Payroll deductions: what employers need to know about changes to provincial income tax rates

September 5, 2023

On March 21, 2023, during his traditional budget speech, the Minister of Finance of Québec announced that Quebecers will benefit from a general reduction in personal income taxes starting in 2023. The effect will be a reduction in the tax rates that apply to the first two taxable income brackets of the personal income tax table.

In addition to having a positive impact on Quebecers’ disposable income, the tax cut will also have repercussions on source deduction rates applied to certain payments and remuneration.

The fixed rates used for provincial income tax source deductions on lump-sum payments have been changed. Employers will therefore have to adjust their calculations for such payments. This will be the case, for example, where sums are paid as retiring allowances, as is frequently the case in the settlement of certain employment termination agreements.

Previously, the rate used to calculate provincial income tax source deductions on a retiring allowance payment was 15% for amounts up to $5,000, and 20% for payments over $5,000. The income tax deductions on such payments made after June 30, 2023, is now 14% for amounts up to $5,000, and 19% for payments over $5,000.

Table of provincial and federal income tax source deduction rates for lump-sum payments, effective July 1, 2023, by amount of lump-sum payment (e.g. retiring allowance):

$5,000 or less
Provincial tax rate 14%	Federal tax rate 5%

Over $5,000 up to $15,000
Provincial tax rate 19%	Federal tax rate 10%

Over $15,000
Provincial tax rate 19%	Federal tax rate 15%

Although it may seem trivial, this review of provincial income tax source deduction rates has far-reaching implications, given that these are often used by parties especially in the negotiation of employment termination agreements. Human resources and payroll professionals must use the new income tax source deductions in their employment termination negotiations to ensure that they are tax compliant. A positive outcome of these rates is that employees will now have more disposable income after tax for the same amount paid by their employer. Such a measure could make reaching an agreement easier in the context of tough negotiations.

As an employer, it is essential that you update your payroll systems and processes to correctly reflect the new income tax rates and ensure tax compliance.

Our team of labour law and tax professionals is available to answer your questions about this change and help you make informed decisions that will benefit your business.

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Authors

Camille Rioux
Senior Associate
Charles-Hugo Gagné
Lawyer

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April 24, 2024

Supreme Court of Canada ruling: Managers are not eligible for unionization under the Labour Code

