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April 4, 2007

Highlights

• Summary Surplus of $166 Million Forecast for 2006-07
• General Corporate Tax Rate Cut Confirmed and Expanded
• New Cuts Proposed to Corporate Small Business Rate
• Personal Tax Rates Reduced

Overview

“The Building Budget"

Today, the Honourable Greg Selinger presented his eighth budget as Minister of Finance. With a continuing strong economy, the province took the opportunity to continue to invest in key areas and also included some tax relief.

The surplus for the 2006-07 fiscal year, originally budgeted at $148 million, is now forecast to be $166 million after a budgeted $110 million transfer to the province's Debt Retirement Fund. However, this surplus did include $75 million drawn from the province's Fiscal Stabilization Fund (FSF). For the 2007-08 fiscal year, the province has budgeted for a surplus of $175 million which includes draws from the FSF of $37 million and a $110 million payment to the Debt Retirement Fund. Note that these numbers fully reflect General Accepted Accounting Principles (GAAP), fulfilling the government's commitment to convert their financial reporting to GAAP, and also includes consolidated amounts from Crown Corporations and other entities.

The government announced new spending in all areas, including health care, education and infrastructure. The budget also included personal and corporate income tax cuts, including cuts to both the general corporate and small business rates.

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

Manitoba Budget Projections (in millions $)
	Original Estimate 2006/2007	Revised Forecast 2006/2007	Projected 2007/2008
Revenue	8,764	8,839	9,302
Expenditures	(8,623)	(8,801)	(9,226)
Transfer to Debt Retirement Fund	(110)	(110)	(110)
Transfer from Fiscal Stabilization Fund	85	75	37
Restatement Adjustment	(113)	--	--
Budgetary Surplus	3	3	3
Consolidated Surplus on a SummaryBasis (includes government organizations)	148	166	175

Personal Tax Changes

Personal Tax Rate Changes

In today's budget, the Finance Minister announced tax cuts to the low and middle personal tax brackets. Effective January 1, 2008, the middle bracket tax rate will be reduced from 13.0% to 12.75% and the threshold between the middle and top brackets will increase from $65,000 to $66,000. Further changes to brackets and rates will be made beginning in 2009, subject to affordability. The following chart summarizes the changes that have been proposed.

Tax Year	First Bracket Rate	Middle Bracket Threshold	Middle Bracket Rate	Top Bracket Threshold
2007 2008 2009 2010 2011	10.90% 10.90% 10.80% 10.70% 10.50%	$30,544   30,544   31,000   32,000   35,000	13.00% 12.75% 12.75% 12.75% 12.75%	$65,000   66,000   67,000   68,000   70,000
Note: all changes planned after 2008 are subject to balanced budget requirements.

Manitoba Tuition Fee Income Tax Rebate

The Minister announced that individuals that graduate on or after January 1, 2007 from a post-secondary institution recognized by the Canada Revenue Agency, and who currently work and pay income tax in Manitoba, can claim 60% of eligible tuition fees paid on or after January 1, 2004. The maximum lifetime rebate is $25,000 (which is equivalent to a 60% rebate on tuition fees of $41,667). The rebate does not affect bursaries and scholarships or existing tax credits for education and tuition fees. Recognized institutions may be located anywhere in the world, and include private colleges.

The maximum claim per year is the least of all of the following:

• Manitoba income tax payable in the taxation year;
• 10% of eligible tuition fees (10% of eligible tuition fees per year for six years totals 60% of the fees);
• $2,500.

Unused claims can be carried forward for up to 20 years.

Basic Personal Amount

The Basic Personal Amount is increased by $200 to $8,034, effective January 1, 2008.

Spousal Amount and Eligible Dependent Amount

A taxpayer can claim a non-refundable tax credit for a dependent spouse (the spouse or common-law partner amount) or, if the taxpayer is a single parent, for one dependent child under 18. Effective January 1, 2008, the maximum spouse or common-law partner amount is raised from $6,482 to $8,034 to equal the Basic Personal Amount. The Budget document infers that the Eligible Dependent Amount is also raised from $6,482 to $8,034 effective January 1, 2008.

