Provinces hike taxes to reduce deficits

In contrast, the list of tax hikes is longer. For starters, personal income tax rates are rising for everyone in New Brunswick and for high-income individuals in British Columbia and Quebec. As well, in Nova Scotia, the temporary fifth (the highest) bracket is being retained for 2014.

Manitoba is increasing its provincial sales tax (PST) for 10 years. The general corporate income tax is going up in B.C. and New Brunswick, while a scheduled cut in Saskatchewan is being deferred. Small-business corporate income taxes are increasing in Prince Edward Island. Quebec has extended its tax on financial services institutions, which was scheduled to end on March 31, 2014, for another five years.

However, these increases won’t be enough to keep Manitoba, New Brunswick and P.E.I. out of a deficit position this year. All provinces except Ontario had expected to balance their books this year, as indicated in their 2012 budgets; now, only B.C., Saskatchewan, Quebec and Nova Scotia are expecting to do so – and, in Quebec’s case, this is only because of legislation that has forced the new Parti Québécois government to renege on some of its election promises.

Only Saskatchewan, Ontario and P.E.I. had better fiscal results than forecasted a year ago; and, in an ironic twist, Ontario was the province that did substantially better.

Ontario’s growth has surprised on the upside since the recession, says Mary Webb, senior economist and manager, provincial economics, with Bank of Nova Scotia in Toronto. That could continue if U.S. growth picks up. Ontario also is being helped by the recent decline in oil prices, the accompanying drop in the Canadian dollar and the large supply of cheap natural gas from U.S. shale deposits, which is reigniting Ontario’s petrochemical sector.

Unfortunately, the improved growth hasn’t allowed Ontario to accelerate its budget balancing target date. The minority Liberal government was prevented from raising personal income tax rates, which could have hastened the arrival of surpluses, by the need to garner support from the New Democratic Party (NDP) in order to pass the budget. And even though the Liberals included most of the NDP’s demands in the budget, it wasn’t clear at press time if the NDP would vote for the budget.

As is often the case in Canada, Ontario’s good news is bad news for other provinces – and that’s particularly the case now. Lower oil and gas prices mean lower royalties for B.C., Alberta, Saskatchewan, and Newfoundland and Labrador. And, with the emergence of U.S. shale oil and gas, producers in Western Canada now need Asian markets but don’t have the pipelines to get their product to ports – and, thanks to lobbying efforts from environmentalists and First Nations, it could be many years before Canadian producers get those pipelines.

There is some debate about which provinces are in the most vulnerable position. Ontario and Manitoba need the most time to return to surplus, Webb says, but several other provinces also face significant challenges.

The recent developments in the North American energy sector pose big challenges for B.C., Alberta, Saskatchewan, and Newfoundland and Labrador.

As for Ontario, it still doesn’t expect to balance its books until fiscal 2018, ending March 31 of that year, and the current plan requires cuts in real (after-inflation) spending every year, which could be very difficult to achieve.

Manitoba is struggling with more frequent floods than in the past, which is what forced the province to increase its PST, the proceeds from which will be used to protect against floods and build other critical infrastructure.

New Brunswick is in better shape, although it didn’t provide a target date to balance its budget; its forecasts go to only fiscal 2016. However, as Webb notes, the province began early in its efforts to restructure its government to deal with both sluggish global growth and the impact of the aging population, which should get the province back to balance by fiscal 2017; in fact, New Brunswick may get there by 2016 if economic growth picks up.

Both Quebec and Nova Scotia also started early, both raising their sales taxes by two percentage points in 2010. Nova Scotia’s strategy has paid off, to the point at which it can reverse that hike. However, Quebec, with the highest level of debt as a percentage of gross domestic product among the provinces, won’t be able to afford to introduce major tax cuts for years.

The biggest challenges facing all the provinces is moderating growth in health-care spending and, for some, putting their public-sector pensions on a sound financial footing.

Health care is a major part of all the provinces’ expenditures, and the aging of the baby boomers is going to make it difficult to keep future increases moderate. At this point, it isn’t a question of trimming at the edges; rather, major reforms in both pricing and how services are delivered is required – and these efforts are underway.

