TaxBreaks, June 2004
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Over the past few years, Canada’s provincial and territorial governments have been proposing various tax cuts. Now that the 2004 budgets have been tabled, we have remarked that some provinces have accelerated those cuts, others have cancelled them completely, and some provinces have even increased tax rates.
In this issue of TaxBreaks, we summarize the essential points of the measures announced by the provinces in their respective 2004 budgets. More specifically, we deal with measures generally applicable to individuals and the principal measures that will have an impact on businesses and the business world.
To begin, we provide a brief review of the federal budget and then present the main features of the provincial measures, proceeding geographically from west to east. In the PDF file attached below, you will find tables of income tax rates, for individuals for the year 2004 and for businesses until 2006, which will help you compare the provincial rates with each other and with the federal rate.
For additional information on federal, provincial and territorial tax rates, see the tables published in Quick Tax Facts 2004 (PDF file below).
We invite our readers who wish to obtain more information on the tax measures announced by the federal government, Ontario, Québec and British Columbia to consult the “Highlights” of these budgets.
Federal
The Minister of Finance tabled the federal budget on March 23, 2004. In it, various measures were announced to provide assistance to the lowest income groups; as well, it announced an increase, as of 2005, in the Canada Education Savings Grant for children of families whose annual revenues are under $70,000.
As for businesses, the small business deduction limit was raised to $300,000 as of the 2005 tax year, one year ahead of schedule.
For computer equipment and related material acquired after March 22, 2004, the capital cost allowance rate went from 30% to 45%. Data network infrastructure equipment acquired after this same date will henceforth be included in a new category whose amortization rate is 30% rather than the previous 20%. Certain provinces, such as Ontario and Manitoba, adopted similar measures; however, their effective dates may vary.
Another change affects the periods for non-capital loss carryforwards and Canadian life insurance losses, which have been extended from seven to 10 years. Finally, as of March 23, 2004, certain fines and penalties will no longer be deductible.
Changes have also been made to the sharing of the $2-million expenditure limit for businesses with a group of common investors entitled to the scientific research and experimental development tax credit.
British Columbia
The Government of British Columbia tabled its budget on February 17, 2004. For individuals, only the family bonus has been increased. Individuals residing in this province who were taxed in multiple jurisdictions will be entitled to full pension tax credits, overseas employment tax credits and dividend tax credits.
For businesses, measures for the Scientific Research and Experimental Development tax credit have been extended five years, taking it to August 1, 2009. This 10% credit for eligible expenses, to a maximum of $2 million annually, is reimbursed to Canadian-controlled private corporations.
Alberta
In the budget it tabled on March 24, 2004, the Government of Alberta announced tax measures that would help maintain its tax competitiveness. Thus the individual tax rate of 10% remains unchanged, with the exception of an indexation of 6% for basic tax credits. On the other hand, as of April 1, 2004, the general corporate income tax rate was lowered from 12.5% to 11.5%, and the income tax rate for small business from 4% to 3%.
Saskatchewan
The Government of Saskatchewan tabled its budget on March 31, 2004; the principal measure therein is the 1% increase in the sales tax, bringing it from 6% to 7%. The Minister of Finance declared that, starting in 2005, the indexation factor for income tax brackets and tax credits will no longer automatically parallel the national inflation rate; rather, the indexation factor will be announced each fall.
While the Government of Saskatchewan did not announce any capital tax changes, it has proposed to consult with oil and gas corporations regarding the uneven playing field that they share with trusts that pursue the same type of oil and gas activity, but that do not pay capital tax.
Manitoba
On April 19, 2004, the Minister of Finance of Manitoba tabled the provincial budget in which the government confirmed the previously announced tax cuts for corporations. The general corporate income tax rate will be reduced to 15% in 2005 and to 14.5% in 2006 and following years; the tax rate for small businesses will be 5% in 2005 and 4.5% in 2006 and thereafter.
Ontario
The first budget of the Liberal government in Ontario was tabled on May 18, 2004. Following the budget, Ontario residents will have to pay a new health insurance premium. The premium will be as much as $450 in 2004 and $900 in 2005.
The Government of Ontario plans to eliminate the capital tax on corporations by January 1, 2012. As part of its plan, the current $5-million deduction from taxable paid-up capital will rise by $2.5 million annually until 2008, when it will reach $15 million. Afterwards, starting in 2009, the current 0.30% capital tax rate will be reduced by 0.075% per year until it has been fully eliminated.
