On March 25, 2025, Québec’s Minister of Finance, Éric Girard, tabled the province’s 2025-2026 Budget. Representatives from the National Payroll Institute were invited to attend a lock-up session for an advance review of the embargoed budget document.
This year’s Budget prioritizes strengthening the economy while safeguarding health care and education. It introduces several measures with a direct impact on payroll, as well as initiatives that may affect both employers and employees across the province.
Harmonizing with capital gains measures
To maintain simplicity in the tax treatment of capital gains and ensure consistency with the federal tax system, the Québec government has aligned itself with the changes announced by the federal government regarding capital gains. In accordance with the federal government’s latest announcements, as of January 1, 2026, the capital gains inclusion rate is expected to be increased from 50% to 66.7% – on the portion of capital gains exceeding $250,000 for individuals – on all capital gains for corporations and trusts. As a corollary, the reduction in the rate of the deduction for security options will apply starting on the same date, namely January 1, 2026.
Uncertainty surrounding the coming into force of the inclusion rate increase
Although the inclusion rate increase has been postponed to January 1, 2026, uncertainties remain regarding the passage of the federal bill to increase the capital gains inclusion rate. The Québec government will closely monitor any potential announcement on this matter, and its decision in response to any changes will take into consideration the best interests of Québec.
Ending certain little-used tax measures
Certain tax measures were introduced several years ago, in a socioeconomic context that has since changed. The review of tax expenditures also revealed that some measures are claimed by few taxpayers and have a low cost, indicating that they are poorly targeted, too complex to claim, or no longer relevant in the current context.
Therefore, in Budget 2025-2026, the government is announcing the abolition of certain measures, namely two little-used public transit measures with a scheduled expiry date of December 31, 2027:
-
The additional deduction of 100% in the calculation of an employer’s income − public transit, whose number of beneficiaries stands at only a hundred or so companies, mainly due to the rise of teleworking.
-
The non-taxation of benefits granted to employees who receive public transit passes from their employer.
Abolishment of the foreign researcher, foreign expert and foreign specialists tax holiday
The tax holiday consists of a deduction applied, by the employer, to the computation of a foreign researcher, foreign expert, or foreign specialist’s taxable income.
The deduction corresponds to a percentage of eligible income for a taxation year. The percentage is 100% for the first two years of an eligible activity period, 75% for the third year, 50% for the fourth year, and 25% for the fifth year (37.5% for a foreign specialist).
The government’s review of tax expenditures has revealed that the foreign researcher, foreign expert, and foreign specialists tax holiday entailed a significant administrative burden and failed to achieve its objectives effectively. This measure will therefore be abolished as of the day following the day of the budget speech.
Consequently, the Minister of Economy, Innovation and Energy will not accept any new application for the issuance of a qualification certificate required for the tax holiday as of the day following the day of the budget speech.
Harmonizing the rate of the tax on insurance premiums and that of the Québec sales tax
In Québec, insurance premiums are not subject to QST, but rather to the tax on insurance premiums at a rate of 9%, which is different from the QST rate of 9.975%.
The analysis of the tax on insurance premiums showed no reason justifying why the rate should be lower than that of the QST. Furthermore, when the tax was introduced in 1985, the rate applicable to insurance premiums was identical to that of the sales tax in force at the time.
In addition, in other provinces where a tax on insurance premiums is in effect, the rate applicable on these premiums is identical to the provincial portion of the sales tax applicable to goods and services.
Budget 2025-2026 provides for an increase in the tax rate on insurance premiums from 9% to 9.975%, as of January 1, 2027, to harmonize it with the QST rate.
Ending indexation of the eligibility threshold for reduced rates of employer contributions to the Health Services Fund
Under the employer contributions to the Health Services Fund (HSF) plan, businesses whose total payroll is below a certain threshold are eligible for reduced contribution rates.
This threshold, which was $5.0 million prior to 2018, has been significantly increased in recent years:
-
- A gradual increase to $7.0 million between 2018 and 2022;
-
- Annual indexation starting in 2023, so that it will have reached $7.8 million by 2025.
Of all the parameters of the general corporate tax system, this threshold is the only one subject to indexation.
In Budget 2025-2026, the government is announcing the end of indexation of the payroll threshold entitling to reduced rates of employer contributions to the HSF, which will be maintained at $7.8 million.
Improving retirement pensions for workers who have suffered an employment injury
The CNESST is responsible for ensuring the well-being of workers. After enhancing the CNESST’s services in recent years, the government is continuing its work to improve them.
CNESST’s support measures include an income replacement indemnity for individuals who have suffered an employment injury and are unable to return to their usual job. To maintain their standard of living, the indemnity compensates for the loss of 90% of after-tax income and may be:
-
- reduced, if the individual is able to take a lower-paying job;
-
- paid at the full rate, if they are completely unable to work.
To protect the retirement pensions of individuals receiving a full income replacement indemnity, the CNESST has an agreement with the QPP. Under this agreement, the months of disability are excluded from the retirement pension calculation, so as not to reduce the amount of the pension.
However, recipients of a reduced income replacement indemnity continue to contribute to the QPP if they are working. Since their income is lower, so are their contributions, significantly reducing their retirement pension. Exclusion from QPP pension calculation
Exclusion from QPP pension calculation
The retirement pension under the Québec Pension Plan (QPP) is calculated on the basis of employment income earned between the age of 18 and retirement. However, to avoid penalizing retirees for exceptional life events, the QPP allows certain contribution periods to be excluded from the calculation. From now on, excluded periods can be:
– months in which a QPP disability pension was received;
– months in which any income replacement indemnity from the CNESST was received, if this indemnity is for a period of at least 24 months, given the measure presented in Budget 2025-2026;
– months in which family benefits were received, such as Family Allowance, for a child under 7.
In addition, all retirement pension recipients can exclude the 15% of months in which their income was lowest. It is important to note that only the QPP base plan allows exclusions. There is no such provision in the additional plan.
Transforming certain deductions into tax credits
In the tax expenditure review, the government analyzed the nature of certain types of assistance in the personal tax system, in particular to determine whether it was still appropriate to maintain certain deductions in this form.
After analysis, it appears that certain deductions can be converted into tax credits while still meeting their objectives.
While deductions reduce taxable income, non-refundable tax credits reduce the tax payable. Thus, the higher the taxpayer’s income, the more significant the tax reduction resulting from the deduction, which is not the case with a non-refundable tax credit whose rate is uniform regardless of income.
Starting in 2026, two deductions will be converted to non-refundable tax credits at the base rate of 14%.
-
The religious residence deduction is a measure designed to reduce the taxable benefit arising from the use of a residence provided by one’s employer to receive the faithful.
The deduction for assistance received for the payment of tuition fees for adult basic education programs will be converted to be consistent with tax assistance for students, which is generally non-refundable tax credits, such as the tax credit for tuition and examination fees.
The Institute will monitor the progress of these announcements and will update its members accordingly.