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Franchises and taxation in Quebec and how to treat tips

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There are numerous specific tax measures that apply to franchises. It’s important to know these measures and we have, therefore, summarized some of them below.

A franchise right is an intangible asset that usually entitles the franchisee to operate a business for a specified or unspecified period of time in accordance with pre-defined rules.

When the franchisee pays to acquire a franchise right, the tax treatment for the franchisee must be determined. If a franchise right has a limited life, it is amortized over that period, which is usually the franchise contract term.

For example, if the franchise right is granted for a four-year period, one quarter of the cost of the franchise can be deducted as a capital cost allowance (CCA) during the four years.

The CCA makes it possible for the franchisee to reduce taxable income and taxes payable. The franchisor must declare the sale of the franchise right in income for the taxation year. Income from the sale of the franchise right is considered business income for the franchisor.

Renewal of franchise rights

If the initial franchise agreement provides for renewal periods, these periods must be analyzed to determine if they have to be included in the amortization period.

The Canada Revenue Agency considers that automatic franchise right renewal periods must be included in determining the franchise’s useful life because the franchisor and franchisee do not need to negotiate the renewal.

If the renewal must be negotiated or is conditional, the facts at hand must be analyzed to determine whether they should be included in calculating the initial amortization period. Lastly, if the renewal periods to be taken into consideration are such that the franchise can be renewed for an unlimited period, the franchise right is amortized on a declining basis at an annual rate of 5%.

To summarize, it’s important to analyze a franchise agreement because of the impact on the amortization period. The shorter the useful life of the franchise right, the higher the amortization cost. In this case, the accelerated franchise right amortization provides a tax benefit, however, an indefinite franchise right is amortized on a declining basis at an annual rate of 5%.

Refundable tax credit for tips paid to employees

The Quebec tax credit for reporting tips is a way to grant financial assistance to eligible employers who pay additional deductions at source and employer contributions on tips paid to employees.

Who can apply for the refundable tax credit?

The employer must carry on a business in the hotel or restaurant industry in Quebec (other than fast-food establishments where employees generally do not receive tips from most customers).

Additionally, the employees must receive tips directly or indirectly in carrying out their duties in the employer’s establishment. An employer can apply for the tax credit with respect to tips received by or attributed to employees who work in the establishment and for which the employer pays additional payroll deductions.

How to apply

The employer must use prescribed form TP 1029.8.33.13 to apply for the credit. The form is attached to the tax return filed with Revenue Quebec or submitted no later than 12 months after the income tax filing deadline.

The form is completed on a calendar year basis. If the corporation’s fiscal year-end is February 28, 2019, the corporation can claim the refundable tax credit for tips received or attributed during the 2018 calendar year.

Note that payroll deductions for which a corporation is claiming the tax credit must have been actually paid at the time of filing the form, other than vacation allowances and the related employer contributions.

To summarize, the refundable tax credit is equivalent to 75% of Quebec payroll deductions (Health Services Fund (HSF), Quebec Pension Plan (QPP), Quebec Parental Insurance Plan (QPIP), etc.) paid by the employer. The tax credit amount tax taxable at the time of receipt.

This article was written in collaboration with Marie-Danielle Roy.

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