SASKATCHEWAN BUSINESS TAX REVIEW

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SASKATCHEWAN BUSINESS TAX REVIEW
Final Report and Recommendations

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Business Tax Review (BTR)

• BTR Committee established March 2005 to
• Review provincial business taxes
• Examine potential reforms
• Public consultation process
• Business, labour, professionals public
• Report to Minister by November/05

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BTR Terms of Reference

• Assess competitiveness of business taxes
• Impact of lowering business taxes
• Impact of changing the tax mix
• Impact of current capital tax reliance
• Effectiveness of existing tax expenditures
• Sustainability of business tax changes

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Current Business Taxes

• High general business tax rates
• 17 Corporate Income Tax rate
• 0.6 Corporate Capital Tax rate
• Targeted tax reductions for specific sectors and
  no payroll tax
• Higher tax load on capital than labour

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Targeted Tax Expanditures
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Current Business Tax Rates
SK Levies High General Income Capital Rates
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BTR Consultation Process

• Committee solicited public input
• Public meetings throughout Saskatchewan
  ? constructive, non-partisan, focused discussion
  of business tax issues
• Direct meetings with business, labour and
  professional organizations

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Summary of Consultations - General Tax Policy
Approach

• Targeted measures effective for specific sectors
• But result in higher general tax rates that
  reduce economic opportunities
• Other jurisdictions reducing business tax rates
• Broad-based approach more efficient, visible and
  simple ? improves competitiveness

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Summary of Consultations - Corporation Capital
Tax (CCT)

• Continually raised as a deterrent to investment
  and growth
• Paid by only 1,400 large corps, but also a
  concern for smaller businesses
• drives away larger businesses deprives them of
  vital local markets for products and services
• creates an incentive for corporations to devise
  strategies to avoid paying the tax

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Summary of Consultations - Corporation Income
Tax (CIT)

• 17 general rate highest in Canada
• Reinforces the high tax image of Sask.
• 12-point differential between general and small
  business tax rates
• Low small business limit of 300,000
• small firms want to grow and steps must be
  taken to lower the costs of expanding

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Summary of Consultations - Provincial Sales Tax
(PST)

• Taxation of business inputs adds to cost of
  investment, impedes economic development
• PST should exempt capital investment or should be
  harmonized with GST
• Harmonization would remove an impediment
  to capital formation for Saskatchewan businesses

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Our Assessment

• Current business taxes are outdated and
  uncompetitive
• Heavy reliance on capital and income taxes
  discourages capital formation
• Targeted tax incentives impair overall economic
  performance
• RESULT Current tax system discourages investment
  and job creation

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Our Assessment

• International and national shift away from
  capital-based taxation
• capital is internationally mobile and takes
  positive productivity with it
• We are out of step with other jurisdictions and
  we are losing investment and jobs

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Competitiveness Investment
Capital Investment in SK Lagging
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Comparison - Business Tax Load
SK has a very high business tax load
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Current METRs on Investment
High METR discourages SK investment
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Current Business Taxes GDP
SK relies heavily on business tax revenues
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Business Investment in Sask
SK is not capturing profits for reinvestment
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Change in Total Employment
Weak SK employment cause for concern
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Summary of Recommendations

• Two major business tax reforms
• Corporate Tax Reform
• 3 Year implementation beginning July 1/06
• Sales Tax Reform
• Subject to public consultations and federal
  negotiations through 2006-07

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Corporate Tax Reform

• Eliminate general CCT rate
• Reduce general CIT rate to 12
• Increase small business limit to 500,000
• Make ITC for MP capital refundable

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Corporate Tax Reform - CCT

• General CCT rate of 0.6 reduced
• July 1/06 - 0.3
• July 1/07 - 0.15
• July 1/08 - eliminated
• Resource Surcharge converted to the royalty
  system July 1, 2008
• No change for financial institutions provincial
  Crown corporations

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Corporate Tax Reform - CIT

• General CIT rate of 17 reduced
• July 1/06 - 14
• July 1/07 - 13
• July 1/08 - 12
• Small business limit of 300K increased
• July 1/06 - 400K
• July 1/07 - 450K
• July 1/08 - 500K

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ITC for MP Capital

• Existing non-refundable ITC converted to
  refundable status on future investment
• Carry forward period for unused ITCs previously
  earned extended to 10 years
• Transitional provision pending sales tax
  harmonization

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Corporate Tax Reform Impact General CCT Rates -
2009
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Corporate Tax Reform ImpactGeneral CIT Rates -
2009
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Combined Federal/Provincial Tax Rates on Small
Business Income
Assumed to be the active business income of
CCPCs.
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Corporate Tax Reform ImpactBusiness Tax Load
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Corporate Tax Reform ImpactMETRs on Investment
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Corporate Tax Reform ImpactBusiness Taxes as a
of GDP
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Corporate Tax Reform ImpactEconomic Impacts (
change)
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Corporate Tax Reform Implementation Plan
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Corporate Tax ReformEstimated Fiscal Impact (M)
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Sales Tax Reform

• Strongly support harmonization of PST
  with federal GST
• Removes tax from business inputs and capital
  investment
• Improves natl and internatl competitiveness
• Streamlined admin, improved enforcement
• Promotes investment, reduces production costs,
  stimulates demand for addl capital and labour

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Impact of Sales Tax Reform

• Significant distributional implications
• Harmonization shifts sales tax from business to
  final consumers
• Business currently pays 54 or about 500 M
• Final consumers would absorb most of this tax
• Reducing this shift requires offsetting measures,
  resulting in fiscal challenges

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Sales Tax Reform Framework

• Proposed framework for harmonization
• Reduce PST rate to 5
• Apply GST base (except reading materials)
• Federal tax administration
• Distributional concerns addressed by
• Rate reduction to 5
• Other tax reductions (income tax or credits)

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Sales Tax Reform O/S Issues

• Fiscal - Unaffordable without federal assistance
• Distributional Impact on final consumers must
  not reduce tax fairness
• Other - Impact on the price of key commodities
  like fuel

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Sales Tax Reform Timetable

• Undertake public consultations and federal
  negotiations through 2006-07
• Federal transitional assistance and on-going fix
  to Equalization required
• Public dialogue on harmonization to explain
  economic benefits
• Announce results in 2007-08 Budget

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Combined Impact of All ReformsBusiness Tax Rates
- 2009
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Combined Impact of All ReformsBusiness Tax Load
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Combined Impact of All ReformsMETRs on Investment
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Combined Impact of All ReformsBusiness Taxes as
a of GDP
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Combined Impact of All ReformsEconomic Impacts
( change)
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Conclusion

• Business Tax Reform will
• Reduce cost of investment, both initially
  ongoing
• Encourage greater investment within province and
  attract external capital
• Promote increased savings and labour force
  participation
• Encourage long term capital accumulation and rise
  in productivity

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Conclusion

• Business Tax Reform will
• Stimulate strong demand for labour - due to
  investment growth
• Promote strong incentive for labour participation
  due to higher wages
• Establish very positive conditions for investment
  and employment growth in province

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Business Tax ReformFrom Good to Great

• The future of Saskatchewan is wide open. All it
  needs is good planning, a positive environment
  in which to invest, and a vision for what it can
  become.
• Business tax reform will create an environment
  more conducive to new investment and will lead to
  more jobs and opportunity for Saskatchewans youth

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Business Tax ReformFrom Good to Great

• Business tax reforms will add to Saskatchewans
  economic momentum
• As the Premier has said
• Saskatchewan has a history of overcoming
  challenges and seizing opportunities there can
  be no social progress without economic progress