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February 17, 2009

Highlights

• Deficits Forecast for 2009-10 and 2010-11
• Corporate Tax Rate Cuts Confirmed
• Dividend Tax Credit Reduced

Overview

“Building Stability and Confidence For The Future"

Today, the Honourable Colin Hansen delivered his first budget as Minister of Finance. Faced with a downturn in projected revenues due to the global economic crisis, the province expects to find itself back in deficit territory after several years of budget surpluses.

For the 2008-09 fiscal year, the government is still expecting a small surplus of $50 million. However, for the next two fiscal years the province expects deficits of $495 million for 2009-10, and $245 million for 2010-11, before returning to a balanced budget the following year.

On the spending side, the government announced cuts in almost all government departments with the exception of health care, education and social services. Infrastructure spending has also been ramped up, as announced two weeks ago. New projects will be accelerated over the next 3 years, some of which will be cost-shared with the federal government.

Tax changes were modest, with most tax reductions having been already announced in the fall of 2008. Today, the government confirmed further reductions to the general corporate tax rate, from 11% to 10.5% effective January 1, 2010 and to 10% effective January 1, 2011, that were initially announced in the 2008 budget. The personal dividend tax credit will be reduced for dividends received out of income taxed at small business rates, to take into account a reduction to the small business corporate tax rate that was effective December 1, 2008.

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

British Columbia  Budget Projections
(in millions $)
	Original Estimate 2008/2009	Revised Forecast 2008/2009	Projected 2009/2010
Revenue	38,490	38,455	38,812
Expenses	(37,690))	(38,405)	(39,307)
	800	50	(495)
Forecast allowance	(750)	0	0
Surplus (Deficit)	50	50	(495)

Personal Tax Changes

Dividend Tax Credit Reduced

To reflect the previously announced reduction in the small business corporate income tax rate to 2.5% from 3.5% effective December 1, 2008, the dividend tax credit on ineligible dividends received by individuals and trusts will be reduced to maintain integration between personal and corporate income taxes. Effective January 1, 2010, the dividend tax credit rate applicable to ineligible dividends will be decreased to 3.4% from 4.2% (expressed as a percentage of the taxable dividend), slightly reducing the small tax advantage currently available when earning small business income through a corporation and receiving the income as a dividend instead of earning the income directly.

RDSP Income Excluded from Benefit Calculations

Registered Disability Savings Plan (RDSP) income will be excluded from income for purposes of determining eligibility for the BC Sales Tax Credit and Medical Services Plan premium assistance, effective January 1, 2009.

Business Tax Changes

Corporate Tax Reductions

To keep the Carbon Tax revenue neutral, it was previously proposed to reduce the general corporate income tax rate to 10% by 2011. Today, the government confirmed this cut, announcing that the general corporate tax rate will be reduced from 11% to 10.5% effective January 1, 2010 and to 10% effective January 1, 2011.

Financial Corporation Capital Tax

The capital tax base is amended to include accumulated other comprehensive income, effective for taxation years ending on or after October 1, 2006. This income is required to be shown as a separate item on a corporation's balance sheet resulting from accounting changes made in 2006.

Film Tax Credit Changes

The additional basic tax credit rates for the Film Incentive BC and the Productions Services Tax Credits were set to expire in 2009, and the Film Incentive BC and Production Services Tax Credits were set to expire in 2013. These credits will now continue beyond these dates, as they will no longer expire.

Sales Tax Changes

Social Service Tax

The following changes were made to the provincial sales tax (PST) effective February 18, 2009 (unless otherwise noted):

