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February 20, 2007

Highlights

• Budget Surplus for 2006-07
• Large Personal Tax Cuts for 2007 and 2008
• New Apprentice Tax Credits Introduced
• Tax Administration to be Streamlined

Overview

"Building a Housing Legacy"

Today, the Honourable Carole Taylor delivered her second budget as Minister of Finance. With a strong economy and government revenues, the government decided to make housing their focus, with the budget providing resources in an attempt to ensure that every British Columbian has access to safe, affordable housing.

For the 2006-07 fiscal year, the government is forecasting a budget surplus of $3.15 billion before a $300 million forecast allowance, which is over a billion dollars higher than last year's surplus. This is the province's third strong surplus in a row. For the 2007-08 fiscal year, the government is projecting a surplus of $1.15 billion, before setting aside $750 million in forecast allowances.

With housing costs among the highest in the country, the government felt the need to address this issue. Spending was announced to help get homeless people in shelters and to enhance housing support for low-income families. For homeowners, the Property Transfer Tax relief under the First Time Home Buyer's Program was enhanced, as was the Home Owner Grant. Other spending initiatives focused on the environment, heath care, programs for people in need, economic development and support for policing, corrections and the justice system.

Taxpayers were also rewarded with cuts to the personal income tax rate for all tax brackets except the highest bracket, which applies to taxable income in excess of $95,909. These rate cuts will be phased-in over 2007 and 2008, with adjustments to deductions at source taking place effective July 1, 2007. When fully implemented, personal income tax on the first $100,000 of income will be reduced by 10%.

The following is a summary of the more important items of interest to our clients.

British Columbia  Budget Projections
(in millions $)
	Original Estimate 2006/2007	Revised Forecast 2006/2007	Projected 2007/2008
Revenue	33,393	35,464	34,887
Expenses	(33,914)	(34,890)	(36,240)
	(521)	574	(1,353)
Commercial crown corporation net income	1,971	2,576	2,503
Forecast allowance	(850)	(300)	(750)
Surplus	600	2,850	400

Income Tax Changes

Personal Tax Rate Reductions

Effective for the 2007 and subsequent tax years, the province will reduce the four lowest personal income tax bracket rates, as follows:

Taxable Income	Current	Revised	Revised
Range (2007 brackets)	2007	2007	2008
$0 to $34,397	6.05%	5.70%	5.35%
$34,397 to $68,794	9.15%	8.65%	8.15%
$68,794 to $78,984	11.70%	11.10%	10.50%
$78,984 to $95,909	13.70%	13.00%	12.29%
Over $95,909	14.70%	14.70%	14.70%

Lower-income individuals will also benefit from a reduction in the phase-out rate for the BC Tax Reduction - the rate will be reduced from 3.6 per cent to 3.4 per cent for 2007 and to 3.2 per cent for 2008 and subsequent tax years. Note that rates will be adjusted effective July 1, 2007 for source deduction purposes.

Adoption Expense Credit

Effective for the 2007 and subsequent tax years, the province will provide an adoption expense tax credit. The credit will be harmonized with the federal adoption expense tax credit and will be calculated at the lowest tax rate for the year. The maximum amount of expenses that will qualify for 2007 will be $10,445, and this amount will be indexed thereafter.

BC Training Tax Credit

As previously announced, new training tax credits for employers and employees have been introduced to help address the skill shortage in BC. The basic credit for employers will be 10 per cent of wages paid up to $2,000 per apprentice in the first 24 months of a non-Red Seal apprenticeship program (Red Seal apprenticeships are eligible for a federal credit). For employees, the basic credit will be $1,000 per year for completing the first year or second year levels of any non-Red Seal apprenticeship program.

Additional completion credits will apply to both Red Seal and non-Red Seal apprenticeship training programs. The employer credits will be the lesser of $2,500 or 15 per cent of wages paid to an apprentice that completes level 3 of any apprenticeship program, and up to $3,000 or 15 per cent of wages paid to an apprentice that completes level 4 or higher of any apprenticeship program. The employee credits will be $2,000 for an apprentice that completes level 3 of any apprenticeship program, and $2,500 for an apprentice that completes level 4 or higher of any apprenticeship program.

Employer and employee credits available in respect of eligible disabled or First Nations apprentices will be 50% higher than the amount otherwise calculated. The new credits are available for wages paid after December 31, 2006 (2007 taxation year for employees) and the program will expire effective January 1, 2012.

