Tax memo: 2012 British Columbia budget

Tax Highlights

Memo No. 2012-07

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Introduction

On Tuesday, February 21, 2012, the British Columbia Minister of Finance, the Honourable Kevin Falcon, introduced the province’s 2012 budget.

The budget changes certain income tax rates, both corporate and personal. It introduces a number of new tax credits, enhances some existing tax credits and reverses several previous tax credit enhancements. In addition, the budget modifies the application of certain other taxes in British Columbia. This Tax memo discusses these and other tax initiatives provided by the budget release, after outlining the fiscal aspects. 

According to the Minister, the province’s economy continues to recover from the global economic turmoil that has affected it since 2008. Despite a $1.6 billion increase in the 2011/12 fiscal-year deficit related to the province’s return to a provincial sales tax (PST) regime, the British Columbia government is projecting a return to a budget surplus by the 2013/14 fiscal year. The budget has an estimated deficit of $2.5 billion for 2011/12 and $968 million for 2012/13, followed by estimated budget surpluses of $154 million in  2013/2014 and $250 million in 2014/2015. These projections are based on economic growth forecasts of 2.9% for the next three fiscal years.

The budget refers to the British Columbia government’s continued commitment to its accelerated infrastructure spending plan. The province now expects to spend $19.2 billion on capital projects (schools, hospitals, roads, bridges, hydro-electric projects and other infrastructure) over the next three years.

The budget forecasts government revenue of $43.1 billion for 2012/13, $44.6 billion for 2013/14 and $45.7 billion for 2014/15, an average annual increase of 2.9% over the next three years. Contingencies of $300 million in 2012/13 and $250 million thereafter are included in the budget to cushion the fiscal plan from unexpected events. In addition, the budget includes forecast allowances of $200 million in 2012/13, $250 million in 2013/14, and $350 million in 2014/15 to guard against revenue volatility.

Total government expenditures are forecast to increase by an average of 0.5% annually over the next three years. Taxpayer-supported debt-to-GDP ratio is forecast to be 17.6% in 2012/13, 18.2% in 2013/14, and 18.3% in 2014/15.

Business tax measures

Corporate income tax rates

General corporate income tax rate

The budget increases the general corporate income tax rate (which also applies to manufacturing and processing (M&P) income) as follows:

2012 BC Budget

This increase is described as a temporary measure to be triggered only if the province’s fiscal situation worsens.

Small business income tax rate

The province’s small business income tax rate will remain 2.5%. This rate was scheduled to drop to 0% on April 1, 2012, but the budget rescinds this reduction. The small business limit will remain $500,000.

Combined corporate income tax rates

The following combined federal/British Columbia rates apply to December 31 year ends:

2012 BC Budget

BC Training Tax Credits

As previously announced, the existing BC Training Tax Credits have been extended three years to December 31, 2014.

Until December 31, 2019, a new refundable training tax credit can be claimed in respect of wages paid to an eligible apprentice in the province’s shipbuilding and ship repair industry. An eligible employer can receive:

  • for each apprentice in the first 24 months of an eligible apprenticeship program, a tax credit equal to 20% of wages paid per year (maximum annual credit of $5,250 per apprentice);
  • similar credits based on an apprentice’s completion of higher training levels; and
  • the above tax credits, increased by 50% in respect of apprentices who are First Nations individuals or persons with disabilities.

Employers claiming this new credit cannot also claim training tax credits under the existing rules.

Book Publishing Tax Credit

The Book Publishing Tax Credit has been extended an additional five years to March 31, 2017.

Film and digital media tax credits

The Film Incentive BC tax credit will no longer be reduced when corporations own less than 100% of the copyright for an interprovincial co-production, effective for productions with principal photography commencing after December 31, 2011.

The regulations are amended to clarify that cutscene productions:

  • can be eligible activities under the Interactive Digital Media Tax Credit; and
  • are excluded from British Columbia’s film tax credits, retroactive to September 1, 2010.

Transition back to PST

As previously announced, on April 1, 2013, British Columbia will revoke the Harmonized Sales Tax (HST) and return to a 7% Provincial Sales Tax (PST) and 5% Goods and Services Tax (GST) tax regime. PST will apply to the same goods and services that had been subject to PST before the implementation of the HST. At that time, permanent PST exemptions that applied previously will also be reinstated.