Manitoba Family Tax Benefit

The calculation of Manitoba tax currently involves four steps once taxable income has been determined:

• Manitoba tax on taxable income is calculated;
• non-refundable tax credits are subtracted;
• the Family Tax Reduction (FTR) is subtracted; and
• other credits are subtracted.

Effective January 1, 2008, the FTR is folded into a renamed Manitoba Family Tax Benefit under the non-refundable tax credit block. By removing one step of the calculation, the process is more streamlined. This change does not affect eligibility or reduce benefits for any taxpayers.

Manitoba Mineral Exploration Tax Credit

The Manitoba Mineral Exploration Tax Credit is a 10% non-refundable personal income tax credit which is earned when Manitobans purchase flow-through shares in exploration companies to finance Manitoba exploration projects. The Minister announced that this credit is extended for one year, to March 31, 2008.

Corporate Tax Changes

Corporate Tax Cuts

Again this year, cuts were announced to the general corporate tax rate and the rate that applies to income qualifying for the small business deduction. The general rate reduction from 14.0% to 13.0% was confirmed and will apply effective July 1, 2008. In addition, subject to affordability, this rate will be reduced further to 12.0%, effective July 1, 2009.

In addition, new cuts to the small business tax rate were announced. The small business rate will be reduced from 3% to 2% effective January 1, 2008, and subject to affordability, to 1% effective January 1, 2009. The dividend tax credit that applies to ineligible dividends will be adjusted accordingly. The following chart summarizes the tax rates that will apply:

Corporate Tax Rates
Taxable Income	2007	2008	2009
$0 - $400,000 $400,000 and over and non-active income	3% 14%	2% 13% (2)	1% (1)   12% (1) (2)
(1)  Subject to budget balancing requirements (2)  Effective July 1

Film and Video Production Tax Credit

The Film and Video Production Tax Credit is scheduled to expire in March 2008. Today, the Minister announced a three-year extension for this credit to March 1, 2011.

Community Enterprise Development Tax Credit

The Community Enterprise Development Tax Credit is a non-refundable personal income tax credit for resident Manitobans investing in qualifying securities in eligible community enterprise development projects. The Minister announced the expansion of this credit to include a new 30% provincial non-refundable income tax credit for individuals and corporations in Manitoba investing directly in emerging enterprises. This credit will be available to individuals and corporations who invest a minimum of $20,000 in eligible securities acquired on or after January 1, 2008. The maximum annual tax credit available will be $45,000 and there will be a lifetime limit of $450,000 that an investor can contribute to a qualifying investee corporation. These securities will not qualify as registered savings plan investments.

Manufacturing Investment Tax Credit

Today, the Minister announced that the refundable portion of the Manufacturing Investment Tax Credit will be increased to 50% from 35% for qualified property acquired on or after January 1, 2008.

Capital Tax Reduced

Under current rules, a corporation is allowed to claim a $10 million deduction in calculating taxable capital. The capital tax rate for corporations with taxable paid-up capital between $10 million and $20 million is 0.3% and the rate for corporations with taxable paid-up capital over $20 million is 0.5%.

Last year's budget contained proposals to reduce the rates effective July 1, 2008, subject to affordability. Today, the Minister confirmed the capital tax rate reduction and accelerated the date to January 1, 2008. The rate will be reduced from 0.5% to 0.4% for corporations with taxable paid-up capital over $21 million and from 0.3% to 0.2% for corporations with taxable paid-up capital between $10 million and $20 million. There is a notch provision for total paid-up capital between $20 million and $21 million.

Furthermore, today's budget contained commitments by the government to eliminate the general capital tax, except for Crown corporations, by December 31, 2010, subject to affordability.

