2004 Prince Edward Island Budget Report
March 31, 2004
Highlights
- Deficit for 2003-04 now Projected to be $85 Million
- Deficit of $33 Million Projected for 2004-05
- Gasoline Tax Increased
Overview
Fiscal Responsibility in the New Millennium
Today, the Honourable Mitch Murphy tabled his first budget as Provincial Treasurer. And unfortunately, it was his duty to confirm that PEI's fiscal position has deteriorated significantly since last year's budget. The consolidated deficit for 2003-04, originally estimated at $11.5 million is now projected to be $85 million (after adjustments relating to changes in accounting policies). The deficit of 2004-05 is forecast to be $33 million. The Treasurer cites flaws in the current fiscal arrangement with the federal government as one of the main source of PEI's financial difficulties, in addition to SARS, BSE and a rising Canadian dollar. In fact, the news could have been worse had it not been for the fact that the province continues to be able to borrow funds at interest rates near historical lows. Despite the low rates, debt service costs represent a significant drain on the province's finances.
There was some good news. The PEI economy outperformed the Canadian economy as a whole, expanding by 2.1% in 2003 (as compared to the 1.7% increase in GDP for Canada as a whole). In addition, employment increased by 2.5% which reduced the unemployment rate to its lowest level since 1980. However, there were problems in some key sectors such as agriculture and the lobster fishery. For the agriculture sector, the Treasurer stated that relief for hog producers will be announced in the coming days in addition to previously announced relief for cattle producers to offset some of the losses realized due to BSE.
Despite the apparent worsening of the province's financial position, major tax and fee increases were not announced today. In particular, a much-discussed proposal to introduce a health care premium was not introduced. The deficit will be attacked mainly by expenditure reductions in areas other than health care. Increases however were announced in the gasoline tax, capital tax on financial corporations, and tobacco taxes. In addition, the sales tax will be broadened to apply to golf green fees.
The following is a summary of the more important budget measures of interest to our clients.
Prince Edward Island Consolidated Projection
(in thousands $) |
|
Original
Estimate 2003/2004 |
Revised Forecast 2003/2004 |
Projected
2004/2005
|
Revenue |
1,029,015 |
1,001,839 |
1,032,584 |
Program expenditures |
(911,805) |
(962,476) |
(933,468) |
Interest charges on debt |
(105,409) |
(103,522) |
(106,635) |
Capital expenditures |
(34,750) |
(42,472) |
(26,250) |
Net (surplus) deficit of crown entities |
(1,103) |
2,882 |
949 |
|
(24,052) |
(103,749) |
(32,820) |
Net effect of change in tangible capital assets policy |
12,560
|
18,647
|
(257)
|
Consolidated deficit |
(11,492) |
(85,102) |
(33,077) |
Personal Tax Measures
2004 Federal Budget Measures Adopted
ax Relief for Canadian Forces Personnel - The 2004 federal budget proposed to exclude from income subject to tax the regular pay that military and police personnel earn while serving on high-risk military or police missions outside Canada, effective for 2004 and subsequent years. PEI has confirmed in its budget that the exemption will apply for PEI tax purposes.
Disability Supports - In order to reduce barriers to employment and education for persons with disabilities, the 2004 federal budget proposed that the current Attendant Care Deduction be replaced with a Disability Supports Deduction, for 2004 and subsequent years. This deduction will broaden amounts previously eligible for the Attendant Care Deduction to include the cost for sign-language interpretation services, voice recognition software, talking textbooks, as well as other similar expenses. PEI has confirmed in its budget that it will mirror the new federal deduction for the costs of disability supports.
Business Tax Measures
Capital Tax Increased
Financial corporations, such as banks, trust companies and loan companies are currently subject to tax on capital at a rate of 3%. The Treasurer announced that this rate will be increased to 5%.
2004 Federal Budget Measures
Adopted In its 2004 budget, the federal government made several adjustments to the corporate tax base. The Treasurer confirmed that these adjustments will be passed through the PEI corporate tax system to provide an added benefit to Island business. In particular, the income threshold for the small business deduction will presumably increase to $300,000 on January 1, 2005. Years that straddle January 1, 2005 will have the limit prorated based on the number of days before and after that date.
Other Measures
Golf Green Fees
The provincial sales tax will be expanded to cover green fees at Island golf courses.
Tax Rebate and Exclusion
The Treasurer announced a rebate of up to $3,000 of provincial sales tax on the purchase of hybrid motor vehicles. Further, the provincial sales tax on low-flush toilets will be eliminated.
Gasoline Tax Increased
Effective midnight March 30, 2004, gasoline tax is increased by 3 cents per litre.
Tax on Tobacco Increased
Effective midnight March 30, 2004, the Health Tax on Tobacco is increased by $5 per carton of 200 cigarettes.
How PEI Compares
The following chart compares top personal and corporate tax rates and sales taxes for all provinces and territories, as announced to March 30, 2004.
|
Top 2004 |
Top Corporate Rates |
Retail Sales |
|
Personal Rates
% |
General
% |
M&P
% |
Small Business
% |
Tax
% |
BC |
43.70 |
35.62 |
35.62 |
17.62 |
7.5 |
Alta. |
39.00 |
33.62 (1) |
33.62 (1) |
16.12 (1) |
- |
Sask. |
44.00 |
39.12 |
32.12 |
18.62 |
6.0 |
Man. |
46.40 |
37.62 |
37.62 |
18.12 |
7.0 |
Ont. |
46.41 |
36.12 |
34.12 |
18.62 |
8.0 |
Qué. |
48.22 |
31.02 |
31.02 |
22.02 |
7.5 (2) |
N.B. |
46.84 |
35.12 |
35.12 |
16.12 (4) |
8.0 (3) |
N.S. |
45.69 |
38.12 |
38.12 |
18.12 |
8.0 (3) |
P.E.I. |
47.37 |
38.12 |
29.62 |
20.62 |
10.0 (2) |
Nfld. |
48.64 |
36.12 |
27.12 |
18.12 |
8.0 (3) |
Yukon |
42.40 |
37.12 |
24.62 |
19.12 (5) |
- |
N.W.T. |
42.55 |
36.12 |
36.12 |
17.12 |
- |
Nunavut |
40.50 |
34.12 |
34.12 |
17.12 |
- |
- Effective April 1, 2004, the Alberta corporate rates are reduced. Prior to the reduction, the combined general rate and M&P rate was 34.62% and the combined small business rate was 17.12%.
- Provincial sales tax applies on GST. Effective combined rate is 15.025% in Québec and 17.7% in PEI.
- As part of the HST (combined rate is 15% with GST).
- The small business rate will be reduced to 15.62% on July 1, 2004.
- The tax rate for M&P profits eligible for the small business deduction is 15.62%.
Prince Edward Island Budget Report 2004 is a publication of BDO Dunwoody LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice..