A new refundable tax credit has been created to promote training of apprentices for certain skilled trades; a general rate of 25% applies to eligible salaries paid after May 18, 2004 and before January 1, 2011. The Government of Ontario will also apply measures that parallel those of the federal budget, including the extension of the period for non-capital loss carryforwards, the rules concerning affiliated persons, the limit on the deductibility of fines and penalties, and the increase in the film tax credit.
Québec
On March 30, 2004, the Québec Minister of Finance tabled a budget in which the creation of a “child assistance” payment was announced for 2005. This payment may reach up to $2,000 for one child, $3,000 for two children, $4,000 for three children, $5,500 for four children, and an additional $1,500 for each child thereafter. This assistance replaces several current tax measures. At the same time, the simplified tax system will be abolished as of 2005. Also, the deductibility of investment expenses is limited to investment income as of March 30, 2004; the excess may be carried back to one of the three preceding taxation years or forward to any subsequent taxation year. The deduction for securities options, which was reduced to 37.5% in the last budget, will again be reduced, this time to 25% of the value of the benefit.
As for businesses, the $600,000 deduction in the calculation of paid-up capital will be raised to $1 million in 2005, and will be reduced when the paid-up capital is between $1 million and $4 million. Several tax credits have been amended, including the tax credit for processing activities in the resource regions, the refundable tax credit for Gaspésie and certain maritime regions of Québec and the refundable tax credit for the Vallée de l'aluminium. Finally, the five-year tax holiday for new businesses has been eliminated. Only businesses whose first tax year was before March 22, 2004 can now benefit from the holiday.
New Brunswick
On March 30, 2004, the Minister of Finance of New Brunswick tabled that province’s budget. It was announced that effective July 1, 2004, small business will enjoy an income tax rate lowered from 3% to 2.5%, combined with an income threshold raised from $400,000 to $425,000.
Nova Scotia
The Minister of Finance of Nova Scotia tabled the provincial budget on April 22, 2004. In contradiction to the previous year’s announcements regarding the 2004 tax year, income taxes for higher tax brackets will not be lowered. Quite the opposite: a new rate of 17.5% will apply, as of 2004, to incomes over $93,000.
The capital tax rate applicable to large corporations that have paid-up capital above $10 million changed from 0.25% to 0.30% as of April 1, 2004. The corresponding rate for financial institutions moved from 3% to 4% as of the same date. On the other hand, the increase to the small business tax threshold has been implemented a year early, rising to $300,000 as of January 1, 2005.
Prince Edward Island
On March 30, 2004, the Government of Prince Edward Island tabled its budget, in which the capital tax rate for financial institutions increased from 3% to 5%. A reduction of up to $3,000 in consumption tax will be granted to purchasers of fuel-cell vehicles.
Newfoundland and Labrador
On March 30, 2004, the Government of Newfoundland and Labrador tabled a budget that introduced a tax credit for low-income residents. As of 2005, the credit could reach up to $416 for individuals and $464 for families. Provincial taxes will be eliminated for individuals with incomes of $12,000 and less and for families with incomes of $19,000 and less. No measures affecting businesses were announced.
Nunavut
The Government of Nunavut tabled its budget on May 18, 2004. The sole tax measures announced were lower property taxes for the 2004 tax year and a 10% increase to the food allowance of the Income Support Program, effective June 1, 2004.
Northwest Territories
On March 18, 2004, the Government of the Northwest Territories tabled its budget, in which individuals in lower tax brackets were granted tax reductions as of January 1, 2005. However, starting July 1, 2004, there are tax rate increases for income between $66,492 and $108,101 (from 11.70% to 12.20%), and for income above $108,101 (from 13.05% to 14.05%). For corporations, the payroll tax will increase from 1% to 2% starting on January 1, 2005, and the tax on large corporations will rise from 12% to 14% as of January 1, 2004.
Yukon
The Yukon Government tabled its budget on March 25, 2004. The only measures announced relate to a tax rate decrease, from 6% to 4%, for small businesses, starting on January 1, 2005. Also, the income threshold for small businesses will rise from $300,000 to $400,000 starting on January 1, 2007.
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