On April 19, 2024, the Supreme Court of Canada rendered its decision in Société des casinos du Québec inc. v. Association des cadres de la Société des casinos du Québec, marking the end of an almost 15 year-long debate on the freedom of association of managers and their exclusion under the Labour Code. The facts The Association des cadres de la Société des casinos du Québec (the “Association”) represents first-level managers at the province’s four casinos operated by the Société des casinos du Québec (the “Société”). The Association is a professional syndicate within the meaning of the Professional Syndicates Act. Although the Association is not governed by Quebec’s Labour Code (the “Code”), given the exclusion of managers from the notion of “employee” provided for in theCode, this exclusion does not prevent members of the Association from associating. In fact, in 2001, the Association and the Société signed a memorandum of understanding governing certain aspects of the collective labour relations. However, faced with the inability of the Association’s members to access the remedies offered by the Code, such as protections against bad-faith bargaining, the right to strike and the specialized dispute resolution mechanism, in 2003 the Association lodged a complaint with the International Labour Organization’s Committee on Freedom of Association. Dissatisfied, the Association then filed a petition for certification under the Code in 2009, requesting that the exclusion of management staff from the definition of “employee,” and therefore from the unionization process under the Code, be declared unconstitutional, as it infringed on the freedom of association protected by the Charters. The Société raised an exception to dismiss, since managers are excluded from the application of the Code. Proceedings prior to the Supreme Court of Canada In its 2016 decision, the Administrative Labour Tribunal (the “ALT”) found that the exclusion of managers from the definition of “employee” violates the freedom of association of the first-level managers represented by the Association, and that this infringement is not justified in a free and democratic society. The exclusion was declared inoperative in the context of this application. According to the ALT, the Association does not benefit from a meaningful process for bargaining in good faith for its members’ working conditions. Furthermore, the Association members’ right to strike is infringed without any other mechanism being provided, which, according to the ALT, constitutes a substantial infringement of the right to collective bargaining. In 2018, the Superior Court of Québec allowed the Société’s application for judicial review. The Superior Court concluded that the exclusion of managers from the Code does not contravene the freedom of association. Employers must be able to trust their managers and, for the sake of employee unionization, there can be no ambiguity about managers’ allegiance1. Managers can organize and associate, but not under this law. In 2022, the Court of Appeal overturned the Superior Court’s ruling and reinstated the ALT’s decision. According to the Court of Appeal, the ALT was right to conclude that the effects of the exclusion from the Labour Code regime constitute substantial interference with the exercise of the freedom of association. The Supreme Court of Canada's decision In a new development on April 19, the Supreme Court of Canada allowed the Société’s appeal, essentially ruling that the exclusion of managers from the Code does not violate the freedom of association. Although the seven (7) judges hearing this case concluded that the Dunmore analytical frameworkis the relevant one, there are applicable concurring reasons. In the opinion of the majority of the Court, a two-part test must be applied: The Court must consider whether the activities in question fall within the scope of freedom of association; and The Court must consider whether the statutory exclusion substantially interferes with those activities, in purpose or effect. In this case, the Association alleged that by excluding managers from the application of the Code, the government was preventing its members from “engaging in a process of meaningful collective bargaining with their employer, with constitutional protection for the Association, sufficient independence from the employer, and the right to recourses if the employer does not negotiate in good faith."2 According to the Supreme Court, the Association’s claim was indeed based on an activity that is protected under the freedom of association, thus passing the first part of the test. However, the Association’s claim fails the second part of the test. The Supreme Court concluded that the exclusion of managers from the Code’s definition of an employee does not substantially hinder the Association’s activities. As the Superior Court had found, this exclusion is intended to distinguish managers from employees and avoid conflicts of interest, in particular by ensuring that the employer can trust its managers and that employees can protect their own interests. The memorandum of understanding between the Société and the Association demonstrates that the members are able to associate and negotiate with the employer. Moreover, this protocol enables the Association to take legal action before the ordinary courts of law in the event of non-compliance with its terms and conditions. According to the Supreme Court, “the right to meaningful collective bargaining does not guarantee access to a particular model of labour relations."3 Conclusion After several years of debate, the Supreme Court of Canada has finally settled the question of the constitutionality of the exclusion of managers from Quebec’s collective labour relations regime set out in the Labour Code. As this exclusion does not violate managers’ freedom of association, they will not be able to validly file petitions for certification under the Code. However, they will be able to exercise their freedom of association in other ways, as in this case, through the Professional Syndicates Act, as well as before the ordinary courts of law. This decision is a positive one for Quebec employers, as it protects the structure of workplaces and the allegiance of managers within organizations. 2018 QCSC 4781, para. 116 et seq. 2024 SCC 13, para. 47. 2024 SCC 13, para. 55.

