This year’s batch of provincial budgets — delivered over the past two months — contain a number of items of particular interest to financial advisors.

In the Quebec budget, there are two noteworthy items, one relating to the dividend tax credit and the other to the rules for defined-benefit pension plans. As well, some provinces dropped their small-business tax rates and Saskatchewan is considering harmonizing its sales tax with the GST — moves that may affect advisors in those jurisdictions.

Quebec is changing its dividend tax credit to a two-tier system, with one rate for large businesses and one for small. For large corporations, dividends will be grossed up to 45%, instead of the current 25%, and the dividend tax credit increased to 11.9% (the income tax rate scheduled for these companies in 2009) from 10.8%. These changes are in line with what Quebec expects Ottawa to do. For small businesses, dividends will continue to be grossed up 25%, while the dividend tax credit lowered to 8% — the income tax rate for these firms as of Mar. 24, when it was lowered from 8.9%.

Quebec’s changes could be a model for other provinces, says David Perry, senior research associate at the Canadian Tax Foundation in Toronto. British Columbia and Manitoba have said they would follow the federal government’s lead, and Prince Edward Island has said the dividend tax credit “will be adjusted to preserve the integration between the corporate and personal income tax systems.” The other provinces are waiting to see exactly how Ottawa proceeds.

Quebec is also lobbying for a change in private-sector supplemental defined-benefit pension plans that would encourage people to work longer. The province is championing phased-in retirement and recommends allowing employees to receive both employment and pension income while continuing to receive incidental benefits as they ease out of the workforce. Workers would negotiate an appropriate contract with their employers. This would require changes federally and would apply nationally.

P.E.I. plans to cut its present 6.5% small-business tax rate to 1% by 2011, bringing it to the level that New Brunswick will be at as of July 1, 2007. Manitoba is accelerating the rate at which it is reducing its small-business tax — to 3% on Jan. 1, 2007, instead of the 4% targeted in the 2005 budget; it is currently 4.5%. As of July 1, 2007, New Brunswick is also moving the threshold for its small-business tax to $500,000 in net income.

Saskatchewan’s business review committee has recommended harmonizing its provincial sales tax with the GST, which would allow businesses to get a rebate on all the sales taxes they pay. Perry views this as an important development that could encourage other provinces to harmonize with the GST. (Quebec, New Brunswick, Nova Scotia and Newfoundland are now harmonized.)

Provinces were hampered in preparing their budgets this year by the uncertainty surrounding future federal/provincial transfers. Fortunately, none of the provinces are in dire straits: seven provinces presented balanced budgets or budgets with surpluses; Nova Scotia — when its 2006 budget finally comes out — is likely to be in a balanced or surplus position. Ontario and P.E.I., meanwhile, expect to eliminate their deficits within the next two years.

Equalization is a major issue. In their election platform, the federal Conservatives promised to exclude non-renewable natural resources revenue from the program. But they may have problems getting agreement when the program comes up for renewal this year. Newfoundland and Nova Scotia, which both have special deals with Ottawa to exclude offshore oil and gas revenue in the calculation of their entitlements for eight years, would be supportive, as would Saskatchewan, which is lobbying for a similar deal. But some provinces may not like the idea if it lowers the amount they receive.

The equalization system has become very complicated. Entitlement calculations are based on the average revenue of only five provinces — Quebec, Ontario, Manitoba, Saskatchewan and B.C. Then there are the special deals. There’s even one for Ontario, under which Ottawa is returning $5.75 billion over five years to make up for Ontario’s large contributions to equalization.

The Tories also have promised to fix the federal/provincial fiscal imbalances, but there’s no information on how they plan to do it — nor whether they can afford to do it. The easy solution would be to tell the provinces that the cut in the GST, which is expected to be announced in the upcoming federal budget, gives them the tax room to raise their provincial sales taxes and generate more revenue. Analysts favour that solution, but it’s probably politically impossible. Prime Minister Stephen Harper promised a tax break, not a shift in who collects the taxes. Nor will the provinces want to be seen to be raising taxes.

