2005 Prince Edward Island Budget Report
April 7, 2005
Highlights
- Corporate Small Business Tax Rate Reduced
- Low Corporate Tax Rate for M&P Income Eliminated
- Land Transfer Tax System to be Introduced
- Other Tax Increases Announced
Overview
"A Plan to Protect the Priorities of Islanders "
Today, the Honourable Mitch Murphy tabled his second budget as Provincial Treasurer.
Although the provincial economy grew by 1.6% in 2004, the Treasurer acknowledged that the financial picture for the province would not improve without significant changes to address spiralling costs. As a result, spending cuts were announced that will apply to all departments of government except Health and Social Services and Education, which received budget increases. Part of the cost reductions will be achieved through the elimination of up to 500 government positions through an early retirement system called the Workplace Renewal Program.
The revised consolidated deficit forecast for 2004-05 is $39.5 million, up from the original estimate of $33.1 million. The increase is mostly due to up front costs associated with the Workplace Renewal Program. The projected forecast for 2005-06 is a deficit of $22 million. The PEI economy is projected to grow by 1.8% in 2005.
There was both good and bad news for corporate taxpayers today. The good news is that the tax rate payable on small business income will be reduced by 1%. But this was offset by some bad news for manufacturers – the preferential tax rate on manufacturing and processing income has been eliminated. The elimination of this incentive was based on a review of corporate tax rates by the government, which concluded that manufacturers are adequately provided for by the small business deduction and the new Progressive Tax Rebate program. This rebate program provides tax incentives to companies and individuals who invest in innovation, growth and development of targeted sectors. Targeted sectors currently include aerospace, bio-science, certain communications technologies, renewable energy, certain financial services and export-focussed manufacturing and processing. These rebates were first announced on December 9, 2004.
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 2004/2005 |
Revised Forecast 2004/2005 |
Projected
2004/2005
|
Revenue |
1,031,804 |
1,072,457 |
1,105,727 |
Program expenditures |
(934,157) |
(964,012) |
(986,472) |
Interest charges on debt |
(106,635) |
(102,065) |
(107,970) |
| Depreciation |
(24,318) |
(38,734) |
(38,942) |
| Net surplus (deficit) of crown entities |
949 |
(2,159) |
(2,100) |
Workforce Renewal Program |
- |
(5,000) |
7,750 |
Consolidated Deficit |
(33,077) |
(39,513) |
(22,007) |
Personal Tax Measures
Property Tax Deferral Threshold Increased
Under current rules, seniors can defer their property tax as long as they live in their own home and their income is $22,000 or less. The income threshold for this incentive has been increased to $30,000 to provide more assistance to lower income seniors.
Business Tax Measures
Corporate Tax Rate Changes
The Treasurer announced two corporate income tax rate changes that will apply as of April 1, 2005 (both changes will be prorated for year-ends straddling April 1st).
Canadian-controlled private corporations (CCPCs) benefit from a lower tax rate on the first $300,000 of income from an active business for both PEI and federal tax purposes. The Treasurer announced today that this rate will be lowered by one percentage point, from 7.5% to 6.5%.
Unfortunately, the news for manufacturers was not as good. Under current rules, income from manufacturing and processing activities not eligible for the small business deduction are eligible for a tax rate reduction of 8.5% from the general corporate tax rate of 16% (giving an effective rate of 7.5%). The Treasurer announced that this incentive will be eliminated. Note that the provincial manufacturing and processing investment tax credit will be maintained.
Other Measures
Fuel Tax Rules Revised
Under the present fuel tax system, gasoline and diesel fuel tax is charged at a flat rate, equal to 17 cents and 16.5 cents per litre respectively. Effective after April 7th, the flat tax rate will be reduced to 11.5 cents per litre for both gasoline and diesel fuel. However, at the same time, both types of fuel will become subject to provincial sales tax, which is currently charged at a rate of 10%. The tax will be based on the wholesale price of fuel. The budget documents suggest that this will mean that Islanders will pay 2.7 cents more for each litre of gas.
Tire Tax Increased
The Treasurer announced tire tax will increase from $2 per tire to $4 per tire to reflect the true cost of disposing of old tires.
New Land Transfer Tax System to be Introduced
Following rules in other provinces such as Ontario, Manitoba and Nova Scotia, a new land transfer tax will be introduced within 30 days. Although details were not provided, the new tax will apply on the gross value of all property sales.
Small-scale Renewable Energy Equipment
Small-scale renewable energy equipment and technology is exempt from provincial
sales tax effective immediately. The tax exemption will apply to such technologies as infrastructure for wind energy systems less than 100 kilowatts, ground-source heat pumps, solar panels for domestic hot water heating systems and electricity production, and biogas systems under 100 kilowatts to capture methane from farm operations to produce energy.
How PEI Compares
The following chart compares top personal and corporate tax rates and sales taxes for all provinces and territories, as announced to April 7, 2005 (including the elimination of the PEI M&P credit).
|
Top 2005 |
Top Corporate Rates |
|
|
Personal Rates
% |
General
% |
M&P
% |
Small Business
% |
Retail Sales
Tax
% |
BC |
43.70 |
35.62 |
35.62 |
17.62 |
7.0 |
Alta. |
39.00 |
33.62 |
33.62 |
16.12 |
- |
Sask. |
44.00 |
39.12 |
32.12 |
18.12 |
7 |
Man. |
46.40 |
37.12 |
37.12 |
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 (1) |
N.B. |
46.84 |
35.12 |
35.12 |
15.62 |
8.0 (2) |
N.S. |
48.25 |
38.12 |
38.12 |
18.12 |
8.0 (2) |
P.E.I. |
47.37 |
38.12 |
38.12 |
19.62 |
10.0 (1) |
Nfld. |
48.64 |
36.12 |
27.12 |
18.12 |
8.0 (2) |
Yukon |
42.40 |
37.12 |
24.62 |
17.12 (3) |
- |
N.W.T. |
43.05 |
36.12 |
36.12 |
17.12 |
- |
Nunavut |
40.50 |
34.12 |
34.12 |
17.12 |
- |
- Provincial sales tax applies on GST. Effective combined rate is 15.025% in Québec and 17.7% in P.E.I.
- As part of the HST (combined rate is 15% with GST).
- The tax rate for M&P profits eligible for the small business deduction is 15.62%.
Prince Edward Island Budget Report 2005 is a publication of BDO Dunwoody LLP and Beaton Fitzpatrick Murray 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. Additional information can be obtained from Beaton Fitzpatrick Murray.