This past January, the premiers of all the provinces and territories except Quebec agreed to reduce the price of six common generic drugs to 18% of the brand price by April 1, down from the 25%-40% price points at the time.

The provinces also are focused on increasing home-care services to minimize the use of more costly stays in hospital and long-term care facilities. Says Webb: “Just about every province is increasing home-care funding.”

New Brunswick is aiming to reduce its health-care expenditures per capita to the national average over the next four years – a tough goal, given that the other provinces are trimming their health-care spending over the same period.

Other moves include Ontario reviewing the fees paid to doctors in order to limit, in some areas, payments for procedures streamlined by technology.

Pension liabilities also are a major problem for some provinces says Webb, and a wide range of reforms are underway,. Most are aimed at sharing the risk with the unions so that if plans become underfunded, benefits are cut. In some cases, changes in private-sector pension plan regulations also are being put in place because of the pressure for governments to help out if a major pension plan collapses.

New Brunswick has developed a “shared risk model” as both an option for its private sector and as the best alternative for the province’s public-sector pension plans. Unlike defined-benefit (DB) plans (in which the employer must ante up if factors such as lower than expected investment returns increase unfunded liabilities) or defined-contribution plans (in which contributions but not benefits are defined), the shared-risk model sets targets rather than guarantees benefits.

Given the proposed model’s design and risk-management framework, there is a high probability that the actual benefits will be close to the targeted benefits, thus offering a more sustainable system than DB plans.

Here’s a look at the major measures affecting individuals and small businesses in this year’s provincial budgets:

– Personal income taxes. B.C. is putting in a new tax bracket with a rate of 16.8% for those with taxable income of more than $150,000 for 2014 and 2015. That’s up from the previous top rate of 14.7%. In addition, the enhancement of the basic personal deduction in B.C., put in place in 2010, is reversed as of April 1.

Manitoba is increasing its personal exemption to $8,884 from $8,634 to offset partially the increase in its PST.

Quebec is putting in a fourth bracket for taxable income above $100,000 with a rate of 25.75%. A refundable tax credit for youth activity is to be phased in over five years, starting in 2013, which will reach $100 per child for households with annual income of up to $130,000.

New Brunswick is raising the rates for all its tax brackets as of July 1. The rate for those with annual taxable income of more than $126,662 will be 17.84%, up from 14.3%; for taxable income of $77,908-$126,662, to 16.52% from 12.4%; for income of $38,954-$77,908, to 14.82% from 12.1%; and for those earning less than $38,954, to 9.68% from 9.1%.

As mentioned earlier, Nova Scotia is retaining the temporary fifth tax bracket, put in place in 2010, for 2014.

– Medical premiums. Only B.C. and Quebec charge these user fees: B.C.’s are increasing by 4% as of Jan. 1, 2014; Quebec’s are being restructured to make them more progressive. Now, 33% of taxpayers in Quebec will be exempt vs the current 20%; and 33% will pay $100 a year vs the current $200, 29% will pay $200 and the remaining, high-income earners will pay up to $1,000.

– Sales taxes. Manitoba is raising its PST to 8% from 7% as of July 1. Nova Scotia is lowering its portion of the HST to 9% for 2014 and to 8% for 2015 from the current 10%. On April 1, P.E.I. moved to an HST and B.C. moved back to a “PST plus GST” model.

– Education-related property taxes. Alberta has reduced the provincial portion for 2013, which now will be set on total operating costs rather than property values. Manitoba plans to eliminate property taxes for all seniors by 2015.

– Small-business corporate income taxes. P.E.I’s rate jumps to 4.5% from 1% as of April 1, 2013. Nova Scotia will be cutting its rate to 3% from 3.5% as of Jan. 1, 2014, and raising the threshold for which it applies to $400,000 from $350,000. Manitoba, whose small-business corporate income tax rate is 0%, is raising the threshold for which it applies to $425,000 from $400,000 as of Jan. 1, 2014.

– Tobacco taxes. These taxes were increased in all provinces except in Alberta, Ontario, and Newfoundland and Labrador.

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