Other Changes

A number of other changes were announced, which are summarized below:

• The BC Sales Tax Credit rules will be amended to exclude the federal Universal Child Care Benefit from the definition of income.
• Changes will be made to ensure double taxation does not arise where an individual claims a foreign tax credit and is subject to alternative minimum tax.
• Effective for eligible expenses incurred after February 20, 2007, mining exploration in prescribed Mountain Pine Beetle affected areas will be eligible for an enhanced mining exploration tax credit rate of 30 per cent, up from 20 per cent.
• The SR & ED Tax Credit will be extended to partnerships effective for eligible expenditures incurred after February 20, 2007 and can be claimed by corporations that are active members of a partnership.
• The new dividend tax credit was confirmed at a rate of 12 per cent of eligible taxable dividends. These changes apply for the 2006 taxation year.
• The Book Publishing Tax Credit and the SR & ED Tax Credit will be extended for five years, to April 1, 2012 and to September 1, 2014 respectively.

Sales Tax Changes

As a result of a review of provincial sales tax policies by the Ministry of Small Business and Revenue, designed to simplify, streamline and enhance the fairness of the sales tax, the following measures were announced.

Tax Remittances

Changes for tax returns and payments under the Social Service Tax Act and the Hotel Room Tax Act include the following:

• The due date for remitting tax returns and payments under these Acts is extended from the 15th day to the 23rd day of the month, effective April 1, 2007.
• Tax returns and payments under these Acts must actually be received by the province by the due date in order to be considered remitted on time, effective April 1, 2007.
• The threshold for quarterly, semi-annual or annual reporting deadlines is increased effective February 21, 2007. Businesses with annual tax remittances of $12,000 or less may now qualify depending on the nature of their business and compliance history.

Audits, Refunds and Record Keeping

Amendments under the Social Service Tax Act, Hotel Room Tax Act, Motor Fuel Tax Act and Tobacco Tax Act include the following:

• Audit assessment limitation periods (with the exception of fraud cases where there is no limitation period) are reduced to four years from six years, effective for tax assessments issued on or after February 21, 2007.
• Likewise, the refund limitation period is also reduced to four years from six years. Applications for the current six year limitation must be received by April 30, 2007.
• Record retention periods are reduced to five years from seven years, effective February 21, 2007.

Other changes, effective February 21, 2007, include:

• Audits of liquor licencees will be reduced to three years.
• Qualifying individuals who have annual gross revenues of $10,000 or less from selling tangible personal property (excluding certain vehicles, aircraft, vessels and liquor or parking rights) are not required to register, collect and remit taxes on those sales.

Exemptions

Changes to Provincial Sales Tax (PST) exemptions, effective February 21, 2007 (unless otherwise noted) include:

• Additional equipment will now qualify for the PST exemption for production machinery equipment used for oil and gas exploration and development.
• An exemption from PST for emergency roadside motor vehicle tire change services is provided so all road side services are now exempt from PST.
• An exemption from PST is available on prescription medications provided for promotional purposes to a physician, dentist or veterinarian.
• Tax on equipment acquired for lease and occasionally supplied with an operator is simplified.
• The PST exemption for catalysts and direct agents used in a chemical reaction to manufacture or transform a product for sale or lease is expanded.

Further Consultations

The government will hold further consultations to develop recommendations in the following areas: farmers' exemptions, work-related safety equipment exemptions, tax application to real property improvements, transfer of business assets to and from partnerships, trusts and amalgamations, special registration permits and audit sampling techniques.

Other Changes

The following PST changes have been made, effective February 21, 2007:

• The exemption for storm windows and storm doors, multi-glazed windows, doors containing multi-glazed windows, and glass and other materials is restructured to apply only to "ENERGY STAR Qualified" products.
• The exemption for the purchases or leases of home heating equipment, listed as being "ENERGY STAR Qualified", is extended.
• The existing provincial sales tax relief for hybrid electric passenger vehicles is extended to March 31, 2011. Hybrid electric passenger vehicles will be eligible for a 100 per cent reduction of sales tax up to a maximum of $2,000 if purchased or leased before April 1, 2011.
• The Act is amended to exclude the value of manufacturers' rebates from the taxable purchase price of motor vehicles if the rebate is provided by the manufacturer to the seller of the vehicle as a condition of the sale of the vehicle.
• Refunds of provincial sales tax will be available to a registered charity or an eligible hospital auxiliary on medical equipment purchased on or after February 21, 2007.
• The Act is amended to clarify that grain, mill and other agricultural feeds and seeds are exempt when purchased and used solely for an agricultural purpose.

