatsimplicity of the tax system is a major concern for the Québecgovernment.

The measures introduced as part of the June 12, 2003 Budget Speechand the March 30, 2004 Budget Speech will have notable simplifyingeffects, particularly regarding the personal income tax system and thetax on capital.

The March 30, 2004 Budget Speech also indicates the difficulty offoregoing the benefits of fiscal autonomy for greater simplicity.

Many initiatives have been introduced so that Québec’s tax systemreflects the government’s concerns, in particular regarding the incentiveto work, the socio-economic situation of artists, employment in theregions and the tax treatment of investment expenses.

These Québec measures will in particular increase the disparitiesbetween the Québec and federal tax systems. That will add to theburden of preparing and filing the tax returns of taxpayers affected bythese measures.

Accordingly, it is unreasonable to maintain that the objective ofsimplicity will always take precedence over the government’s social oreconomic objectives.

Nonetheless, the government must be guided by a genuine concern toenhance the efficiency and simplicity of application of the personal andcorporate tax systems when it makes its fiscal policy choices.

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