Cuts in the capital tax rates in Quebec and Nova Scotia, and a reduction in New Brunswick’s small business tax rate, were very welcome measures in this year’s crop of provincial budgets.


Economists say the capital tax has the most negative impact on economic growth of any tax. New Brunswick’s move — to a 1% small business tax rate by mid-2007 — lowers the bar on tax competitiveness and will pressure others to follow suit and lower their rates.

Unfortunately, however, some provinces back-tracked on or put off promised tax cuts.
Quebec’s Liberal government had promised in its successful 2003 election campaign to cut personal taxes by
$5 billion over five years. But now it is talking about eliminating the gap with the provincial average and — as Bank of Montreal economics department points out — it’s using an unweighted average. Thus, when it says the gap with the provincial average will be $1.2 billion in 2006, it will still be $3.8 billion higher than Alberta, $3.4 billion higher than Ontario and $3.1 billion higher than British Columbia. Quebec also promised to eliminate its capital tax by 2008 and is only reducing it.

The Ontario Liberal government promised in its election campaign to cut taxes and instead implemented a big Medicare premium. Although this can be justified by the huge deficit inherited by the previous government, B.C., in the same situation, came through with the promised tax cuts. It slashed spending instead.

The Nova Scotia Conservatives included their election promise of a 10% personal income tax cut in the 2003 budget but reneged in 2004. They don’t intend to reintroduce the cut, even though they expect to run significant surpluses during the next four years.

Alberta is still promising a reduction in its corporate tax rate to 8% but hasn’t produced a timetable — even though it could well afford the move.

Here’s a look at what the provinces did do in
this year’s budgets:

> Small business tax rate: New Brunswick cut its small business tax rate to 2% from 2.5% as of July 1, with an increase in the threshold to $450,000 from $425,000. It plans to reduce the rate to 1% and raise the threshold to $500,000 by July 2007.

A number of other provinces lowered their small business rate or raised thresholds.
Manitoba’s rate goes to 4.5% from 5% in 2006 and to 4% in 2007. Quebec’s rate edges down to 8.4% from 8.9% in 2006.
B.C.’s threshold goes to $400,000 from
$300,000 and Nova Scotia’s to $350,000 from $300,000 as of April 26, and goes to $400,000 a year later.

Small business rates in other provinces are 7.5% in P.E.I.; 5.5% in Ontario; 5% in Saskatchewan, Manitoba, Nova Scotia and Newfoundland; 4.5% in B.C. and 3% in Alberta.

> Capital tax: Quebec is gradually dropping its rate for non-financial institutions to 0.3% from 0.6% and for financial institutions to 0.58% from 1.16% by 2009. Nova Scotia is cutting its rate for non-financial institutions to 0.2% from 0.3% by mid-2008.

The only other move on the capital tax front was Saskatchewan’s decision to make royalty trusts subject to capital tax — to level the playing field. The province has a committee looking at its business tax competitiveness that is to make recommendations in time for consideration in the 2006 budget. Economists at TD Bank Financial Group hope the recommendations will include “an outright and prompt removal of the capital tax.”

With the rate drops in Quebec, Saskatchewan’s 0.6% rate for non-financial institutions is now the highest in the country.
At 17%, the province also has the highest general corporate rate.

B.C., Alberta, P.E.I. and Newfoundland don’t have a capital tax for non-financial institutions, and Alberta doesn’t have one for financial institutions, either.

> General corporate tax rate: Manitoba is cutting its general corporate tax rate — currently 15% — to 14.5% in 2006 and 14% in 2007. Quebec, on the other hand, is increasing its to 11.9% from 8.9% over the period 2006-09. The rate will be higher than Alberta’s 11.5%. Quebec corporations will be paying slightly more taxes than the other provinces despite the cuts in capital taxes.

There were a number of minor moves on the corporate tax side, including enhancing or extending various credits or deductions.

@page_break@> Quebec sme growth stock plan: One move of particular interest to financial advisors is Quebec’s introduction of a small and medium-sized enterprises growth stock plan, which provides a 100% tax deduction for an individual investing in a SME.

The province, which is the only one that collects personal income taxes itself and has an entirely independent system, has RRSP contributions limits in line with that proposed in the February federal budget.

> Personal income taxes: Manitoba and New Brunswick are the only provinces reducing personal income tax rates. Manitoba’s goes to 13.5% in 2006 from the current 14%. It is also increasing the personal exemption by $100 next year.

New Brunswick plans a 5% cut in the personal tax burden over the next three years but offers no details beyond a “first step” of indexing personal exemptions, tax brackets and the low income tax reduction.

Quite a few other provinces provided tax relief for low income individuals.

> Retail sales tax: B.C. lowered its retail sales tax to 6.5% from 7% in October prior to the budget. IE