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March 2, 2010

Highlights

• Deficit of $2.8 Billion Forecast for 2009-10
• Deficit of $1.7 Billion Forecast for 2010-11
• Balanced Budget by 2012-13 (ignoring forecast allowance)
• Film and Media Credits Enhanced

Overview

“Budget 2010 - Building a Prosperous British Columbia"

On March 2, 2010, the Honourable Colin Hansen delivered his second budget as Minister of Finance. With signs that the economy is improving, the Finance Minister was able to provide some good news in terms of the elimination of the provincial deficit. In the budget last fall, the Minister updated his deficit forecast for the 2009-2010 fiscal year from $495 million to $2.8 billion. In today's projections, the deficit remains at $2.8 billion. The deficit for the 2010-2011 fiscal year has been estimated at $1.7 billion. A balanced budget is projected for the 2012-2013 fiscal year provided that the forecast allowance isn't needed.

Due to lower revenues, spending for the 2009-2010 fiscal year is now projected to be lower than the amount set out last fall. However, the Minister also stated that there will be additional support for more affordable housing, health care and families. At the same time, the province will have to refocus spending in other areas and improve efficiency. In particular, the number of full-time public service employees will be reduced from the current level of approximately 31,000 to 28,000 by 2012-2013.

The BC economy is expected to grow by 2.2% in 2010, 2.3% in 2011 and 2.7% in 2012. These estimates are slightly below the average of private sector forecasts.

Very few tax changes were announced today, other than technical changes. The work of the federal and provincial governments on the Harmonized Sales Tax (HST) continues, with an effective date of July 1, 2010. New HST place of supply, rebate and self-assessment rules were introduced last week and BDO Tax Bulletins on these changes will be available soon.

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

British Columbia  Budget Projections
(in millions $)
	Original Estimate 2009/2010	Revised Forecast 2009/2010	Projected 2010/2011
Revenue	38,812	37,050	39,190
Expenses	(39,307)	(39,700)	(40,605)
	(495)	(2,650)	(1,415)
Forecast allowance	0	(125)	(300)
Surplus (Deficit)	(495)	(2,775)	(1,715)

PERSONAL TAX MEASURES

The following changes were highlighted in today's budget, although they had been announced previously.

Increased Personal Tax Credits

As a measure to provide HST related income tax relief, effective January 1, 2010, the basic personal amount is increased to $11,000 from $9,373 in 2009. In addition, the spouse and equivalent to spouse amounts are increased for 2010 to $9,653 from $8,026 in 2009.

BC HST Credit Introduced

With the implementation of the HST on July 1, 2010, a BC HST credit has been introduced to provide assistance with the HST to low and modest income individuals and families. The maximum annual credit amount is $230 per family member. This credit amount is reduced by 4% of net income for the prior year in excess of $20,000 for single individuals. For families, the reduction is 4% of family net income in excess of $25,000. Family net income includes the recipient's and spouse's net income from the prior year.

The credit will be paid together with the GST credit and the BC Low Income Climate Action tax credit on a quarterly basis. The first payments of this credit will be made in July 2010. Due to the elimination of the provincial sales tax (PST), the BC sales tax credit is integrated with the BC HST credit effective for the 2010 year.

Mining Flow-Through Share Tax Credit Extended

The BC Mining Flow-Through Share tax credit is a non-refundable tax credit for individuals equal to 20% of their BC flow-through mining expenditures. The tax credit will be extended to the end of 2013.

BUSINESS TAX CHANGES

Interactive Digital Media Tax Credit Introduced

On February 3, 2010, the new BC Interactive Digital Media tax credit was announced for qualifying projects beginning after August 2010. As confirmed in today's budget, the credit will be 17.5% of qualifying BC labour employed in the development of qualifying interactive digital media. To assist in the tax credit application process, a certification process will be implemented and qualifying projects must be completed to be eligible for this credit.

Film Tax Credits Enhanced

The following announcements were made on February 3, 2010 related to the BC Film tax credits. The changes are effective for productions with principal photography beginning after February 2010 and were confirmed in today's budget:

• The basic Production Services tax credit rate is increased to 33% from 25%.
• The Film Incentive BC tax credit rate of 35% applies to qualifying BC labour expenditures up to a cap of 60% of total production costs, increased from a cap of 48%.
• The Digital Animation or Visual Effects tax credit is increased to 17.5% from 15%.

Corporation Capital Tax Act

Amendments to the Corporation Capital Tax Act to introduce a financial institutions minimum tax effective April 1, 2010, are repealed. The tax was intended to be a minimum capital tax for large financial institutions. However, the federal minimum capital tax, which applies to large financial institutions, effectively provides a provincial minimum corporate income tax because the province shares the federal corporate income tax base. As a result, an additional minimum tax on capital is not necessary.

SALES TAX CHANGES

On July 23, 2009, the BC government announced its intention to eliminate its existing PST and introduce a HST regime with the federal GST. In today's budget the government released a fair bit of information on the HST. Most of the information was not new, but the following two items are notable.

Additional Hotel Room Tax

After consultations with tourism sector stakeholders, the government has decided to continue the additional hotel room tax (AHRT) program beyond June 30, 2011 to allow eligible local governments, regional districts, destination marketing organizations and other eligible entities to raise revenue for tourism marketing.

Tax on Private Sales of Vehicles, Boats and Aircraft

The private sale of vehicles, boats and aircraft is currently subject to 7% PST but is not subject to GST. The government confirmed today that effective July 1, 2010, the tax on the private sale of these items in BC will be continued but at a rate of 12% as opposed to 7%.