Other Measures

Federal Harmonization

As Manitoba uses federal tax rules for calculating income for both individuals and corporations, many of the federal tax changes that have been announced recently will apply automatically. The budget documents highlighted that Manitobans will benefit from the following initiatives:

• The new pension income-splitting measure will apply effective January 1, 2007.
• The capital gains exemption will increase to $750,000 for dispositions after March 18, 2007.
• The capital cost allowance (CCA) rate for manufacturing or processing machinery and equipment is improved from a 30% declining-balance write-off to a 50% straight-line write-off, on acquisitions after March 18, 2007 and before 2009. All other CCA changes announced in the 2007 federal budget will also apply.
• The tax benefit of donating securities to public charities is now extended to gifts to private foundations.
• The meal expense deduction for long-haul truckers is increased from 50% to 80% over the next five years.
• The age limit for maturing Registered Pension Plans and Registered Retirement Savings Plans is increased from 69 to 71.
• An increased tax deduction for donations by corporations of inventoried medicines destined for developing countries is introduced.

Payroll Tax

Today's budget proposed to increase the payroll exemption under the Health & Post-Secondary Education Tax Levy to $1.25 million from $1.0 million of annual payroll, effective January 1, 2008. As well, the threshold below which employers pay a reduced rate is raised to $2.5 million from $2.0 million.

Education Property Tax Credit

The base amount of this credit is increased from $400 to $525. The majority of homeowners will have this amount subtracted from their 2007 property tax bills, with the Province reimbursing school divisions and municipalities accordingly. Renters will receive the increased amount when they file their 2007 income taxes.

Farmland School Tax Rebate Increased

The Farmland School Tax Rebate provides a rebate of the school division special levy on farmland. In 2007, this rebate will be increased to 65% from 60% of the special levy on farmland. As well, the Minister announced that the rebate rates are to increase by 5% annually until it reaches 80% by 2010.

Green Energy Manufacturing Tax Credit

A new refundable Green Energy Manufacturing Tax Credit was announced in today's budget to promote the production and purchase for use in Manitoba of new machinery and equipment used to generate renewable energy. The credit will be equal to 10% of the value of qualifying property produced in Manitoba and sold for residential or commercial use in Manitoba before 2019. Qualifying property will initially include equipment for wind power, solar energy, geothermal energy and hydrogen fuel cells.

Retail Sales Tax Exemption

The Retail Sales Tax exemption currently available on manure slurry tanks and lagoon liners for use in farm livestock operations is extended for a further two years to June 30, 2009.

Other Technical and Administrative Measures

Other measures contained in today's budget include:

• Interest and Penalties under the Insurance Corporations Tax Act - The Insurance Corporations Tax Act will be amended to allow for the discretionary waiver of interest and penalties.
• Riparian Tax Credit - A regulation will be introduced to allow for a new intake of applications for the Riparian Tax Credit.
• Streamlining Administration - The following measures will be implemented to reduce paperwork and tax administration costs for business:
• Crafters, hobbyists and other small home-based businesses will no longer be required to register and collect Retail Sales Tax.
• Corporations remitting Capital Tax of $5,000 or less per year will no longer be required to pay quarterly installments.
• The application of sales tax on electricity and natural gas will be amalgamated under the Retail Sales Tax Act.

How Manitoba Compares

The following chart compares top personal and corporate tax rates and sales taxes for all provinces and territories, as announced to April 4, 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	46.95	35.12	35.12	18.12	8.00 (3)
NS	48.25	38.12	38.12	18.12	8.00 (3)
PEI.	47.37	38.12	38.12	17.42 (4)	10.00 (2)
Nfld.	48.64	36.12	27.12	18.12	8.00 (3)
Yukon	42.40	37.12	24.62	17.12 (5)	-
NWT.	43.05	33.62	33.62	17.12	-
Nunavut	40.50	34.12	34.12	17.12	-

1. The general tax rate will be reduced to 35.12% on July 1, 2007.
2. Provincial sales tax applies on GST. Effective combined rate is 13.95% in Québec and 16.6% in P.E.I.
3. As part of the HST (combined rate is 14% with GST).
4. The small business tax rate was reduced from 18.52% on April 1, 2007.
5. The tax rate for M&P profits eligible for the small business deduction is 15.62%.

Manitoba 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. For additional information, contact your BDO advisor or visit us at www.bdo.ca.