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April 16, 2024

Tax opportunities under the Indian Act

Although it is not often well-understood in business and tax circles, the Indian Act (the “Act”), coupled with federal and provincial tax laws, provides several tax planning opportunities for Indigenous taxpayers. These laws provide various tax exemptions for people who qualify as “Indians” under the Act, as well as for “bands” and other “councils.” These terms are defined in the Act and require case-by-case analysis, but essentially they refer to people of Indigenous origin who have at least one family member who is registered or entitled to be registered as an Indian within the meaning of the Act. The criteria for a tax exemption In particular, those who qualify can benefit from a tax exemption when income is earned on a “reserve.” There are several criteria to be met, and although the Canada Revenue Agency (“CRA”) has issued guidelines on the subject, their application remains a question of fact that varies depending on the particular circumstances applicable to each taxpayer. In general, the CRA requires that income earned by an “Indian” within the meaning of the Act be sufficiently connected to a reserve to be exempt. This is the case when, for example, income-generating services are performed entirely or almost entirely within the territory of a reserve, when the employer and the employee reside on a reserve, or when income is derived from non-commercial activities carried out by a band. Business income can also be tax-exempt, but the criteria for being considered connected to a reserve are stricter, since generally only income-generating activities situated on a reserve will be tax-exempt. However, it is still possible to organize the affairs of a taxpayer and their corporate entities to ensure that these criteria are met, or to highlight certain connecting factors. Such planning, if done properly, is entirely legitimate and can result in significant tax savings. In a recent interpretation (CRA Views 2022-0932231I7), the CRA illustrated this principle by considering employment income related to an off-reserve airport to be exempt, even if none of the guidelines are followed, in cases where such an airport is necessary to supply a reserve that has no other means of transportation and delivery. This interpretation shows that the connection between an income and a reserve is not established solely by the physical presence of the income-generating business, and that several other arguments, sometimes more subtle, can be used to support the connection between an income and a reserve. A few nuances to consider However, care must be taken when a company is incorporated by someone who qualifies as an “Indian.” A company with its head office on a reserve cannot qualify as “Indian” within the meaning of the Act. Its income therefore cannot be tax-exempt, and will be taxed according to the usual rules. Despite this, certain plans can ease the tax burden on these companies and on shareholders who qualify as “Indians” under the Act, such as paying wages and bonuses to an employee shareholder. But it’s essential to carefully analyze the various pitfalls and risks that such planning entails. Furthermore, certain exemptions exist for companies formed by bands, but the eligibility criteria are strict and require a thorough analysis of the proposed structure. In addition to the income tax exemption, “Indians” within the meaning of the Act and certain entities mandated by bands may benefit from a tax exemption when they purchase goods on a reserve or have goods delivered to them on a reserve. Different exceptions and nuances apply. However, companies headquartered on a reserve are not exempt from their tax collection obligations and may be required to register for the GST/QST. To help you understand these rules and ensure optimal tax planning, we invite you to consult our tax team. We look forward to working with you on your business projects.

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March 5, 2024

Labour shortage: Revised ratios of qualified staff members in child care centres

