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February 19, 2008

Highlights

• Budget Surplus for 2007-08
• New Carbon Tax Introduced
• Climate Action Credit Introduced
• Personal and Corporate Income Taxes Reduced

Overview

"Turning to the Future, Meeting the Challenge"

Today, the Honourable Carole Taylor delivered her third budget as Minister of Finance. The government made the environment its focus, with a plan to introduce a carbon tax on carbon-emitting fuels. Calling it a major shift in the way the province levies taxes, the government committed to return every dollar raised from the new carbon taxes to the people of BC in the form of lower taxes.

For the 2007-08 fiscal year, the government is forecasting a budget surplus of $2.12 billion before a $150 million forecast allowance. While down from last year's surplus, it is the province's fourth strong surplus in a row. For the 2008-09 fiscal year, the government is projecting a surplus of $800 million, before setting aside $750 million in forecast allowances.

Taxpayers were rewarded with personal and corporate tax cuts, to ensure that the new carbon tax will be revenue neutral. The carbon tax is scheduled to triple over the next four years, which should mean more tax cuts are in store. Today, personal tax rates were reduced for the two lowest income tax brackets. On the corporate side, the general corporate tax rate was reduced to 11 per cent from 12 per cent, putting BC on target to have a corporate tax rate of 10 per cent by 2011, meeting the target provincial corporate tax rate set out by the Federal Government in its Fall 2007 Economic Statement. The corporate tax rates for small businesses were reduced to 3.5 per cent from 4.5 per cent, with a target to reduce this to 2.5 per cent by 2011.

The budget also contained a number of incentives to stimulate economic growth. As far as spending is concerned, the government announced that two-thirds of all new spending over the next three years would be devoted to healthcare, with $3 billion of additional funds committed to health care budgets over the next three years.

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

British Columbia  Budget Projections
(in millions $)
	Original Estimate 2007/2008	Revised Forecast 2007/2008	Projected 2008/2009
Revenue	34,887	36,525	35,810
Expenses	(36,240)	(37,280)	(37,690)
	(1,353)	(755)	(1,880)
Commercial crown corporation net income	2,503	2,875	2,680
Forecast allowance	(750)	(150)	(750)
Surplus	400	1,970	50

Personal Tax Changes

To make the implementation of the carbon tax revenue neutral, tax cuts and reductions have been proposed, including personal tax reductions.

Income Tax Rates Reduced

The bottom two provincial personal income tax rates will be reduced for the 2008, 2009 and subsequent tax years - the reductions are highlighted in the chart below.

Taxable income range (brackets shown are for 2008 and are subject to indexing)	Existing Tax Rates	Tax Rates With Proposed Changes
		2008	2009
$1 to $35,016	5.35%	5.24%	5.06%
$35,016.01 to $70,033	8.15%	7.98%	7.70%
$70,033.01 to $80,406	10.50%	10.50%	10.50%
$80,406.01 to $97,636	12.29%	12.29%	12.29%
Over $97,636	14.70%	14.70%	14.70%

Dividend Tax Credits Reduced

To reflect the corporate income tax cuts that are discussed later, the dividend tax credit on both eligible and ineligible dividends received by individuals and trusts will be reduced effective January 1, 2009. The dividend tax credit rate applicable to eligible dividends will be reduced to 11 per cent from 12 per cent and the dividend tax credit applicable to ineligible dividends will be reduced to 4.2 per cent from 5.1 per cent (all rates are expressed as a percentage of the taxable dividend).

Climate Action Credit/Dividend

A new ongoing low income climate action tax credit has been proposed effective July 2008. The maximum credit each year is equal to $100 per adult plus $30 per child (single parent families will receive the adult amount for the first child in the family). This amount is then reduced by two per cent of net family income (recipient's and spouse's net incomes from the prior year) in excess of a threshold of $30,000 for single individuals and $35,000 for families. This credit will be paid with the Federal GST credit, with the first payment being made in October 2008.

