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Significant Changes in BC Tax

Normally, in most provinces, the income tax changes in provincial budgets are pretty simple. Most provinces piggyback the federal tax system. Thus, every change in federal law affects the provincial coffers directly. The only significant provincial decision is to decide what personal and corporate tax rates will be. In fact, for individuals, the provincial tax is not calculated on federal taxable income, but on “basic federal tax”. This is all changing!

Along with other provinces, in 2000, BC will shift its provincial tax calculation for individuals from basic federal tax to federal taxable income. BC will match the three federal brackets in 2000, which are essentially, under $30,000, $30-60,000, and over $60,000. BC’s tax rates will be 8.4%, 12.4% and 14.4% respectively. A 30% provincial surtax will kick in on provincial tax over $5,300. A second one for 15% will kick in on provincial tax over $8,660.

However, commencing in 2001, each province may go its own way in setting brackets, rates, credits, etc. This will lead to a nightmare for the companies who program tax preparation software and drive people who “do it the ole fashioned way” to fork over some cash to these afore-said software-makers. In 2001, BC will:

• Index the tax brackets according to BC’s inflation experience (while the feds will do their own thing!)
• Eliminate the provincial surtaxes above and recover the revenue loss in the rest of the system by creating five brackets instead of the previous three. The top provincial bracket will kick in at $85,000.
• Reduce the middle bracket, consistent with the feds
• Index some of the basic exemptions on its own schedule, separate from the feds

While the provinces are gleeful about the new deal with the feds, the step forward is one backward-taken in some ways. Michael Wilson simplified our system in the mid-’80s by shrinking the number of brackets down to three. This made it easier for tax practitioners to give counsel “on the fly”. Now, the combination of the federal and provincial systems will create many brackets. So, giving simple, quick advice on the tax cost of something will be gone, and advisors will be running off to their computers to answer client enquiries.

Secondly, we now may see even more regional disparities in tax burdens, as the differing philosophies of the provincial governments have more room to be show-cased.

On the corporate side, BC has been aggressively attacking its corporate tax rates. The small business rate on active income dropped from 9% to 8.5% in January 1999, followed by another drop to 5.5% in July 1999, and yet another one to 4.75% in July 2000. Also, effective April 1, 2000, a new 3% BC investment tax credit was introduced for qualified capital investment. It applies against BC taxes owing and can be carried back three years and forward ten years. Qualified investments are new machinery, equipment or buildings to be used in BC for manufacturing and processing activities. The detailed applications of the new program draw from the mature federal rules in this area.

Lastly, don’t forget that BC added an R&D investment tax credit program last Fall, to match the feds and several other provinces.

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