OTHER CHANGES

Medicare Protection Act

Medical Services Plan premiums will be increasing effective January 1, 2011. The maximum monthly premium rates will increase by $3.50 per month to $60.50 for single persons, by $7.00 per month to $115.00 for two person families and by $7.00 per month to $121.00 for families of three or more persons.

Carbon Tax Act

The following changes were announced:

• The definition of "natural gas" is clarified to include acid gas and waste gas even when they have been removed from the natural gas, effective March 3, 2010.
• A penalty is introduced, effective March 3, 2010, for vendors who sell fuel in BC without being appointed a collector as required under the Act.
• Effective July 1, 2010, propane is included in the security scheme that applies to most fuels including gasoline and light fuel oil.
• The carbon tax rate for kerosene fuel is increased to 5.22 cents per litre from 5.08 cents per litre to equal the jet fuel carbon tax rate, effective July 1, 2010.

Motor Fuel Tax Act

As previously announced, propane used in motor vehicles is exempt from motor fuel tax effective July 1, 2010.

Effective March 3, 2010, a penalty is introduced for vendors who sell fuel in BC without being appointed a collector as required under the Act.

Tobacco Tax Act

The budget clarified that, effective March 3, 2010, the calculation of the 77% tax on cigars applies to the retail cigar price if the retail dealer who sells the cigar also manufactured the cigar in Canada or imported the cigar into Canada. In all other cases, the tax applies to the wholesale price plus a markup equal to 30% of the wholesale price. The maximum tax payable per cigar is increased to $6 from $5 per cigar.

It was also announced that there will be an annual fee payable by tobacco retailers as a condition for selling tobacco products in BC. Details, including the fee amount, commencement date and reporting requirements, will be provided later this year.

Property Transfer Tax Act

The Property Transfer Tax Act is amended to clarify that, effective March 3, 2010, no property transfer tax is payable on transfers to correct a conveyance error. As well, the requirement to obtain an administrator's certificate prior to registration of transfers to correct the error is eliminated.

It was also announced that the exemption for transfers required to amend a strata plan is re-instated effective March 3, 2010 and will be similar to the exemptions provided for transfers for subdivisions.

Home Owner Grant Act

For the 2010 taxation year, the threshold for the phase-out of the home owner grant remains at the 2009 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.

A northern and rural home owner benefit was announced in last year's budget, effective for the 2011 taxation year. This benefit will be provided as an increase to the home owner grant. The benefit amount for owners of homes valued at or below the home owner grant phase-out threshold is $200. The combined northern and rural benefit and home owner grant will be phased-out at a rate of $5 for every $1,000 of assessed value in excess of the threshold. This benefit applies in those areas of BC outside the Greater Vancouver Regional District, the Fraser Valley Regional District and the Capital Regional District.

School Act

The following was announced with respect to school property taxes:

• For the 2010 taxation year, the average residential school property tax rates will be the same as in 2009, since there was no inflation in 2009.
• The total non-residential school tax revenue for 2010 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 2010 taxation year, the average residential rural area taxes will be the same as in 2009. 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

The property tax deferment program allows home owners to defer property taxes until their home is sold, transferred to a new owner or becomes part of an estate. As announced in the February 9, 2010 Throne Speech, eligibility for the program is expanded to include families with children under age 18. This expansion of the program applies for 2010 and subsequent taxation years.

To be eligible, a home owner must financially support at least one child under age 18, meet the basic eligibility criteria for the program and have at least 15% equity in their home. Simple interest is charged on deferred taxes at the prime rate.

Applications for the expanded program will be available before property tax notices are sent out in May. They will be available from municipalities, Government Agents/Service BC offices and from the Ministry of Finance website.

International Financial Activity Act

To help BC grow as an international financial centre, tax refunds for BC corporate income tax paid on qualifying international financial activities are provided by the International Financial Activity Program. To further expand the program, the International Financial Activity Act is amended to (effective dates vary):

• Broaden the program to include new types of international businesses in clean technology, carbon trading and digital media publishing and distribution.
• Expand and clarify eligible activities to include operating an investment fund.
• Clarify qualifying patent activities to include all income related to the licensing of a qualifying patent.
• Introduce changes for specialists, replace management services as a qualifying activity with a new category of executive specialist and add a new category of specialists for administrative support and back-up office services.
• Remove the effect of an anomaly under the Income Tax Act that allowed for tax refunds in years where the program participant had no other income or loss.
• Repeal the resident exception for deposit and loan transactions with a prescribed business.
• Restrict lending activities to arm's length parties.

HOW BRITISH COLUMBIA COMPARES

The following chart compares top personal and corporate tax rates and sales taxes for all provinces and territories, as announced to March 2, 2010.

	Top 2010 Personal Rates %	2010 Corporate Rates
		General %	M&P %	Small Business %	Provincial Retail Sales Tax %
BC	43.70	28.50	28.50	13.50	7.00(6)
Alta.	39.00	28.00	28.00	14.00	-
Sask.	44.00	30.00	28.00	15.50	5.00
Man.	46.40	30.00	30.00	12.00(1)	7.00
Ont.	46.41	32.00(2)	30.00(2)	16.50(2)	8.00(6)
Qué.	48.22	29.90	29.90	19.00	7.50(7)
NB	43.30	30.00(3)	30.00(3)	16.00	8.00(8)
NS	48.25	34.00	34.00	16.00	8.00(8)
PEI	47.37	34.00	34.00	13.10(4)	10.00(7)
Nfld.	44.50	32.00	23.00	16.00	8.00(8)
Yukon	42.40	33.00	20.50	15.00(5)	-
NWT	43.05	29.50	29.50	15.00	-
Nunavut	40.50	30.00	30.00	15.00	-