In addition to the ongoing credit, the province will make an additional one-time climate action payment of $100 to each British Columbian who was resident in the province on December 31, 2007 (the $100 for each child will be paid to their parents). To receive a payment, individuals must file an income tax return or notify the province of their eligibility no later than August 31, 2010.

Business Tax Changes

Carbon Tax Introduced

Legislation will be introduced to impose a broadly based carbon tax effective July 1, 2008. With tax reductions introduced in other areas, the Government states that the tax will be revenue neutral overall. The initial rate of tax for each fuel will be based on $10 per tonne of carbon dioxide equivalent emissions released from the burning of the fuel. The tax will increase by $5 per year until it reaches $30 per tonne on July 1, 2012

As of July 1, 2008, the tax rates for major fuel types will be:

• gasoline - 2.41 cents per litre
• diesel fuel - 2.76 cents per litre
• natural gas - 49.88 cents per gigajoule
• heating fueloil - 2.76 cents per litre
• Canadian bituminous coal - $20.79 per tonne
• sub-bituminous coal - $17.72 per tonne

These taxes will be three times higher by July 1, 2012.

Corporate Tax Reductions

Again as a measure to keep the introduction of the Carbon Tax revenue neutral, cuts to corporate income tax rates were announced in today's budget. The general corporate tax rate will be reduced from 12 per cent to 11 per cent and the small business corporate income tax rate will be reduced to 3.5 per cent from 4.5 per cent. Both changes are effective July 1, 2008.

Film Tax Credit Changes

The following two changes were included in previous announcements:

• The Production Services and Film Incentive BC tax credits are extended for five years to June and April 2013 respectively.
• The basic Film Incentive BC tax credit rate is increased to 35 per cent from 30 per cent and the basic Production Services tax credit is increased to 25 per cent from 18 per cent for qualifying labour expenditures incurred after December 31, 2007 and for new productions beginning before January 1, 2010.

New Financial Institution Minimum Tax

The existing corporation capital tax on financial institutions will be phased-out evenly over three years starting April 1, 2008 until it is eliminated effective April 1, 2010. In its place, a minimum tax based on 1 per cent of BC paid up capital (with a deduction provided for BC corporate income taxes paid) will apply to financial institutions that have a net paid up capital in excess of $1 billion effective April 1, 2010. The Corporation Capital Tax Act is also amended to clarify that only non-equity shares of credit unions are to be excluded from the tax base of corporation capital tax liabilities effective January 1, 2001.

Sales Tax Changes

Social Services Tax

The following changes were made to the provincial sales tax (PST), effective February 20, 2008 (unless noted):

