Provincial finances received a shot in the arm with the increased federal transfers announced in the March 19 federal budget. But the questions is: will the transfers provide enough additional money to restore fiscal balance between Ottawa and the provinces?

David Perry, senior research associate at the Canadian Tax Foun-dation in Toronto, maintains it will take a few years to determine if the added money is sufficient to keep the provinces deficit-free while allowing them to reduce their debt and become or remain competitive in their taxation policies.

All of the provinces — except Newfoundland and Labrador and possibly Nova Scotia — receive more money with the changes to the equalization program and the Canada health and social transfer. These two provinces have the option of continuing with the accords they signed in 2005 with the previous federal Liberal government. These accords exclude the provinces’ offshore oil and gas revenue from the calculation of their equalization benefits, which is based on average revenue for five provinces excluding Alberta and the Atlantic provinces. The new equalization formula excludes only 50% of the oil and gas revenue, but is based on the revenue of all 10 provinces.

One ominous development this year is the decision by New Brunswick’s new Liberal government to raise taxes in order to stay out of deficit. Fortunately for the province, it has been the poster child of fiscal responsibility and tax competitiveness. Because of that, it is able to raise taxes without losing competitiveness. The question now becomes whether the increase in federal transfers — which were not included in New Brunswick’s budget — will be enough to ensure the province doesn’t have to raise taxes again down the road.

There’s also the question of whether this is a harbinger of things to come for the other vulnerable provinces. Ontario, Quebec, Manitoba and Prince Edward Island do not have oil and gas revenue swelling their coffers, and all have economic challenges.

But New Brunswick is the only one of the five hitting the wall in the fiscal year ending March 31, 2008. The other four are managing to cut taxes or introduce new programs while remaining close to staying balanced. Ontario’s budget is projecting a $400-million deficit, but that’s only if the $750-million contingency reserve for unexpected expenditures and/or lower than anticipated revenue is needed. Manitoba took $72 million out of its fiscal stabilization fund in fiscal 2007. Quebec projects a balanced budget and P.E.I. a small $2-million surplus.

Despite being pre-election budgets, Ontario’s, Quebec’s and Manitoba’s budgets weren’t full of goodies. Quebec voters elected a minority Liberal government in the March 26 election, so it’s not known yet what in the budget will be implemented. But with the addition of about $700 million in federal transfers, the deficit of $995 million projected for fiscal 2009 will be much smaller and may not even occur.

Manitoba voted on May 22, after Investment Executive went to press; Ontario’s election will be on Oct. 10.

Analysts like what Manitoba and P.E.I. are doing. TD Bank Financial Group calls Manitoba’s policy selection a “good balance between responding to tax pressures from other western provinces, reinvesting in priority areas and debt bur-den.”

In P.E.I.’s case, TD urges the province to focus on areas crucial to its competitiveness: reducing the debt burden, providing broad-based tax relief and boosting investment in strategic areas such as education and training.

Nova Scotia and Newfoundland and Labrador are out of the woods for the time being because of their offshore oil and gas revenue, but they need to take advantage of this to reduce debt loads and tax bur-dens. Nova Scotia made a start in 2006 and Newfoundland and Labrador has moved on the tax side with this budget.

The focus of most of this year’s budgets, however, is on spending as provinces struggle to find the money needed for health care and education. But there are some significant tax cuts. B.C., Manitoba, Quebec and P.E.I. cut personal income tax rates and/or raised the thresholds for tax brackets. Some provinces have already said they will follow the federal government in allowing pension income-splitting and Perry expects the rest to follow. “There is a lot of pressure for uniformity in tax regimes for tax-planning purposes and simplicity in tax forms,” he says.

@page_break@Manitoba is reducing its corporate tax rate in steps, reaching 12% by mid-2009 from the current 14.5%, and will eliminate its general capital taxes by 2011. Saskatchewan’s general capital taxes will disappear by mid-2008, and Nova Scotia’s by 2012. Ontario moved up elimination of both its general and financial institutions’ capital taxes to mid-2010, while Quebec kept its current rate but raised the non-refundable capital tax credit for manufacturing and processing to 10% from 5% and extended it to 2012.

Manitoba is reducing its small-business tax rate; Newfoundland and Labrador raised the threshold to qualify as a small business. Alberta has instituted an independent review of its tax and royalty regime for the petroleum sector.

The only major move on sales taxes was Saskatchewan’s pre-budget cut to 5% from 7%.

Alberta is reducing its education property tax, and Ontario says it will gradually cut the education tax rate for businesses to a uniform 1.6% by 2014.

In Manitoba and Saskatchewan, cuts are part of multi-year reforms. Saskatchewan completed its personal income tax reforms in 2003.The corporate side, including changes to the resources royalty regime, is to be finished by mid-2008

Where does this leave the various provinces in terms of tax competitiveness? Here’s a summary:

> Personal Income Taxes. This is hard to evaluate because of the differences in the number of tax brackets, the levels at which they kick in and the variety of deductions and tax credits in the various provinces.

With its cuts this year, B.C. now has the lowest rate for up to $100,000 in annual income, but Alberta is lower for higher income levels. Saskatchewan is second-lowest, followed by Ontario.

Newfoundland and Labrador’s big cuts will give it the lowest tax burden in the Atlantic region, but it will still be “meaningfully higher than Ontario and the West,” says TD. And New Brunswick, even with its increases, remains competitive within the region.

> Corporate Income Taxes. Manitoba’s income tax cut to 12% in mid-2009 will put the province in line with B.C. New Brunswick’s increase to 13% from 12% puts it in step with Saskatchewan but less than Ontario and Newfoundland and Labrador, both at 14%, and Nova Scotia and P.E.I., both at 16%.

Alberta and Quebec have the lowest corporate income tax rates, at 10% and 9.9%, respectively. Saskatchewan and Newfoundland and Labrador have lower rates for manufacturing, with Saskatchewan at 10%, vs 13% for other local corporations, and Newfoundland and Labrador at 5%, vs 14%.

> Capital Taxes. B.C., Alberta, P.E.I., Newfoundland and Labrador and the federal government have no general capital taxes, a group that Saskatchewan, Ontario and Manitoba will join in 2008, 2010 and 2011, respectively. Only Alberta does not have capital taxes on financial institutions; Ontario plans to eliminate them in 2010.

> Small Business. The big move was in New Brunswick, where the rate increases to 5% on July 1 for the 2007 taxation year from 1.5%, instead of dropping to 1% as planned. The threshold for the rate also declines, to $400,000 from $475,000. Manitoba is lowering its rate to 1% by 2009 from 3%. New-foundland and Labrador raised the threshold for this tax to $400,000 from $300,000.

Alberta and Manitoba now have the lowest small-business tax rates, at 3%. Quebec’s is 8%; Ontario, 5.5%; P.E.I., 5.4%; Nova Scotia and Newfoundland and Labrador, 5%; and B.C. and Saskatchewan, 4.5%.

> Payroll Taxes. Manitoba increased the exemption to $1.25 million from $1 million for 2008, and raised the threshold for which a reduced rate is charged to $2.5 million from $2 million. Only Manitoba, with its rate of 2.15%, Ontario (1.95%), Quebec (4.26%) and Newfoundland and Labrador (2%) have these taxes.

> Sales Taxes. Excepting Alberta, which has no sales taxes, Sas-katchewan’s is the lowest at 5%. P.E.I. is at 10%, while the other Atlantic provinces and Ontario are at 8%. Quebec is at 7.5%, and B.C. and Manitoba are both at 7%. IE