• The exemption for the following items is extended to March 31, 2011:
  • ENERGY STAR qualified oil-fired forced-air furnaces, boilers, and air and ground-source heat pumps purchased or leased for residential use.
  • ENERGY STAR qualified windows, doors and skylights.
  • Residential gas-fired water heaters with an energy factor of 0.80 or greater.
• Commercial boilers fired by natural gas or propane with a boiler input rating of at least 200,000 BTU/h are exempt if they have a combustion efficiency of at least 90% as described and tested in accordance with specific standards. This exemption expires March 31, 2011.
• A temporary exemption for devices to reduce idling is introduced. Auxiliary power units, cabin heaters and engine heaters for trucks with a gross vehicle weight of at least 5,000 kg are exempt until March 31, 2012.
• The exemption for certain aerodynamic devices that are designed to reduce wind resistance and improve the fuel efficiency of commercial tractor-trailers is expanded to include base flaps and boat tails. Labour charges to install these devices are also exempt.
• Equipment specifically designed to produce mechanical or electrical energy from ocean currents, tides or waves is exempt. Generators, wiring, controllers, monitors, pumps, tubing, floats, water fences, aids to navigation as defined in the federal Canada Shipping Act, 2001, and devices that convert direct current into alternating current are also exempt when sold with and as part of the specifically designed equipment.
• The exemption for production machinery and equipment is expanded to include, when used by manufacturers of tangible personal property other than electricity, transformers and converters, inverters, regulators, breakers and switches designed for use and used with transformers. This equipment is exempt if located within a qualifying manufacturing site, mine site, well site, natural gas processing plant or petroleum refinery and used exclusively to transmit or distribute electricity if more than 50% of the electricity is used to power exempt machinery and equipment or as an integral component in a manufacturing process.
• The exemption for production machinery and equipment is clarified with respect to machinery and equipment used to transmit or distribute tangible personal property (including electricity and heat generated by local government bodies and local government corporations). This machinery and equipment is exempt if it is located within a qualifying manufacturing site, mine site, well site, natural gas processing plant or petroleum refinery and is used primarily to transmit or distribute qualifying tangible personal property, raw materials, partially finished goods or similar items within the site, processing plant or refinery.
• The exemption for production machinery and equipment is expanded to include materials used to repair, maintain, modify or assemble exempt machinery and equipment. Materials qualify for exemption if they are purchased by an eligible person and remain part of, or attached to, the machinery or equipment after the repair, maintenance, modification or assembly. Examples of materials that may qualify for exemption include sheet metal and electrical wiring.
• Effective July 31, 2001, the exemption for production machinery and equipment is clarified to include machinery or equipment used to generate heat only if the generation of heat is one step in an activity to:
  • fabricate or manufacture tangible personal property to create a new product that is substantially different from the material or property from which it was made,
  • process tangible personal property by performing a series of operations or a complex operation that results in a substantial change in the form or other physical or chemical characteristics of the tangible personal property, or
  • extract or process minerals, petroleum or natural gas.
• Bona fide farmers are exempt from PST on purchases of egg packing equipment and refrigeration equipment used for cooling or cold storage of farm products. To qualify for exemption, this equipment must be acquired and used solely for a farm purpose.
• The following prescription drugs and vaccines are exempt:
  • drugs listed on Schedule I or Schedule IA and vaccines listed on Schedule II of the Drug Schedules Regulation under the Pharmacists, Pharmacy Operations and Drug Scheduling Act, and
  • vaccines listed on Schedule A of the Veterinary Drug and Medicated Feed Regulation, under the Pharmacists, Pharmacy Operations and Drug Scheduling Act.
• The definition of "prescription" is also updated to recognize that in addition to physicians, dentists and veterinarians, other practitioners such as midwives, nurse practitioners and pharmacists are authorized to prescribe certain medications.
• Retroactive to January 1, 2000, the Act is amended to clarify the concept of "at another person's expense". These changes ensure that tax is payable on transactions where property, services or rights are acquired for use by one person at another person's expense.

Revenue Neutral Carbon Tax Plan

In 2008, legislation was introduced to impose a broadly based Carbon Tax applicable to the purchase or use of fossil fuel within British Columbia. With tax reductions introduced in other areas, it is expected that the tax will be revenue neutral overall.

In order to keep the Carbon Tax revenue neutral, a number of measures were announced in the fall of 2008 and additional measures have been announced in today's budget beginning in 2011. The following is a summary:

• Reductions to the tax rates for the two lowest income tax brackets that were to take effect on January 1, 2009 were made retroactive to January 1, 2008. As a result, the rate for the first income tax bracket is 5.06% and for the second income tax bracket is 7.70%.
• The low income climate action tax credit will increase by 5% to $105 per adult, plus $31.50 per child effective July 1, 2009. As announced in the budget, the tax credit will increase by 10% to $115.50 per adult, plus $34.50 per child effective July 1, 2011.
• Introduction of a Northern and Rural Homeowner benefit of up to $200 beginning in 2011.
• The small business corporate income tax rate was reduced to 2.5% from 3.5% effective December 1, 2008 rather than by 2011.
• An Industrial Property Tax Credit was introduced to reduce provincial school property tax on major industrial and light industrial properties by 50%, effective for 2009 and subsequent taxation years. As announced in the budget, the tax credit will be increased to 60% beginning in 2011.
• School property taxes for land classified as farm land will be reduced by 50% beginning in 2011.