Transitional rules to address the application of PST are forthcoming. Generally, the PST transition rules will mirror the federal HST transitional provisions.  The PST generally will apply when tax becomes payable after March 31, 2013. Specific PST transitional rules will apply for various types of transactions (e.g., for goods coming into British Columbia). The transition to the HST had provisions for the pre-payment before the introduction of the HST; comparable rules are not expected for the reintroduction of the PST.

On February 17, 2012, British Columbia announced transitional provisions to mitigate potential double taxation on new housing resulting from the return to PST. These transitional rules are discussed in our Tax memo, “Returning to B.C.’s Provincial Sales Tax: Transitional rules for new housing” at www.pwc.com/ca/taxmemo.

On the transition to PST, certain levies and taxes will be reinstated, including:

  • Passenger Vehicle Rental Tax;
  • a surtax on passenger vehicles with a purchase price of $55,000 and over;
  • the multijurisdictional vehicle tax for certain commercial carriers;
  • the Innovative Clean Energy Fund levy on the purchase of natural gas, fuel oil and propane, but not on the purchase of electricity; and
  • the Hotel Room Tax, which applied to short-term accommodation.

The 12% tax on private sales of vehicles, boats and aircraft will continue to be in effect. It ensures similar tax treatment of private sales and sales by GST registrants. Either the 12% tax or the PST will apply, not both.

The 10% PST will be reinstated on liquor. However, it is expected that liquor mark-ups will be reduced to their pre-HST levels to keep shelf prices constant.

Administrative improvements will be made to the PST, with the intent to reduce the administrative and compliance requirements for businesses.    

Small Business Venture Capital Tax Credit

The budget for this program, which provides a 30% income tax credit on investments in eligible business corporations, has increased by $3 million, allowing for an additional $10 million in investment.

Personal tax measures

Personal income tax rates and brackets

No changes have been made to personal income tax brackets beyond the previously legislated inflation increases.

Dividend tax credit rates

For 2012 and later years, British Columbia’s dividend tax credit rate on eligible dividends will be 10%, instead of 9.76%. Therefore, the top tax rate on eligible dividends will be 25.78%, down from 26.11%.

Top personal tax rates

Top combined federal/British Columbia rates follow:

2012 BC Budget

BC First-Time New Home Buyers’ Bonus

The BC First-Time New Home Buyers’ Bonus will provide a refundable income tax credit to first-time home buyers of a newly constructed home. The credit equals 5% of the home’s purchase price (maximum credit is $10,000), but is reduced as follows:

2012 BC Budget

The credit will apply only if the HST applies and a written agreement of purchase and sale was entered into after February 20, 2012, and before April 1, 2013. Further, the home must be the first home of the individual and his or her spouse or common-law partner, and must be intended as the individual’s primary residence.

BC Seniors’ Home Renovation Tax Credit

The BC Seniors’ Home Renovation Tax Credit will provide a 10% refundable tax credit on eligible expenditures incurred after March 31, 2012, to a maximum credit of $1,000. It can be claimed by persons 65 years or over or by individuals who share a home with a relative of that age.

The credit is available on both owned and rented properties. Eligible expenditures will include permanent home renovations that will provide a senior with increased independence and the ability to remain in the home longer.

Children’s Fitness Credit and Children’s Arts Credit

Commencing 2012, a non-refundable Children’s Fitness Credit and Children’s Arts Credit will be available. Eligibility will mirror their federal equivalents.

Medical Expense Tax Credit

The $10,000 limit on claims of medical expenses for a dependant other than a spouse or minor child is eliminated, starting 2012.

Transition back to PST

As a result of the return to a PST regime, the BC First-Time New Home Buyers’ Bonus, discussed above, is introduced. In addition:

  • Basic personal amount tax credit – the enhancement to this credit in 2010 will be reversed, starting 2013. The basic personal amount for each year will be based on the 2009 amount of $9,373, adjusted for inflation. For 2013 only, the amount will blended, reflecting the previous (higher) credit for the first three months of 2013, and the new (lower) credit for the remainder of the year.
  • BC Harmonized Sales Tax (HST) Credit – will be eliminated on April 1, 2013. The final BC HST Credit quarterly payment will be issued January 2013.
  • BC Sales Tax Credit – will be re-implemented, commencing 2013. It will have the same eligibility criteria and benefit calculation that it had before its replacement by the BC HST Credit. The maximum annual credit will be $75 per adult, reduced by 2% of family net income over $15,000 for single individuals and over $18,000 for couples.

Medical Services Plan

Effective January 1, 2013, monthly Medical Services Plan premiums will increase for:

  • single individuals – by $2.50 to $66.50;
  • two-person families – by $4.50 to $120.50; and
  • families of three or more persons – by $5.00
    to $133.00.

