2006 British Columbia Budget Report
February 21, 2006
Highlights
- Budget Surplus for 2005-06 Tax on Dividends to be Reduced
- Targeted Sales Tax Relief
Overview
"The British Columbia we're building for tomorrow"
Today, the Honourable Carole Taylor delivered her first full budget as Minister of Finance. With a strong economy, the government was able to report its second surplus in a row, a significant achievement in improving the province's finances. Expectations are that the economy will remain strong and the budget focused on meeting the needs of the future.
For the 2005-06 fiscal year, the government is forecasting a budget surplus of $1.78 billion before a $300 million forecast allowance, similar to last year's surplus. For the 2006-07 fiscal year, the government is projecting a surplus of $1.45 billion, before setting aside $850 million in forecast allowances. Spending on the budget focused on enhanced services for children and expanded skills training programs designed, in the government's words, to keep the province growing with confidence. $421 million is targeted at programs for vulnerable children, while $400 million was set aside to increase training and skills development and to expand post-secondary education. This $400 million includes $90 million for a new tax credit program over three years to encourage businesses to help train the workforce - however, details will only be announced after consultation with industry representatives from around the province. The budget did contain some tax relief for homeowners through increases to the home owner grant and targeted sales tax relief. The government also announced that BC will change the way the province taxes dividends, in conjunction with the Federal changes in this area, details of which are expected to be included in the next Federal budget.
The following is a summary of the more important items of interest to our clients.
British Columbia Budget Projections
|
(in millions $) |
|
Original Estimate 2005/2006 |
Revised Forecast 2005/2006 |
Projected
2006/2007 |
Revenue |
30,746 |
33,430 |
33,393 |
Expenses |
(32,456) |
(33,709) |
(33,914) |
|
(1,710) |
(279) |
(521) |
Commercial crown corporation net income |
2,330 |
2,054 |
1,971 |
Forecast allowance |
(400) |
(300) |
(850) |
Surplus |
220 |
1,475 |
600 |
Income Tax Changes
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 announced that BC will enact changes to harmonize the province's rules with the Federal rules, once details on the Federal changes are announced.
Other Income Tax Changes
Medical Expense Credit - The maximum amount of medical expenses that can be claimed each year on behalf of dependent relatives will be increased from $5,000 to $10,000 per dependant (effective for 2005 and subsequent tax years).
Regional Film Tax Credits - As previously announced, the enhanced tax credit rates for film and video productions are extended to 2008. The basic Film Incentive BC tax credit rate will remain at 30 per cent for productions that begin prior to April 2008 and the basic Production Services Tax Credit will remain at 18 per cent for productions that begin prior to June 2008. In addition, the definition of the designated Vancouver area will be amended for the Film Incentive BC and Production Services Tax Credits (effective February 22, 2006). The effectiveness of this program will be studied in 2007.
BC Mining Tax Credits - The BC Mining Flow-through Share Tax Credit will be extended for three years to December 31, 2008 and the definition of excluded expenses for the purposes of the Mining Exploration Tax Credit is also amended.
Royalty and Deemed Income Rebate - BC will eliminate the royalty and deemed income rebate and harmonize with the Federal resource sector rules effective for tax years starting after 2006.
Sales Tax Changes
Exempt Software Services
Effective February 22, 2006, provincial sales tax (PST) on all labour services related to software will be eliminated. For example, exempt services will now include labour charges to install, configure, modify, repair and maintain computer software.
Production Machinery and Equipment
Effective February 22, 2006, the PST exemption for production machinery and equipment will be expanded to include businesses providing manufacturing services to manufacturers eligible for this exemption. As well, the exemption for pre-manufactured parts used to repair and maintain exempt machinery and equipment will be expanded to include parts purchased or leased by qualifying manufacturers to assemble qualifying machinery or equipment (note that materials remain subject to tax). Further clarification of the requirements to qualify for the exemption has also been provided.
Increased Vehicle Surtax Thresholds
The threshold at which the surtax on passenger vehicles will apply has been increased to $55,000 from $49,000, effective for vehicles purchased after February 22, 2006. The tax rates will apply as follows:
- 7 per cent on passenger vehicles valued at less than $55,000;
- 8 per cent on passenger vehicles valued at $55,000 or more, but less than $56,000;
- 9 per cent on passenger vehicles valued at $56,000 or more, but less than $57,000; and
- 10 per cent on passenger vehicles valued at $57,000 or more.
For leased passenger vehicles, the surtax thresholds will apply to the first lease payment due after February 22, 2006.
Repeal of Environmental Tax on New Tires
The $3 levy on each new pneumatic tire purchased or used in the province is to be repealed with the introduction of an industry stewardship program for tires. The industry stewardship program is expected to be introduced during 2006 and implemented by early 2007.