@page_break@Perry considers all the provinces to be in quite good shape, but Derek Burleton, senior economist at TD Bank Financial Group, has concerns about Newfoundland, Quebec and Nova Scotia. The three have the highest debt as a per cent of GDP among the 10 provinces and their tax rates already tend to be at the high end, although Nova Scotia’s personal tax loads are middle of the road.

Ontario and P.E.I. are OK, Burleton says; Manitoba and New Brunswick are in good shape and the three most western provinces are in even better shape — especially Alberta, which has no debt and has the enviable problem of figuring out ways to invest its surplus.

Newfoundland’s special deal with the feds made a big difference to its finances, putting it in the black for the first time since it joined Confederation. To its credit, it has already put the $2-billion up-front payment toward paying off about half its unfunded pension liabilities.

In its 2007 budget, Newfoundland also cut or eliminated 34 fees paid by businesses and individuals, and will review its overall tax structure in the coming year.

Quebec, which projects a balanced budget in two years, is likewise finally tackling its debt. It put in place a debt-reduction plan, dedicating a portion of its substantial electricity-related revenue to this purpose. It has a debt target of 25% of GDP in 2025.

Ontario’s shortfall this year is a substantial $2.4 billion, but the province expects to balance its budget in the fiscal year ending Mar. 31, 2009, or perhaps a year earlier.

P.E.I. has been chipping away at its deficit, which is projected to be just $13 million this year; it, too, expects to balance its books in fiscal 2009.

Manitoba and Saskatchewan both use rainy-day funds to balance their budgets. Without transfers from these funds, Manitoba would be in deficit through to 2010 and Saskatchewan would have a shortfall in 2008. These transfers bother analysts because they distort the picture of fiscal finances in any given year. They are, however, undeniably useful as they allow governments to put money away in good years and spend it in periods when revenue growth is weak or expenditures are pushed up by unexpected events.

In Manitoba’s case, each year it puts aside $100 million to reduce debt and $10 million to lower unfunded pension liabilities. Without that, it would be in surplus.

And given the fluctuations in resources prices, including agriculture, Saskatchewan can reasonable justify using such a fund.

Saskatchewan is lowering taxes. By July 1, 2008, its corporate income tax rate is scheduled to fall to 12% from 17%; the capital tax will be eliminated except for non-financial and provincial Crown corporations; and the small business tax threshold will be increased to net income of $500,000 from $300,000. Also the investment tax credit for manufacturing and processing became fully refundable as of Apr. 1.

The 12% corporate income tax rate in mid-2008 will put Saskatchewan even with B.C. and New Brunswick. B.C. reduced its rate to 12% from 13.5% in a mini-budget last fall; New Brunswick is cutting its rate to 12% from 13% on Jan. 1, 2007.

Alberta’s corporate income tax rate is lowest at 10%, down from 11.5% as of April 1.

Manitoba reduced its rate by half a percentage point to 14.5% as of Jan. 1, 2006, instead of waiting until July 1. It plans further drops, to 14% on Jan. 1, 2007, and, if fiscally possible, to 13% a year later.

P.E.I. is looking at ways to reduce its corporate income taxes.

There was some action on capital taxes, but not as much as analysts had hoped. Analysts think this tax should be universally eliminated because it discourages capital investment and, thus, productivity growth. Ontario has plans to eliminate it in 2010, and New Brunswick and Manitoba plan to reduce rates over the next few years. Manitoba is also extending its manufacturing investment tax credit — which does encourage capital spending — to June 2009.

Only Alberta has no capital taxes; B.C., P.E.I. and Newfoundland don’t levy capital taxes on non-financial corporations.

A few provinces reduced personal taxes. Manitoba lowered the rate on its middle personal income tax bracket to 13% as of Jan. 1, 2007, and eliminated residential education property taxes; Alberta and B.C. are cutting property taxes; and New Brunswick has a program to protect businesses and households from climbing energy costs. IE