SPECIAL REPORT | TAX BREAKS FOR MANUFACTURING COMPANIES

Responsible for nearly 11% of Canada’s gross domestic product (“GDP”)[1], manufacturing is a key component of our economic vitality. In Quebec, this reality is all the more important, with nearly 14% of GDP coming from this industry[2]. Innovation, investment, workforce and economic and political uncertainty are among the main challenges facing manufacturing companies. Both the federal and Quebec governments are concerned about the challenges facing the industry in the coming years. Since the Income Tax Act does not specify which activities constitute manufacturing or processing, we must rely on the ordinary meaning of the term to determine whether a company carries out manufacturing and processing activities. However, certain activities are specifically excluded from this expression, such as construction and logging. In addition, case law has established two criteria to be considered in determining whether a taxpayer is engaged in manufacturing and processing activities:

• Is there a change in the form, appearance or characteristics of the property concerned?
• Does the product become more marketable?

In a series of four articles, we’ll provide you with a thematic overview of these different forms of assistance. To support manufacturing companies, the latest budgets tabled by the federal and Quebec governments provide for a number of tax incentives; we’ll start with some of the new features.

Federal and Quebec

Accelerated depreciation on acquired assets used in manufacturing and processing

Equipment

Businesses engaged in manufacturing activities that acquire capitalizable property after 2015 and before 2026 for use in manufacturing and processing are entitled to capital cost allowance (“CCA”) at a rate of 50% on the declining balance, rather than CCA at a rate of 20% on the declining balance for businesses not engaged in manufacturing activities. However, in the year of acquisition, only 50% of the expenditure is eligible for CCA.

Building

Although not new, the acquisition of a new building after March 18, 2007, that is used 90% or more for manufacturing and processing purposes, allows the purchaser of the building to deduct depreciation at a rate of 10% on a declining-balance basis of the purchase price, compared to a rate of 4% on a declining-balance basis for the acquisition of a standard commercial building. However, the purchaser must make the election, within the prescribed timeframe, in a letter accompanying his or her income tax return, for both Quebec and federal income tax purposes.

Quebec

Tax rates

Small and medium-sized enterprises (“SMEs”) in the manufacturing sector can benefit from a tax rate reduction of up to 4% in Quebec. To qualify for this reduction, the proportion of manufacturing and processing activities of the manufacturing SME must be greater than 50%.

When the proportion of manufacturing and processing activities in a given year is between 25% and 50%, the rate of the additional reduction available to the SME is reduced on a straight-line basis.

Here are the tax rates for companies with a tax year beginning after January^1, 2017:

Health Service Fund (HSF) contribution rate reduction

In summary, for eligible employers with total payroll of associated companies of less than $1 million, the applicable rate for the 2017 calendar year has been reduced from 2.5% to 1.55%. As for eligible employers with total payroll between $1 million and $5 million, they become subject to a reduced rate ranging from 4.26% to 1.55%.

The two conditions to be met in order to benefit from the reduced rate are as follows:

• More than 50% of wages must be attributable to activities in the primary and manufacturing sectors;
• The company’s activities are grouped under codes 11, 21 or 31 to 33 of the North American Industry Classification System (NAICS):
  • 11: Agriculture, forestry, fishing and hunting;
  • 21: Mining, quarrying, and oil and gas extraction;
  • 31 – 33: Manufacturing.

For example, for a payroll of $750,000[3], a company that does not qualify for the reduced FSS contribution rate will have to pay a contribution of $18,750[4] to Revenu Québec. A company that qualifies for a reduced contribution rate will have to pay $11,625 for an identical payroll, representing a saving of $7,125.

Additional deduction for transportation costs for manufacturing SMEs

To improve the competitiveness of remote manufacturing SMEs, the Quebec government has introduced a deduction in the calculation of net income that varies between 1% and 10%[5] of the company’s gross income when the company is a Canadian-controlled private corporation and has a consolidated paid-up capital of less than $15 million.

However, the deduction is subject to the following ceilings:

• 50,000, if the company’s most important manufacturing activities are carried out in the central zone;
• 150,000 if the company’s most significant manufacturing activities are carried out in the intermediate zone[6];
• 350,000 if the company’s most significant manufacturing activities are carried out in the remote zone[7];
• No regional cap applicable if the company’s most important manufacturing activities are carried out in the particular remote area[8].

The rate of the additional deduction applicable to a corporation, for a taxation year, is that applicable to the zone in which the capital cost of its manufacturing and processing equipment is located. In addition, in order for the company to benefit from the maximum deduction rate, more than 50% of its activities must be attributable to manufacturing and processing activities.

Many other tax incentives have been introduced by our governments. In future news releases, we’ll look at various tax credits and deductions that are still in force, as well as credits specifically related to innovation, and various financial aids specific to the manufacturing industry.

References:

[1] www.ic.gc.ca (2011)

[2] www.stat.gouv.qc.ca (2012)

[3] 750 000 x 2,5 % = 18 750 $

[4] 750 000 x 1,55 % = 11 625 $

[5] The 2017 Quebec budget proposes to increase the applicable rate from 7% to 10% for the special remote zone.

[6] See www.budget.finances.gouv.qc.ca/budget/2014-2015a/fr/documents/renseignementsadd.pdf to determine the zones applicable to your company’s activities.

[7] See www.budget.finances.gouv.qc.ca/budget/2014-2015a/fr/documents/renseignementsadd.pdf to determine the zones applicable to your company’s activities.

[8] Île-d’Anticosti, Îles-de-la-Madeleine, MRC du golfe du Saint-Laurent (Côte Nord) and Kativik Regional Government (Nord-Du-Québec)

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