At a time when the pandemic is continuing to have repercussions and we are experiencing a severe labour shortage, the educational childcare sector is facing unprecedented challenges. These circumstances have led to a reassessment of the standards relating to the presence of qualified childcare staff with children. The purpose of this bulletin is to shed light on the regulatory amendments that have been made to the Educational Childcare Regulation1 (the “ECR”), and more specifically to the required ratio of qualified staff members. Enacted by Order in Council 102-2024,2 these amendments came into force on March 1, 2024. Childcare providers should imperatively take cognizance of these regulatory amendments, as they will help them optimize their operations and improve their ability to respond to the challenges they are facing in attracting and retaining qualified childcare staff. Background On July 22, 2021, in response to the impact of the pandemic on educational childcare services, amendments were made to the requirements respecting the ratio of qualified staff members provided for in the ECR. During the first 9 months that followed the end of the public health emergency, the ratio was reduced to one qualified staff member out of three. During the 12 months after that, it was increased to one in two. The ratio applicable to childcare services was expected to return to pre-pandemic levels, or a ratio of two qualified staff members out of three, on March 1, 2024.3 However, faced with the labour shortage,4 which is particularly affecting the childcare sector, the government estimated that many childcare providers would not be able to comply with a qualified childcare staff ratio of two out of three, as was initially required for that date. As a result, the legislator amended the ECR once again so as to address ongoing problems and prevent service closures or disruptions. These amendments are summarized below. New ratio requirements for childcare services Section 23 of the ECR has been amended to reaffirm the general standard stipulating that the ratio of qualified childcare staff must be two out of three. However, section 23.1 of the ECR now provides for certain exceptions to the previously established rule on the ratio of qualified childcare staff. The notable exceptions are as follows: A ratio of one qualified childcare staff member out of two may be maintained during the provision of childcare until March 31, 2027. A ratio of one qualified childcare staff member out of three will be authorized while childcare is being provided during the first and last business hour of the permit holder’s core hours. A ratio of one qualified childcare staff member out of three will also be authorized during the first five years following: the initial issuance of a day care centre permit; the modification of a day care centre permit to increase, by 8 or more, the maximum number of children that may be provided with childcare in the permit holder’s facility; or the conclusion of a first subsidy agreement between the Ministère de la Famille and the holder of a day care centre permit, provided that the agreement was entered into after October 31, 2023. Conclusion The changes described above, came into force on March 1, 2024, are intended to address the current shortage of qualified staff in the childcare sector in Quebec. Although the temporary flexibility and the exceptions to the qualified staff ratio will help childcare providers guarantee the continuity and accessibility of their services, compliance with prescribed ratios is still mandatory. Note that failure to comply with these requirements may lead to administrative penalties or penal sanctions, as well as a decision by the Ministère de la Famille suspending, revoking or not renewing a permit. The members of the Lavery team are available to answer your questions. The information and comments contained herein do not constitute legal advice. They are intended solely to enable readers, who assume full responsibility, to use them for their own purposes. Chapter S-4.1.1, r. 2. Regulation to amend the Educational Childcare Regulation, O.C. 102-2024 (G.O. II) Regulation to amend the Educational Childcare Regulation, O.C. 879-2021 (G.O. II). Ministère de la Famille, Mémoire au conseil des ministres : Projet de règlement modifiant le Règlement sur les services de garde éducatifs à l’enfance, tabled on September 20, 2023; Ministère de la Famille, Portrait de la main-d’œuvre du réseau des services de garde éducatifs à l’enfance, 2022–2023, October 2023.