Other Changes
Other changes, effective February 22, 2006 (unless otherwise noted) include:
- An exemption from PST on the sale of custom and eligible modified software sold as part of a business (as a going concern);
- A partial refund of tax paid on parts and labour to convert shuttle buses and passenger buses to operate as hybrid electric vehicles or on HCNG (a blend of hydrogen and compressed natural gas) of up to $5,000 and $10,000 respectively;
- Clarifying changes to the definition of hybrid electric vehicle;
- Refund for the BC portion of the annual multi-jurisdictional vehicle tax paid on leases of short-term rental vehicles to the public for transportation of goods if PST is collected on the lease payments;
- Expansion of the list of items that qualifying bona fide farmers can purchase or lease for a farm purpose that are exempt from PST to include sand used for livestock bedding and heat; and
- Effective February 21, 2000, exemption on heat purchased for residential use (note that retroactive exemption allows residential purchasers who have paid tax to apply for a refund).
Other Changes
Home Owner Grant
Three changes will apply for the 2006 taxation year:
- The basic home owner grant will be increased from $470 to $570. For those recipients who are 65 or older, disabled or a veteran, the grant is increased from $745 to $845.
- The threshold for the phase-out of the home owner grant is increased from $685,000 to $780,000. For properties valued above the new threshold of $780,000, the grant is reduced by $5 for every $1,000 of assessed value in excess of the threshold (the grant is eliminated for properties valued at $894,000 for homeowners in general and at a value of $949,000 for seniors, veterans and the disabled).
- Disabled homeowners will now qualify for the additional grant if they purchase a residence that has been modified by a previous owner for use by a disabled person. The structural modifications must meet the homeowners' disability needs and have a value that exceeds $2,000.
Motor Fuel Tax Act
The following changes have been made, effective February 22, 2006:
- The authorized uses of coloured gasoline and diesel fuel are expanded to include any vehicle that is not licensed to operate on a highway regardless of the vehicle type or use.
- A partial tax refund is available for tax paid on fuel used in stationary motor vehicles to operate equipment for prescribed purposes. The list of prescribed purposes is expanded.
- The definitions of motive fuel and marine diesel fuel are amended to include biodiesel. This will ensure the appropriate clear or coloured fuel tax rate is applied when biodiesel is not blended with diesel fuel.
Small Business Venture Capital Act
The Small Business Venture Capital program provides credits for investments in eligible small businesses or in venture capital corporations which invest in eligible small businesses. For the 2006/07 program year, the tax credit budget for the program is increased from $20 million to $25 million.
Training and Skills evelopment Tax Credits
Over the next three years, $90 million will be set aside for a new credit program that will be designed in consultation with industry representatives to help meet the demand for skilled workers.
Property Transfer Tax Act
The following administrative changes have been made, effective February 22, 2006:
- The exemption for transfers of land to the Public Guardian on behalf of a minor is amended.
- The definition of “family farm corporation” is clarified to provide that all shareholders must be individuals to qualify for exemption.
- An exemption from property transfer tax is provided on the amalgamation of two or more BC societies under the Society Act.
- Where sales tax and property transfer tax are both paid on the same portion of the value of property, a refund of property transfer tax will be available.
Mineral Tax Act
To ensure the mineral tax applies to the full selling price of the minerals in cases where two or more related persons operate a mine, the definition of gross revenues from mining operations is clarified, effective January 1, 2006.
Hotel Room Tax
Effective February 22, 2006, the low cost lodging exemption threshold is increased from $20 to $30 per night. As well, the continuous stay exemption is expanded, reducing the continuous stay period from 2 months to 1 month.
School Act
For the 2006 calendar year, the average residential school property tax rates will be increased by 2 per cent, the provincial inflation rate for 2005.
Taxation (Rural Area) Act
For the 2006 calendar year, the provincial rural residential tax rate has been reduced due to rising average assessed values. Average residential provincial rural area taxes will increase by the 2 per cent provincial inflation rate.
How BC Compares
The following chart compares top personal and corporate tax rates and sales taxes for all provinces and territories, as announced to February 21, 2006.
|
Top 2006 |
Top Corporate Rates |
|
|
Personal Rates
% |
General
% |
M&P
% |
Small Business
% |
Retail Sales
Tax
% |
BC |
43.70 |
34.12 |
34.12 |
17.62 |
7.0 |
Alta. |
39.00 |
33.62 |
33.62 |
16.12 |
- |
Sask. |
44.00 |
39.12 |
32.12 |
18.12 |
7.0 |
Man. |
46.40 |
37.12 (4) |
37.12 (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 be reduced to 36.62% on July 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.
British Columbia 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. Additional information can be obtained from your nearest BDO Dunwoody LLP office or through our Internet World Wide Web home page at www.bdo.ca.