Other Changes

Motor Fuel Tax Act

Effective February 18, 2009, the budget proposes to classify hydrogen fuel as a Category 1 alternative motor fuel and to exempt it from motor fuel tax provided that:

• the hydrogen is purchased for use in a fuel cell vehicle, and
• the hydrogen is not produced by electrolysis using coal-generated electricity, unless the carbon dioxide emitted as a result of the process is captured and stored or captured and sequestered.

Tobacco Tax Act

Effective February 18, 2009, the tax rate on cigarettes is increased to $37.00 from $35.80 per carton of 200 cigarettes, and the tax rate on fine-cut tobacco is increased to 18.5 cents per gram from 17.9 cents per gram.

Home Owner Grant Act

For the 2009 taxation year, the threshold for the phase-out of the home owner grant remains at the 2008 level of $1,050,000. For properties valued above the 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 and above for homeowners in general. An additional grant, available to seniors, veterans and the disabled is eliminated for properties valued at $1,219,000 and above.

School Act

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

• For the 2009 calendar year, the average residential school property tax rates will be increased by the provincial inflation rate for 2008.
• The total non-residential school tax revenue for 2009 will generally be limited to inflation plus new construction. The rates will be set when revised assessment roll data are available.

Taxation (Rural Area) Act

For the 2009 calendar year, the average residential provincial rural area taxes will increase by the provincial inflation rate for 2008. 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.

International Financial Activity Act

The International Financial Activity Act is amended to:

• Allow the commissioner discretion to accept late notifications of amalgamations between a registered and a non-registered corporation. The rules currently require notification within 90 days of an amalgamation.
• Expand the list of eligible patents to include patents relating to wastewater treatment and fuel cell technology, effective April 1, 2009.
• Clarify that a non-resident person excludes a business carried on in Canada by that non-resident person, effective September 1, 2004.

As well, a review of the program has been initiated to examine program objectives and opportunities for improvement and streamlining.

Logging Tax Act

Corporations that are not able to use the full amount of the logging tax credit will be given a partial remission of the logging tax, effective for taxation years ending after December 2008. This will ensure that small business corporations with logging income can benefit from the reduction in the small business corporate income tax rate.

Measures Previously Announced

The following measures were previously announced in 2008:

• The BC Mining Flow-Through Share Tax Credit is extended to the end of 2009.
• Eligibility for the Film Incentive BC Tax Credit has been expanded as the requirement for a corporation to be BC-controlled is removed for productions with principal photography starting on or after January 1, 2009.
• Effective for 2009 and 2010, a temporary property tax deferment program was introduced, allowing certain homeowners experiencing financial hardship due to current economic conditions to defer their property taxes.
• Effective for the November 2008 tax returns, the allowances paid to businesses for collecting and forwarding provincial sales tax and hotel room tax to the province has doubled.

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 17, 2009.

	Top 2009 Personal Rates %	Top Corporate Rates
		General %	M&P %	Small Business %	Retail Sales Tax %
BC	43.70	30.0	30.0	13.5	7.0
Alta.	39.00	29.0	29.0	14.0	-
Sask.	44.00	31.0	29.0	15.5	5.0
Man.	46.40	32.0 (1)	32.0 (1)	12.0	7.0
Ont.	46.41	33.0	31.0	16.5	8.0
Qué.	48.22	30.9	30.9	19.0	7.5 (4)
NB	46.95	32.0	32.0	16.0	8.0 (5)
NS	48.25	35.0	35.0	16.0	8.0 (5)
PEI	47.37	35.0	35.0	14.2 (2)	10.0 (4)
Nfld.	44.50	33.0	24.0	16.0	8.0 (5)
Yukon	42.40	34.0	21.5	15.0 (3)	-
NWT	43.05	30.5	30.5	15.0	-
Nunavut	40.50	31.0	31.0	15.0	-

 

Download the 2009 British Columbia Budget Report