2014-2015 British Columbia budget highlights
Canadian tax alert
February 18, 2014
Read a summary of the British Columbia budget highlights from Deloitte's tax professionals.
BC Minister of Finance, Michael de Jong, presented the 2014 BC Budget this afternoon, announced as Balanced Budget 2014. While steady growth for the BC economy is expected, the budget focuses on spending discipline with modest spending on priority areas. Additional funding of $415 million is provided to help make British Columbia more affordable for BC families, create jobs and stimulate growth.
The following is a summary of the tax highlights contained in the budget.
- Introduction of a Liquefied Natural Gas (LNG) income tax, a two-tier tax on income from the liquefaction of natural gas at LNG facilities in British Columbia.
- Taxes on cigarettes are further increased by $3.20 a carton, effective April 1, 2014.
- Increased threshold for the first time homeowners’ exemption from Property Transfer Tax.
The focus of the budget released today reinforces the commitment of prior budgets to deliver a “balanced” budget and projects surpluses of $184 million in 2014-2015, $206 million in the following year and $451 million in the third year. The fiscal plan includes contingencies to help manage unexpected costs and priority initiatives, including LNG development. Budget 2014 does not provide any additional funding to ministries for public sector compensation. Any future negotiated settlements will be provided from Contingencies vote allocations.
Measures in Budget 2014 include working to eliminate the deficit and reduce borrowings, which is critical in maintaining BC’s triple-A credit rating.
Annual spending is projected to grow at an average of 2.2%,compared to an expected annual average revenue growth of 2.6%. A number of tax policy measures are included in Budget 2014 and are projected to generate $181 million in net benefits to taxpayers. Economic growth is projected at 2.0% in 2014, 2.3% in 2015, and 2.5% in 2016, which is on track with estimates provided last year of 2.2% for 2014 and 2.5% for 2015.
The projected revenue growth of 2.6% will come from increased taxation revenues associated with increased corporate profits, personal income, job creation, housing starts and consumer spending, as well as tax revenues due to job creation and the temporary 2.1% increase in tax rates for individuals with incomes greater than $150,000 per year. This temporary tax measure is limited to two years (2014 and 2015).
Exports and manufacturing improved last year with steady demand outside of British Columbia for its products. The pace of BC employment is expected to continue to improve. The potential slowdown in domestic activity, weakness of the U.S. economic recovery, slowing demand for goods and services by Asia, fluctuating Canadian dollar and ongoing concerns about European Union member debt instability remain concerns for the BC economy.
Measures concerning business
- BC’s Scientific Research and Experimental Development Tax Credit extended for an additional 3 years to September 1, 2017. The credit is available to eligible taxpayers performing eligible research and development activities in the province.
- Film tax credits are extended to the Capital Region District for the purposes of the Distant Location Tax Credit, effective for productions beginning on or after February 19, 2014. This extension applies to both the Production Services Tax Credit and Film Incentive BC Tax Credit.
- Elimination of provincial corporate income tax preference for credit unions that allowed credit unions to benefit from a lower tax rate on a portion of their income. This will be phased out over 5 years starting in 2016. The federal preferential corporate tax rate is being phased out over 5 years commencing 2013.
Measures concerning individuals
- The June Update 2013 introduced the BC Early Childhood Tax Benefit of $55/month per child under 6, starting April 2015 for eligible families. The maximum benefit will be available to eligible families with family net incomes up to $100,000 and will be fully phased out at family net incomes of $150,000.
- Budget 2013 introduced the BC Training and Education Savings Grant of $1,200 for children born on or after Jan 1, 2007 and Minister de Jong confirmed that by the end of the fiscal year the BC government intends to work with the federal government to begin making payments. No matching or additional contributions are required in order to receive the grant. In order to claim the grant, a family is required to open an RESP account and apply for the grant before the child turns seven years old.
- BC’s Mining Flow-Through Share Tax Credit extended to the end of 2014.
Sales tax measures
- Exemption from provincial sales tax (PST) for new residents bringing or sending tangible personal property, used solely for a non-business purpose, into British Columbia is expanded to include such property that enters British Columbia within one year from the date the individual became a resident of British Columbia. Formerly, such goods had to be brought into British Columbia within six months of the person becoming a resident.
- To facilitate carbon tax collection, the director is authorized to appoint a vendor as a collector up to four years retroactively. Penalties are clarified for retroactive collector appointments which may be imposed on a vendor who sells fuel before being appointed a collector.
- Purchase price of an accommodation sold with meals and services is the lesser of 15% of the total value of the consideration accepted by the accommodation provider or $100 per day, for accommodation providers that only sell packages for a single price, regardless of the type of services provided or the type of the accommodation provider.
- A number of BC PST clarifications are being made, and we note the Ministry of Finance has already re-issued PST Bulletins that are affected, with a summary of the relevant clarifications at the end of each such bulletin.
LNG tax measures
The government plans to table legislation for a new double-tiered LNG income tax this fall. This new tax and the return of the 7% BC PST in 2013 will be key cost considerations for organizations looking to invest billions of dollars in BC-based LNG facilities. The minister released a number of high-level details for the proposed tax regime today while noting that they are still subject to review and are to be determined and confirmed in legislation this fall.