Premium assistance will be enhanced to ensure those receiving assistance will be unaffected.

Carbon Tax

The carbon tax will increase to $30 per tonne of carbon dioxide equivalent on July 1, 2012, and will remain at this rate after June 30, 2013.

As a result of an adverse British Columbia court decision in Island Tug & Barge Ltd. v The Queen [2011] ETC 5006, effective February 22, 2012, a clarification provides that refunds of carbon tax are provided only for fuel used inter-jurisdictionally, not inter-provincially, by a commercial marine service.

Beginning May 1, 2012, the obligations of collectors, retail dealers and purchasers for fuel imported by ship into British Columbia will be made generally more consistent with federal obligations regarding fuel imported by ship.

Tobacco Tax

On the return to the PST regime, the provincial portion of the HST on tobacco products will be eliminated. Tobacco tax rates will be adjusted to generally keep the overall tax on tobacco products constant.  

Motor Fuel Tax

Starting April 1, 2012, the refund for jet fuel used for the cargo portion of a flight that begins or ends outside North America is expanded to provide an exemption and refund for jet fuel used in all international passenger and cargo flights, including flights to the United States.

Beginning May 1, 2012, the obligations of collectors, retail dealers and purchasers for fuel imported by ship into British Columbia will be made generally more consistent with federal obligations regarding fuel imported by ship.

Property Transfer Tax

Amendments to the Property Transfer Tax Act will:

  • give the administrator authority to refund tax when there was no legal obligation to pay it; and
  • allow the re-registration of a life estate without the incidence of tax following the registration of a mortgage involving the same owner, the same life estate holder, the same property and the same terms as the original life estate.

Property tax measures

Home Owner Grant

As previously announced, the threshold for the phase-out of the $570 home owner grant will increase from $1,150,000 to $1,285,000 for the 2012 tax year. The grant is reduced by $5 for every $1,000 in assessed value exceeding this threshold, so that it is eliminated for properties valued at $1,399,000 or more.

The additional $845 grant available to seniors, certain veterans and the disabled is eliminated for properties valued at $1,454,000 or more.

For the 2012 and subsequent taxation years, the income threshold below which certain homeowners may qualify for a full grant, despite the value of their homes, increased from $28,000 to $30,000. The income threshold to qualify for a partial benefit increased from $30,000 to $32,000.

As previously announced, a new low-income veteran’s supplement will provide certain low-income veterans (who otherwise would not qualify) the enhanced home owner grant, commencing 2012. If income for the previous year was below $30,000, the full enhanced grant will be allowed. If it was below $32,000, a partial grant will be available.

Starting 2012, homeowners who have moved into a residential facility can qualify for the home owner grant for one additional year.

Property tax deferment program

Starting 2012, fire insurance will no longer be required to be eligible to defer property taxes under this program. Instead, for purposes of determining whether the minimum equity requirements are met, the calculation will exclude the value of uninsured improvements to the property.

Also commencing 2012, new leaseholders will not be eligible to defer property taxes. Leaseholders that currently defer taxes will not be affected by this change.

School Act

Average residential school property taxes for 2012, before the application of the home owner grant, will continue to increase at the previous year’s provincial inflation rate. Rates for non-residential property classes, except the rate for the major industry property class, will be set so that non-residential school property tax revenue will increase by inflation plus new construction. As previously announced, the major industry class rate will be set to be the same as the business class rate.

The School Act is amended to allow for partial exemptions when one registered owner of a particular property is tax-exempt and others are not.

Rural Area Tax

For 2012, average residential rural area taxes will increase by the previous year’s provincial inflation rate. Non-residential rural area tax rates will be set so that total tax revenue from this source will increase by the provincial inflation rate plus the cost of new construction.

Commencing 2012, the Taxation (Rural Area) Act (TRAA) is amended to clarify that the exemption for property held in trust for a First Nation applies only with respect to property held by the Crown. It is also amended to allow for partial exemptions when one registered owner of a particular property is tax-exempt and others are not.

Other tax measures

Police Tax

Amendments to the Police Act will provide that the fee paid to municipalities for administration of the police tax will be permanently set. The minister will have to approve changes to the fee.

Insurance Premium Tax

Effective July 1, 2012, the Insurance Premium Tax Act is amended to remove certain classes of insurance definitions and allow them to be defined by the new Classes of Insurance Regulation under the Financial Institutions Act.