• A point-of-sale tax reduction is provided for the purchase or lease of new conventional fuel efficient vehicles that meet fuel efficiency criteria set out in the Federal government's ecoAUTO rebate program. Tax reductions of up to $2,000 will be available.
• An exemption from the PST will be provided for residential refrigerators, clothes washers and freezers that are listed as "ENERGY STAR qualified". The exemption will expire on March 31, 2010.
• Gas-fired water heaters with an energy factor of 0.80 or greater are exempt from PST when purchased for residential use. This exemption will expire on December 31, 2009.
• Local governments, may qualify for exemption from PST on purchases or leases of production machinery and equipment used primarily to generate electricity or in a cogeneration plant to generate electricity and heat for sale or own use.
• Due to the uncertainty about the applicability of passenger vehicle rental tax (PVRT) to car-sharing organizations and automotive service facilities, it was clarified that the PVRT does not apply to leases entered into before April 1, 2008. Effective on April 1st, the $1.50 per day PVRT will not apply to passenger vehicles leased for a period of 8 consecutive hours or less. This tax relief will apply to passenger vehicles leased from all lessors, including rental companies and automotive service facilities that provide courtesy vehicles for their customers.
• The exemption from PST for non-motorized two-wheeled bicycles is expanded to include electric power-assisted two and three-wheeled cycles.
• Two-wheeled vehicles that are manufactured to operate exclusively on electricity are eligible for the alternative fuel vehicle tax reduction. The tax reduction will expire on March 31, 2011.
• A new exemption from PST is provided for the purchase of insulation designed to prevent heat loss from hot water tanks, hot and cold water pipes and ductwork.
• Hydrogen cell passenger buses are eligible for a 50 per cent reduction in the tax payable on the purchase or lease of the bus to a maximum of $10,000. This reduction will expire on March 31, 2011.
• An exemption from PST is provided for biodiesel fuel, including the portion of biodiesel fuel used in a furnace oil blend, when used for heating or other non-motive purposes.
• Tractor/trailer gap faring devices, tractor roof farings, trailer side skirts and aerodynamic bumper and tank skirts, purchased for the purpose of increasing the aerodynamics of a commercial tractor trailer, are exempt from PST.
• The exemption from PST for coal and coke is repealed except when purchased for use in a residential dwelling unit. A one-year transitional refund may be available.
• Registered charities that provide tangible personal property of nominal value (tokens or gifts such as pins, ribbons, plastic bookmarks etc.) in exchange for donations are not required to collect PST from donors. In these circumstances, registered charities are required to pay PST on the purchase of tokens or gifts.
• The PST exemption for catalysts and direct agents is expanded to include chemical substances that produce or modify a reaction that is essential for the processing or manufacture of a product for sale or lease (with some exceptions).
• The definition of charity funds is clarified to include bingo affiliation grants for purposes of the medical equipment refund available to registered charities or eligible hospital auxiliaries (this change is effective February 21, 2007 - as a result, applications for refunds of PST paid on medical equipment paid with these grants can be filed).
• An exemption from PST is provided for emission control devices for diesel vehicles that are verified to reduce particulate emissions by at least 20 per cent if purchased before January 1, 2009 (for devices purchased before April 1, 2011, the reduction in emissions must be at least 50 per cent to qualify for the exemption).
• Prescription dental and optical appliances provided for promotional purposes to a dentist, optometrist, optician, or physician are exempt from PST.
• The trade-in allowance is clarified to apply to purchases of motor vehicles purchased from other Canadian jurisdictions for use in BC.
• The application of PST to dedicated telecommunications services in BC is clarified by excluding distances to and from satellites to calculate the tax payable.
• Bona fide farmers and aquaculturists are exempt from PST on purchases of qualifying all terrain vehicles acquired and used solely for a farm or aquaculture purpose.
• Under the Motor Fuel Tax Act, authorized coloured fuel use in farm vehicles is expanded to allow all vehicles licensed as farm vehicles under the Commercial Transport Act to use coloured fuel when traveling for farm purposes on a highway (as the existing family farm truck emblem program is no longer required, it is eliminated).
• Work related safety equipment and apparel worn by or attached to a worker and purchased to meet the requirements of the Workers Compensation Act or the Mines Act is exempt from PST if certain conditions are met.
• Effective with contracts entered into on or after October 1, 2008, a contractor is responsible for paying the PST on any tangible personal property used in the completion of a contract to improve real property, unless the contact explicitly states that the customer is liable for the tax.
• Effective April 1, 2008, eligible businesses may enter into an agreement with the Ministry of Small Business and Revenue to obtain a special registration number (replacing the need to complete a certificate of exemption for purchasing exempt production machinery and equipment and to apply for a refund of tax paid on items purchased in BC and subsequently shipped out of the province for use).
• Guidelines have been developed on the application of PST to transactions involving trusts and the amalgamation of companies or organizations. As well, the application of PST to transfers of assets involving family and spousal trusts have been clarified.
• Guidelines have been developed on the application of PST to transactions involving partnerships.
• The term "well head" for purposes of the production machinery and equipment exemption is replaced with the term well site (to clarify eligibility for exemption).

Other Changes

International Financial Activity Act

Effective February 20, 2008 (unless noted otherwise), the International Financial Activity Act is amended to:

• Expand the list of eligible life-science related patents to include green-related patents for power generation using forces of nature such as wind, solar and tidal, effective March 1, 2008.
• Change the definition of international financial business to include a substantial presence test.
• Allow non-securities corporations to trade in money market investments.
• Allow management and control functions as eligible activities.
• Clarify the inclusion of hedging activities for taxpayers, effective September 1, 2004.