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February 21, 2024

New corporate transparency requirements in Canada, Québec and the U.S. – What Canadian and Québec companies need to know

Over the last several years, member countries of the OECD, including Canada and the U.S., have committed to various international undertakings dealing with corporate governance. In keeping with these commitments, since 2019, the Canada Business Corporations Act (CBCA) has required business corporations incorporated under the CBCA to prepare and maintain a register of individuals with significant control over the corporation. Nearly all Canadian provinces, including Québec, have also amended their legislation to make control of companies incorporated in their jurisdiction more transparent. For instance, since March 31, 2023, companies registered with the Québec Enterprise Register (REQ) must report their ultimate beneficiaries to the REQ. Providing greater transparency in the control of Canadian businesses is a continuing process, and additional provisions that apply to federal business corporations came into force on January 22, 2024, and others, applicable to businesses registered with the REQ, will come into force on July 31, 2024. The provisions of the Corporate Transparency Act of the United States requiring companies to report beneficial ownership information came into force on January 1, 2024; some of these provisions are of interest for Canadian companies. Canada – Public register of individuals with significant control Since June 2019, business corporations incorporated under the Canada Business Corporations Act have been required to maintain a register of “individuals with significant control” (ISCs) containing the following information: the name, date of birth and last known personal address of each ISC the citizenship, country or countries where the ISCs are residents for tax purposes the date on which each of these individuals became an ISC the manner in which the individual is an ISC and any other information required by the regulation.1 Although federal corporations must make this register accessible to the Director tasked with administering the Canada Business Corporations Act, to shareholders and creditors of the corporation and to investigative bodies, the register was not accessible to the public until recently. On November 2, 2023, the federal legislator amended the provisions of the Canada Business Corporations Act to, among others: allow ISCs to provide an address for service in addition to their personal address provide that a portion of the ISC information compiled by federally incorporated businesses must be sent to the Director tasked with administering the CBCA provide that the Director must make the following information on ISCs accessible to the public: their name their address for reporting purposes if such an address is provided or, failing which, their personal address the date on which they became an individual with significant control and a description of the manner in which each one is an individual with significant control Note that even if the date of birth, citizenship, country or countries where the ISC is a resident for tax purposes and their personal address (if they provided an address for reporting purposes) must be provided to the Director overseeing the Canada Business Corporations Act, this information will not be made public. The Director may, however, in turn provide to any police force, the Canada Revenue Agency and any provincial body that has responsibilities similar to those of the Canada Revenue Agency, bodies that have investigative powers in relation to certain offences, a provincial enterprise register or provincial agency enforcing corporate law in that province all or part of a corporation’s ISC information, which goes beyond the information it makes available to the public. A corporation must send its ISC information electronically through the Corporations Canada website, at incorporation (if incorporated after January 22, 2024), annually and concurrently with the filing of its annual declaration, within 30 days following its merger with another CBCA corporation, within 30 days of the date on which it becomes subject to the CBCA after incorporating under the laws of another jurisdiction, and within 15 days following any changes made to its register of ISCs. These amendments came into force on January 22, 2024. To assist federal corporations in drawing up a list of their ISCs, the Director tasked with administering the Canada Business Corporations Act posted a letter template on its website that federal corporations may send to their shareholders, their ISCs and to anyone who could reasonably be expected to have the relevant knowledge to identify their ISCs.2 The purpose of that letter is to help the corporation in identifying its ISCs. It is mandatory for shareholders to respond to the corporation’s request and failure to respond may result in significant fines and even imprisonment. Québec – Search a natural person by last name and first name Since April 1, 2023, most private businesses that required to register in Québec must report to the Registre des entreprises du Québec the names, residential address and date of birth of each of their ultimate beneficiaries, and the type of control exercised by them or the percentage of shares or units of the corporation owned by these ultimate beneficiaries or of which they are the beneficiaries. In general, an ultimate beneficiary of a business is a natural person who owns or is the beneficiary of 25% or more of the voting rights for that business, who owns or is the beneficiary of 25% or more of its fair market value or who has an influence that could result in de facto control over the business. The information reported on ultimate beneficiaries is accessible to the public and free for anyone consulting the REQ. The requirement to report ultimate beneficiaries applies to almost all businesses registered in Québec and is not limited to businesses incorporated under Québec law nor to business corporations. Therefore, any foreign legal person that is required to register in Québec must report its ultimate beneficiaries. The same applies to partnerships, such as general partnerships and limited partnerships, and some trusts. As of July 31, 2024, it will be possible to search the REQ using the last name and first name of a natural person. Accordingly, from that date, it will be possible to obtain the list of all businesses registered in the REQ of which a person is a director, officer, one of the three shareholders controlling the greatest number of votes and an ultimate beneficiary by searching by his or her last name and first name. The last and first name of the natural person and his or her residential address will appear in the search results. However, if a work address was reported to the register for that person, only the work address will appear. Federally incorporated businesses registered with the REQ A federally incorporated business that does business in Québec must maintain a register of its ISCs under the Canada Business Corporations Act and report information on its ultimate beneficiaries to the REQ. Although most ISCs of a federally incorporated business will also be