2006 Alberta Budget Report
March 22, 2006
Highlights
- Budget Surplus of $7.4 Billion Projected for 2005-06
- Budget Surplus of $4.1 Billion Estimated for 2006-07
- General Corporate Income Tax Rate to Fall April 1st
- Major Capital Expenditures Announced
Overview
"Strengthening Today, Securing Tomorrow"
Under this tagline, the Honourable Shirley McClellan today presented her second budget as Minister of Finance for Alberta. And keeping these promises won't present much of a challenge given the revenue the province is currently generating. With oil prices at near record levels and a booming economy, Alberta's financial outlook is the envy of governments everywhere.
The projected surplus for the 2005-06 fiscal year, originally forecast to be $248 million after a net transfer to the province's Sustainability Fund of $2.6 billion, is now forecast to be a balanced budget. However, this is very misleading. The actual surplus for 2005-06 is now expected to be a staggering $7.4 billion. With a transfer from the capital account for capital grants, the province will transfer almost $9.2 billion to the Sustainability Fund, the Heritage Fund, the capital account (which will fund capital spending in future years) and other funds. The estimated budget surplus for 2006-07, before any transfers to the various funds of the province, is expected to be $4.1 billion. However, this seems low considering the budget for the upcoming year assumes oil prices of $50 US per barrel, well below the current price.
With all this cash, the government did loosen the purse strings with increased spending in infrastructure, health and education. Operating spending will increase in the next fiscal year by 8.3% and capital spending of $13.3 billion over 4 years was announced. However, as expected, taxpayers were left disappointed as tax relief was limited to a cut to the province's general corporate tax rate and a minor increase in the personal tax credit for individuals.
The following is a summary of the more important items of interest to our clients.
Alberta Budget Projections
|
(in millions $) |
|
Original
Estimate
2005/2006 |
Revised
Forecast
2005/2006 |
Projected
2006/2007 |
Revenue |
$27,346 |
$34,601 |
$32,408 |
Program Expenses |
(25,535) |
(26,966) |
(28,067) |
Debt Servicing Costs |
(291) |
(260) |
(245) |
Net Revenue |
1,520 |
7,375 |
4,096 |
Transfers from (to)
- Sustainability Fund
- Capital Account |
(2,546)
1,274 |
(9,170)
1,795 |
(5,692)
1,896 |
Contingency Allowance |
$248 |
¾ |
$300 |
Personal Tax Changes
Personal Exemption Increased
Under current rules, most Alberta tax credits are indexed for inflation - for 2006, these tax credits were increased by 1.9% when compared with the corresponding amounts for 2005. Today, the Finance Minister announced that the basic personal credit, the spousal/partner credit and the eligible dependant credit (for taxpayers without a spouse or partner) will be increased by an additional $100. With indexing and today's increase, the basic, spousal/partner and eligible dependant amounts will be $14,899 for 2006.
Taxation of Dividends
Last year, the Federal Liberal government announced plans to amend the income tax rules for individuals who receive dividends from Canadian corporations. Under current rules, when an individual receives a dividend, that dividend is grossed-up by 25% to reflect the pre-tax corporate profit, and a credit is allowed to the individual to reflect taxes paid by the corporation. Despite this gross-up and credit system, the Federal tax system and the tax systems in most provinces were not "integrated" with respect to business income not eligible for the corporate small business deduction as less overall tax would be paid where an individual earns income directly when compared with the combined corporate and personal tax payable where the same income is earned by a corporation and the net income after tax is paid as a dividend to the individual. Under the Federal proposal, the gross-up factor will be increased to 45%, and there will also be an increase to the Federal dividend tax credit. These changes will ensure that a similar amount of overall tax is paid on income earned directly and income passing through a corporation.
Today, the Finance Minister did not commit to following the Federal government's initiative, but she did state that the government would review the issue once details on the Federal changes are announced and will make an announcement later in the year on whether Alberta would follow the Federal government.
Corporate Tax Changes
Corporate Income Tax Rate Cut
Currently, the Alberta general corporate income tax rate (the rate payable on income not eligible for the small business deduction) sits at 11.5%. The Minister announced that this rate will be cut to 10%, effective April 1, 2006. The small business income tax rate remains at 3%.
Income Trusts
The popularity of income trusts as a business vehicle is well documented. By converting a corporate-owned business to an income trust, corporate income taxes are avoided as trust income is allocated to the trust interest owners (who pay tax on the income). Where the trust interest is held in deferred income plans such as RRSPs, RRIFs and pension plans, no tax is paid on the income until taxable payments are received from the plan. The Government stated that under one estimate, Alberta's net revenue loss due to income trust conversions is about $400 million annually. As part of its ongoing review of the tax system, Alberta is examining this issue.
Other Measures
School Property Tax Rates Cut
The government will reduce school property tax rates by about 7.1% for 2006. Rates for residential and farm property will fall to $4.80 from $5.17 per $1,000 of equalized assessment. Commercial property rates will be reduced to $7.05 from $7.59 per $1,000 of equalized assessment.
The government also reiterated its commitment to protect seniors from year-to-year increases in school property taxes and will continue to provide a rebate to eligible seniors.
Health Care Insurance Premiums
Currently, full and partial premium subsidies are available to reduce the cost of health care insurance premiums for all seniors and for lower income individuals, couples and families. In the budget, the government has announced that the income levels under which the premium subsidies are available for those with lower income will be raised by $5,000 effective April 1, 2006. The income thresholds for the full subsidy will be increased to $17,450 from $12,450 for an individual, to $26,200 from $21,200 for a couple, and to $32,210 from $27,210 for a family. The income thresholds at which the subsidy will be completely phased-out will be increased to $20,970 from $15,970 for an individual, to $33,240 from $28,240 for a couple, and to $39,250 from $34,250 for a family.
How Alberta Compares
The following chart compares top personal and corporate tax rates and sales taxes for all provinces and territories, as announced to March 22, 2006.
|
Top 2006
Personal Rates
% |
Top Corporate Rates for 2006 |
Retail Sales
Tax
% |
General
% |
M&P
% |
Small Business
% |
BC |
43.70 |
34.12 |
34.12 |
17.62 |
7.0 |
Alta. |
39.00 |
33.62 (7) |
33.62 (7) |
16.12 |
- |
Sask. |
44.00 |
39.12 |
32.12 |
18.12 |
7.0 |
Man. |
46.40 |
36.62 (4) |
36.62 (4) |
17.62 |
7.0 |
Ont. |
46.41 |
36.12 |
34.12 |
18.62 |
8.0 |
Qué. |
48.22 |
32.02 |
32.02 |
21.62 |
7.5 (1) |
N.B. |
46.84 |
35.12 |
35.12 |
15.12 (5) |
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 (6) |
36.12 (6) |
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%.
- The general and M&P tax rate will now be reduced to 36.62% effective January 1, 2006.
- The small business tax rate will be reduced to 14.62% on July 1, 2006.
- The general and M&P tax rate will be reduced to 33.62% on July 1, 2006.
- The general and M&P tax rate will be reduced to 32.12% on April 1, 2006.
Alberta Budget Report 2006 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. For additional information, contact your BDO advisor or visit us at www.bdo.ca.