The following is a summary of the general mechanics of the LNG tax announced today.
- Tax is levied at the level of the LNG plant on downstream production income from liquefaction of natural gas at LNG facilities in British Columbia.
- Production income will include revenues from sale of liquefied natural gas, rents and fees for the use of a LNG facility and tolling fees for processing natural gas at a LNG facility, regardless of whether the LNG is exported or sold domestically.
- The first tier of income tax (Tier 1 tax), at a rate of up to 1.5%, becomes payable when LNG production revenue exceeds allowable operating costs (positive net proceeds).
- Tier 1 tax is creditable against the second tier of tax (Tier 2 tax).
- Tier 2 tax, at a rate of up to 7%, is payable when the operator’s “capital investment account” has been fully recovered through net proceeds.
- Both tier 1 and 2 taxes are to be calculated on a facility by facility basis, according to supplemental information provided to the stakeholders.
- The capital investment account will include the costs of constructing the LNG facility and making it operational. A facility would include gas purification and liquefaction systems, storage tanks, marine loading systems and other supporting equipment and facilities.
In his speech to the stakeholders this morning, the Minister indicated that there are a myriad of complex factors that are still under consideration, including the following:
- What should be included in the capital costs of a LNG plant and what should be excluded?
- Whether there should be augmentation of these capital costs or not?
- The use of transfer prices to determine the cost of natural gas, sales of LNG, rental and processing fees, for transactions between non-arm’s length parties, under different possible structures.
Most, if not all, of the above major considerations will be determined and confirmed in legislation this fall. The government will continue its analysis of global economic and market conditions to ensure that the province receives its fair share of the value added from the liquefaction of natural gas in British Columbia while remaining competitive. The government is aiming to provide certainty on the major components of the new tax structure to the proponents this fall while the details for the administration and enforcement of the tax system will be tabled in the spring of 2015.
Finally, in the questions and answers period with the stakeholders, the Minister reconfirmed the government’s goal of having three LNG facilities in British Columbia by 2020, while noting the investment decisions for the proponents, the government and other stakeholders are complex and difficult with evolving world markets.
Guiding principles for the LNG tax structure
Per the BC government, the proposed taxation framework is based on four guiding principles:
- Appropriate share for British Columbians: The people in BC should receive an appropriate return for the consumption of the province’s supply of non-renewable natural gas.
- Competitive jurisdiction: The overall tax regime including all taxes will need to be competitive with similar jurisdictions for this type of LNG investment and with characteristics (e.g., skilled workforce, proximity to markets and gas reserves and cooler temperature) similar to British Columbia.
- Predictability: Project proponents are to be provided with a clear description of the fiscal regime prior to final investment decision.
- Level playing fields for the proponents: All proponents will be subject to the same framework.
Corporate income tax impact for potential investors
Companies carrying on business in British Columbia are subject to a combined federal and provincial income tax rate of 26%. LNG producers will be subject to a higher rate of tax, possibly up to another 7% of tax. Furthermore, due to the nature of the Tier 1 tax, producers may be required to pay LNG tax when they are not sufficiently profitable to be subject to corporate income taxes.
Under the current federal and BC regimes, income taxes are not deductible unless specifically allowed. Therefore, the proposed LNG tax would not be deductible unless the federal government takes steps to provide relief. In addition, the federal government can provide further assistance by accelerating tax depreciation for LNG production facilities (presently depreciable at a low rate of 8% on a declining basis).
For potential investors facing large upfront capital outlays and high uncertainties, the announcement of the tax follows on the heels of last year’s return of the 7% provincial sales tax (PST) regime, and at a time when many are predicting a reduction in the premium currently associated with oil-linked LNG contracts.
Comparison to competing countries
The BC government reviewed the tax and royal regimes of key competitor jurisdictions, such as Australia and the United States, particularly with respect to the proposed BC LNG income tax and concluded the proposed framework appears competitive when compared with the frameworks in those jurisdictions.
Other tax measures
- Tax rate on cigarettes increased effective April 1, 2014 from $44.60 to $47.80 per carton and the tax rate on fine-cut tobacco is increased from 22.3 cents per gram to 23.9 cents per gram.
- First Time Homebuyers’ threshold increased for registrations on or after February 19, 2014 to $475,000 from $425,000. Properties valued between $475,000 and $500,000 will be eligible for a partial exemption. Eligible first time homebuyers can save up to $7,500 in property transfer tax on the purchase of their home.
- Homeowner grant phase-out threshold decreased from $1,295,000 to $1,100,000 for the 2014 tax year. The threshold enables 93.8% of homeowners to claim the full grant, while 95% were eligible for the full grant under the previous threshold.
- Medical Services Plan premiums will increase effective January 1, 2015 by about 4%. Premium assistance is enhanced so the increase will not affect those receiving assistance.
- Under property deferment programs where a property becomes subject to an easement, eligible homeowners can defer property taxes until the home is sold, transferred to a new owner or becomes part of an estate if they meet a minimum equity requirement.
- Property of a university that is leased to a college affiliated with the university is exempt from property taxation so long as it is held for college purposes. This exemption will be retroactive to the extent necessary to give it effect for the 2014 taxation year.
For further details, we refer you to the Ministry of Finance website.
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