Other Changes

Mineral Tax Act

Effective February 21, 2007, the new mine allowance, is being extended to January 1, 2016 from January 1, 2010. The allowance encourages new mine development in the province by effectively providing a deduction of 133.3 per cent of capital costs for mines that commence production between December 31, 1994 and January 1, 2016 or that expand existing mines during that same period.

Motor Fuel Tax Act

Effective February 21, 2007, the Motor Fuel Tax Regulation is amended to:

• Allow all biodiesel fuel to be eligible for alternative motor fuel status.
• Clarify that propane used in any motor vehicle or machinery for farming purposes is exempt from tax.

Property Transfer Tax Act

The following changes have been made, effective February 21, 2007:

• The fair market value threshold for eligible residential property under the First Time Home Buyers' Program is increased and will apply throughout the province. The new threshold will be $375,000, which is increased from $325,000 in the Capital Regional District, Fraser Valley Regional District and Greater Vancouver Regional District, and from $265,000 in other areas of the province.
• Under the First Time Home Buyers' Program, eligible families purchasing homes from BC affiliates of Habitat for Humanity Canada can claim an exemption if the fair market value of the home is less than a threshold.

Home Owner Grant Act

Two changes will apply for the 2007 taxation year:

• The threshold for the phase-out of the home owner grant is increased from $780,000 to $950,000. For properties valued above the new threshold of $950,000, 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 $1,064,000 for homeowners in general and at a value of $1,119,000 for seniors, veterans and the disabled).
• The homeowner grant is provided to some low-income homeowners who, but for the high assessed value of their home, would receive the additional home owner grant. This measure ensures that low-income seniors and other qualified individuals who own and reside in properties that have increased in value beyond the threshold but who may face financial hardship receive some or all of the homeowner grant.

School Act

The following changes were announced with respect to school property taxes:

• For the 2007 calendar year, the average residential school property tax rates will be increased by 2 per cent, the provincial inflation rate for 2006.
• The total non-residential school tax revenue for 2007 will be limited to inflation plus new construction. There are seven non-residential property classes and the adjustment to rates may differ by property class and will be set when revised assessment roll data are available.
• A new exemption from school tax for specified improvements of wind power projects is effective for the 2007 tax year.

Taxation (Rural Area) Act

For the 2007 calendar year, the average residential provincial rural area taxes will increase by the 2 per cent provincial inflation rate for 2006. The rates for non-residential provincial rural properties will be based on limiting the change in total tax revenue from these properties to inflation plus new construction.

Land Tax Deferment Act

BC provides a low interest loan program that allows qualifying BC owners to defer annual property taxes on their principal residences. For the 2007 calendar year, owners may begin to defer property taxes on their home if they are 55 years old (lowered from 60 years old).

Ports Property Tax Act

Eligible ports property that becomes taxable during the year through the occupation of Crown Land will be allowed the designation for the ports property tax rate cap. This designation will be available in the year the property becomes taxable.

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 20, 2007.

	Top 2007	Top Corporate Rates
	Personal Rates %	General %	M&P %	Small Business %	Retail Sales Tax %
BC	43.70	34.12	34.12	17.62	7.00
Alta.	39.00	32.12	32.12	16.12	-
Sask.	44.00	36.12 (1)	32.12	17.62	5.00
Man.	46.40	36.12	36.12	16.12	7.00
Ont.	46.41	36.12	34.12	18.62	8.00
Qué.	48.22	32.02	32.02	21.12	7.50 (2)
NB	46.84	34.12	34.12	14.62 (3)	8.00 (4)
NS	48.25	38.12	38.12	18.12	8.00 (4)
PEI .	47.37	38.12	38.12	18.52 (5)	10.00 (2)
Nfld.	48.64	36.12	27.12	18.12	8.00 (4)
Yukon	42.40	37.12	24.62	17.12 (6)	-
NWT.	43.05	33.62	33.62	17.12	-
Nunavut	40.50	34.12	34.12	17.12	-

British Columbia Budget Report 2007 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.