the ultimate beneficiaries under the Act respecting the legal publicity of enterprises and vice versa, the two acts do not define an ISC and ultimate beneficiary in exactly the same way. A person may be an ultimate beneficiary under the Act respecting the legal publicity of enterprises without necessarily being an ISC under the Canada Business Corporations Act (and vice versa). Consequently, the content of the register of ISCs for a federally incorporated business — and thus information it will have reported to the Director in charge of the Canada Business Corporations Act — may not be identical to the ultimate beneficiary information it will have reported to the REQ. However, federally incorporated businesses that do not do business in Québec are not required to register under the Act respecting the legal publicity of enterprises. All other provinces, except for Alberta,3 have now incorporated provisions into their business corporations legislation requiring corporations registered under the laws of that province to maintain a register of individuals with significant control. As a result, these provisions only apply to business corporations incorporated under the law of the province and, therefore, do not apply to business corporations incorporated under the Canada Business Corporations Act or under the business corporation act of another province. Corporate Transparency Act in the United States coming into force – Impact on Canadian businesses On January 1, 2021, the Corporate Transparency Act, part of the U.S. Anti-Money Laundering Act of 2020, came into force. Just like the amendments made to the Canada Business Corporations Act and to the Act respecting the legal publicity of enterprises (Québec), the aim of the Corporate Transparency Act is to prevent and fight against money laundering, terrorism financing, corruption, tax fraud and other illicit activities, among others, by increasing the transparency of private companies incorporated in or registered in the United States. On January 1, 2024, the reporting requirements in the Corporate Transparency Act to identify “beneficial owners,” which are basically equivalent to ISCs under the Canada Business Corporations Act and “ultimate beneficiaries” under the Act respecting the legal publicity of enterprises (Québec), came into force. Businesses covered by the act and incorporated before January 1, 2024, have until January 1, 2025, to file their first Beneficial Ownership Information Report. Businesses incorporated after that date must file their first report no later than 30 days after the date they first register with a U.S. government authority. Reports on beneficial ownership of businesses are filed with the Financial Crimes Enforcement Network, an agency of the U.S. Department of the Treasury, better known by its acronym FinCEN. Reporting businesses must submit an updated report within 30 days of any change in information previously reported to FinCEN. Reports on beneficial ownership are not accessible to the public and are not subject to the U.S. Freedom of Information Act. The information contained in these reports will be, however, generally accessible to United States law enforcement agencies and United States federal tax authorities. Foreign law enforcement authorities may also be granted access in certain circumstances through United States federal intermediary agencies. Provided they have received the consent of their clients, financial institutions will also have access to the information to facilitate compliance with customer due diligence requirements under applicable law. All corporations incorporated in the U.S. must file beneficial ownership information reports unless they are legally exempt. Exempt businesses include: most businesses whose securities are registered under the Securities Act of 1934 large businesses, i.e., businesses with more than 20 full-time employees in the U.S., having a facility in the U.S., and having reported over U.S.$5 million in gross revenues or sales in the previous reporting period. It follows that in most cases, unless it is exempted, usually because it will qualify as a “large business” due to the number of its employees and its revenues, a U.S. subsidiary of a Canadian corporation will have to comply with the act and report the identity of its Canadian beneficial owners. A reporting business must, among other things, report the full name, the date of birth and the address of all its beneficial owners. The U.S. subsidiary of a Canadian corporation must also submit a copy of the Canadian passport (or from the country of citizenship of the person in question) for each of its beneficial owners. A person is deemed a beneficial owner of a corporation if he or she is a natural person who, directly or indirectly, exercises substantial control over the reporting corporation, or owns or controls at least 25% of the corporation’s ownership interests (shares, units or others), in voting rights or in value. The definition of “substantial control” for the purposes of the Corporate Transparency Act is much broader and more specific than what is found in equivalent Canadian legislation. An individual has “substantial control” over a reporting corporation under the Corporate Transparency Act if such individual (i) is a senior officer in the corporation, (ii) has authority to appoint or remove certain officers or a majority of the directors (or similar body) of the reporting corporation, (iii) is an important decision maker of the reporting corporation or (iv) has any other form of substantial control over the reporting corporation. The Corporate Transparency Act imposes serious penalties on individuals who willfully fail to file or update beneficial ownership information or who willfully file false information. These penalties include civil penalties of up to U.S.$500 per day of violation, fines of up to U.S.$10,000, as well as potential; imprisonment for a period up to two years. Note that the act contains a presumption against senior officers in respect to reported information that is false, incomplete or not up to date. These officers could therefore be held personally held liable for civil penalties and fines and could be subject to imprisonment if the reported information proves to be false or incomplete or not up to date. Senior officers must therefore be especially vigilant and ensure that the reporting requirements under the Corporate Transparency Act are met. The Director tasked with administering the Canada Business Corporations Act has posted a template for the register of ISCs on its website. This register can be found at: https://ised-isde.canada.ca/site/corporations-canada/sites/default/files/documents/2023-12/04.3_isc-register-template_en.xlsx This template can be found at: This template can be found at: https://ised-isde.canada.ca/site/corporations-canada/sites/default/files/documents/2023-12/06.1_request_for_information_template_isc_en.pdf The three territories, Yukon, Northwest Territories and Nunavut, still have yet to amend their legislation to require a register of individuals with significant control to be maintained for business corporations incorporated under the business corporation acts of those territories.

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