Blog: The Quebec Small Business Deduction: Interpretative Guidelines Provided by Revenu Québec

December 8th, 2016 Quebec Small Business Deduction

The criteria that must be met by a corporation to benefit from the Quebec small business deduction (SBD) for taxation years beginning after December 31, 2016 have been modified in the Quebec budget of March 2016. Under the new rules, unless a corporation is in the primary or manufacturing industries, the corporation will be able to claim the SBD only when its employees worked a minimum of 5,500 hours in the taxation year. If this test is not met, a corporation can still claim the SBD for a taxation year where its employees together with the employees of associated corporations worked a minimum of 5,500 hours in the preceding taxation year. Only work hours paid will be considered for the SBD. All the information made available by the Ministry of Finance when the change was announced is presented in greater detail in our previous publication Québec Budget 2016 – Changes to the Small Business Deduction published on August 22, 2016.

Recently, Revenu Québec provided guidance on how it intends to interpret the new rules governing the SBD and the requirement regarding the number of hours worked.

Revenu Québec clarified what it considers as an hour worked and paid for purposes of the SBD. For the computation of hours, Revenu Québec will only acknowledge the hours during which an employee was at work. Therefore, when an employee is on paid holidays or other paid leaves, these hours are disregarded. However, where the employer organized a social activity for all its employees during the regular working hours, these hours will be considered.

Revenu Québec also reiterated that the maximum number of hours that can be taken into account is 40 hours per week per employee. For example, when an employee is paid for a 35 hour working week but has worked 45 hours during the busy season, only 40 hours may be taken into account. Similarly, if the employee has only worked 25 hours for a week during the summer while his/her salary is based on a 35-hour week, only 25 hours can be considered since the test requires hours worked and paid.

In determining the number of hours for SBD purposes, the hours worked by a shareholder of the corporation can be included in the calculation. Revenu Québec confirmed that an individual will be considered a shareholder of a corporation where he holds shares in the corporation indirectly via one of more holding companies. However, where the shares are held via a discretionary trust of which the individual is a beneficiary, this individual will not be considered as a shareholder. Moreover, Revenu Québec confirmed that to qualify, the shareholder does not have to hold a minimum number of shares nor do his shares have to bear certain attributes.

Revenu Québec confirmed that the new test based on hours worked and paid applies per corporation and not per business carried on by the corporation.

Furthermore, Revenu Québec reviewed the situation where a corporation carries on a business through a partnership. If a corporation fails to meet the criterion regarding the number of hours worked and paid and receives income from a partnership, this corporation will be able to claim the SBD on its specified partnership income only if the partnership meets the 5,500-hour test for its employees. Revenu Québec considered other examples involving partnerships. Please contact the tax group for more details.

Lastly, Revenu Québec clarified its position regarding situations involving joint ventures and nominal expenditures corporations. It specified that only employees who are employed directly or solely by the corporation should be taken into account.

Please do not hesitate to contact the tax group if you require additional information or clarification.

About the Author:

Isabelle Nadeau, B.C.L., LL.B., LL.M. Tax, is a Tax Manager at Crowe BGK.

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