2006 Prince Edward Island Budget Report
March 30, 2006
Highlights
- Corporate Small Business Tax Rate to be Cut to 1%
- Deficit of $18 Million Now Forecast for 2005-06
- Projected Deficit of $12.5 Million for 2006-07
- Balance Budget Predicted for 2007-08
Overview
"On Course. On Target."
Today, the Honourable Mitch Murphy tabled his third budget as Provincial Treasurer. Unlike his first two budgets, the economic news was more upbeat this year. GDP growth for 2006 is predicted to be 2.2%, which is a slight improvement from 2005. Employment on the Island increased by 1.9%, which helped reduced the unemployment rate for 2005 to 10.8% - the lowest level in 25 years.
The revised consolidated deficit forecast for 2005-06 is $18 million, down from the original estimate of $22 million. The decrease is due to stronger than expected revenue, and especially, a net surplus from crown corporations (which was previously estimated to be a deficit). The projections for 2006-07 show a deficit of $12.5 million. The Treasurer also announced that the province is in line to balance the budget for the 2007-08 fiscal year.
In the 2006-07 fiscal year, program expenditures will increase by $40.2 million when compared with the original budgeted expenditures for the 2005-06 fiscal year. Most of the increase will be devoted to healthcare ($19.2 million), education ($10.6 million) and expenditures for social services and seniors ($8.2 million).
There was very good news for corporate taxpayers today, as the province announced a five-year program which will reduce the small business corporate income tax rate to 1% by April 1, 2010 - the lowest small business rate in Canada (matching the 1% rate that was announced last year by New Brunswick). There was more good news - no tax increases were announced.
The following is a summary of the more important budget measures of interest to our clients.
Prince Edward Island Consolidated Projection
(in millions $) |
| |
Original
Estimate 2005/2006 |
Revised Forecast 2005/2006 |
Projected
2006/2007 |
| Revenue |
1,105.7 |
1,116.8 |
1,154.6 |
| Program expenditures |
(972.7) |
(989.8) |
(1,012.9) |
| Interest charges on debt |
(114.0) |
(112.5) |
(118.3) |
| Depreciation |
(38.9) |
(36.9) |
(37.8) |
| Net surplus (deficit) of crown entities |
(2.1) |
4.4 |
1.9 |
| Consolidated Deficit |
(22.0) |
(18.0) |
(12.5) |
Corporate Tax Changes
Corporate Income Tax Cut For Small Businesses
Following up on last year's 1% reduction of the corporate income tax rate that applies on small business income, the Treasurer announced further plans to assist small businesses by decreasing the small business tax rate over the next five years. The rate, which is currently 6.5%, will be reduced by 1.1% annually, effective April 1st of each year until the small business rate is reduced to 1% by the end of the five-year plan.
| Effective Date |
Tax Rate for Canadian-Controlled Private Corporations on Active Business Income up to $300,000 |
| April 1, 2006 |
5.4% |
| April 1, 2007 |
4.3 |
| April 1, 2008 |
3.2 |
| April 1, 2009 |
2.1 |
| April 1, 2010 |
1.0 |
The Treasurer also made a general statement that the government will be reviewing ways to reduce its general corporate tax rate, which currently stands at 16%.
Personal 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 (DTC). 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 Treasurer announced that the provincial DTC will be adjusted (i.e. decreased) to ensure integration is maintained with respect to the small business corporate income (although specific changes were not disclosed).
Note that no reference was made in the budget documents to the Federal initiative to improve integration for income not eligible for the small business deduction. A reduction of the provincial DTC without a decrease in the general corporate tax rate will actually make the “disintegration cost” higher for corporate business income that doesn’t qualify for the small business deduction. So, it is hoped that the province will participate in the Federal government’s initiative along with reducing the general corporate tax rate.
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, 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 |
21.12 (8) |
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 (9) |
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.
- The small business tax rate was reduced from 21.62% on March 24, 2006.
- The small business tax rate will be reduced to 18.52% on April 1, 2006.
Prince Edward Island Budget Report 2006 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.