Small Business Venture Capital Act

Effective 2008/09, the tax credit budget for the equity capital program is increased annually by $5 million with $7.5 million of the total budget of $30 million to be allocated to clean technology business.

Motor Fuel Tax Act

Effective February 20, 2008, the Motor Fuel Tax Act is amended to:

• Classify biodiesel and ethanol as alternative motor fuels for all purposes so they are exempt from tax for all uses.
• Clarify that motor vehicles that also run on railway tracks are authorized to use locomotive fuel while traveling on the rails.
• Expand the use of lower taxed coloured fuel by crew crummies used by logging and mineral mining companies as transportation.
• Expand the fuel tax refund for persons with disabilities to include persons with a permanent mental disability that precludes public transit use.

Property Transfer Tax Act

The following changes have been made, effective February 20, 2008:

• The fair market value threshold for eligible residential property under the First Time Home Buyers' Program is increased to $425,000 from $375,000.
• First time home buyers are no longer required to have registered financing in order to be eligible for the exemption.

Home Owner Grant Act

The following changes will apply for the 2008 taxation year:

• As announced previously, the threshold for the phase-out of the home owner grant is increased from $950,000 to $1,050,000. For properties valued above the new threshold of $1,050,000, 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 $1,164,000 for homeowners in general and at a value of $1,219,000 for seniors, veterans and the disabled).
• The additional grant may be available to home owners who construct a new residence that incorporates modifications to the design costing more than $2,000 in order to meet their disability needs or those of their spouse or relative.
• A number of other technical changes were announced

School Tax Act

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

• For the 2008 calendar year, the average residential school property tax rates will be increased by the provincial inflation rate for 2007.
• The total non-residential school tax revenue for 2008 will generally be limited to inflation plus new construction.
• The provincial school tax rate on major industrial property will be reduced over two years starting January 1, 2008 to equal the business class rate.

Taxation (Rural Area) Act

The following changes were announced in today's budget:

• For the 2008 calendar year, the average residential provincial rural area taxes will increase by the provincial inflation rate for 2007. 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.
• Effective for the 2009 tax year, eligible camps that are owned, held in trust for, or occupied by a registered charity, will be provided with an exemption. Camp properties that were previously exempt but which do not qualify under the new exemption will have their current exemption grandfathered for the 2008 to 2010 tax years to allow them time to review the eligibility criteria.

Ports Property Tax Act

The property tax relief provided to port operators under the ports competitiveness initiative is extended for ten years. As well, the annual base compensation to municipalities will be adjusted annually for inflation starting in 2009.

Victoria Regional Transit Commission Tax

The Victoria transit tax collected by the province on behalf of the Victoria Regional Transit Commission is increased by 1 cent per litre to 3.5 cents per litre, effective April 1, 2008.

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 19, 2008.

	Top 2008 Personal Rates %	Top Corporate Rates
		General %	M&P %	Small Business %	Retail Sales Tax %
BC	43.70	31.5 (1)	31.5 (1)	15.5 (1)	7.0
Alta.	39.00	29.5	29.5	14.0	-
Sask.	44.00	32.5 (2)	29.5	15.5	5.0
Man.	46.40	33.5 (3)	33.5	13.0	7.0
Ont.	46.41	33.5	31.5	16.5	8.0
Qué.	48.22	30.9	30.9	19.0	7.5 (6)
NB	46.95	32.5	32.5	16.0	8.0 (7)
NS	48.25	35.5	35.5	16.0	8.0 (7)
PEI	47.37	35.5	35.5	15.3 (4)	10.0 (6)
Nfld.	45.50	33.5	24.5	16.0	8.0 (7)
Yukon	42.40	34.5	22.0	15.0 (5)	-
NWT	43.05	31.0	31.0	15.0	-
Nunavut	40.50	31.5	31.5	15.0	-

British Columbia Budget Report 2008 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.