SASKATCHEWAN BUSINESS TAX REVIEW

Final Report and

Recommendations

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

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

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

5April 2004

Saskatchewan Finance

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Targeted Tax ExpandituresSmall Business Sector $183.5 M

M&P Sector $43.5 M

Agriculture Sector $259.3 M

R&D Sector $10.0 M

Resource Sector $16.2 M

Other Sectors $21.0 M

Total $533.5 M

Current Business Tax Rates

BC AB SK MB ON

Corporate Income Tax General M&P Small business

12.0%12.0%4.5%

11.5%11.5%3.0%

17.0%10.0%5.0%

15.0%15.0%5.0%

14.0%12.0%5.5%

Corporate Capital Tax Exemption General

--

--

$20 M0.6%

$5 M0.5%

$5 M0.3%

Provincial Sales Tax 7% - 7% 7% 8%

Payroll Taxes -

SK Levies High General Income & Capital Rates

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

BTR – Consultation Process

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

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”

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”

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”

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

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

Competitiveness & Investment

Average Annual Increase, 2002 to 2004, Private Non-Residential Gross Fixed Capital Formation

Saskatchewan

Britain

Italy

Iceland

Netherlands

Germany

Japan

Ireland

Australia

USACanada

France

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

85 95 105 115 125

KPMG Index (USA=100)

Capital Investment in SK Lagging

Comparison - Business Tax Load

107%

53%

117% 120%111%

0%

100%

BC AB SK MB ON

SK has a very high business tax load

Current METRs on Investment

39%

32%

44%

40% 41%

15%

25%

35%

45%

BC AB SK MB ON

High METR discourages SK investment

Current Business Taxes % GDP

4.2%

3.2%

2.1%

3.8%

3.5%

4.1%

0.6%

0%

1%

2%

3%

4%

5%

BC AB SK MB ON

SK relies heavily on business tax revenues

Business Investment in Sask

0%

100%

200%

300%

400%

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Investment as ashare of profits

$0

$2

$4

$6

$8Profits

($ billions)

SK is not capturing profits for reinvestment

Change in Total Employment

Annual Percentage Change

2001 2002 2003 2004

BC (0.4) 2.0 2.8 2.3

AB 2.9 2.5 2.8 2.3

SK (2.7) 1.7 1.5 0.9

MB 0.5 2.4 0.6 0.9

ON 2.9 2.5 2.8 2.3

Weak SK employment cause for concern

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

Summary of Recommendations

Corporate Tax Reform

• Eliminate general CCT rate

• Reduce general CIT rate to 12%

• Increase small business limit to $500,000

• Make ITC for M&P capital refundable

22April 2004

Saskatchewan Finance

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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

23April 2004

Saskatchewan Finance

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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

24April 2004

Saskatchewan Finance

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ITC for M&P 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

Corporate Tax Reform Impact General CCT Rates - 2009

0.6%

0.3%

0.5%

0.0%0.0% 0.0%0.0%

0.2%

0.4%

0.6%

BC AB SK MB ON

17%

14%14%

11.5%12% 12%

8%

10%

12%

14%

16%

18%

BC AB SK MB ON

Corporate Tax Reform ImpactGeneral CIT Rates - 2009

27April 2004

Saskatchewan Finance

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Combined Federal/Provincial Tax Rates on Small Business Income*

2009 Taxation Year

Up to $300K$300K - $400K

$400K - $500K

Over $500K

BC 17.6% 26.6% 34.1% 34.1%

AB 16.1% 25.1% 33.6% 33.6%

SK (current) 18.1% 39.1% 39.1% 39.1%

SK (reformed) 18.1% 27.1% 27.1% 34.1%

MB 17.1% 26.1% 36.1% 36.1%

ON 18.6% 27.6% 36.1% 36.1%

* Assumed to be the active business income of CCPCs.

Corporate Tax Reform ImpactBusiness Tax Load

117% 120%

53%

107% 111%

97%

0%

100%

BC AB SK MB ON

Corporate Tax Reform ImpactMETRs on Investment

44%40%

32%

39%41%

36%

0%

10%

20%

30%

40%

BC AB SK MB ON

Corporate Tax Reform ImpactBusiness Taxes as a % of GDP

4.1%3.8%

2.1%

3.2%

4.2%

3.6%

0%

1%

2%

3%

4%

BC AB SK MB ON

Corporate Tax Reform ImpactEconomic Impacts (% change)

Medium Term Long Term

Real GDP 1.3% 3.2%

Investment:

Primary sector

Goods producing

Services sector

5.5%

6.9%

5.4%

9.2%

9.5%

7.8%

Wages 1.0% 3.0%

Corporate Tax Reform Implementation Plan

Current 2006* 2007* 2008*

General CCT Rate 0.6% 0.3% 0.15% -

CCT Surcharge Shift to Royalties by 2008

General CIT Rate 17% 14% 13% 12%

SmBus Limit $300,000 $400,000 $450,000 $500,000

M&P ITC (future) Full Refundability

M&P ITC (prior) Extend Carry-Fwd to 10 Years

* All measures legislated effective July 1 unless otherwise stated

Corporate Tax ReformEstimated Fiscal Impact ($M)

2006-07 2007-08 2008-09 2009-10

Corp Capital Tax $48.8 $82.6 $108.9 $120.2

Corp Income Tax $33.2 $66.9 $85.4 $94.3

M&P ITC $7.9 $10.5 $10.5 $10.5

Subtotal $89.9 $160.0 $204.8 $225.0

Income Shifting ($10.0) ($35.0) ($45.0)

Net Impact $89.9 $150.0 $169.8 $180.0

Strongly support harmonization of PST with federal GST• Removes tax from business inputs and capital

investment

• Improves nat’l and internat’l competitiveness

• Streamlined admin, improved enforcement

• Promotes investment, reduces production costs, stimulates demand for add’l capital and labour

Sales Tax Reform

35April 2004

Saskatchewan Finance

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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

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)

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

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

Combined Impact of All ReformsBusiness Tax Rates - 2009

BC ABSK

(pre)SK

(post)MB ON

CIT General Rate

12% 11.5% 17% 12% 14% 14%

CCT General Rate

- - 0.6% - 0.5% 0.3%

Sales Tax Rate

7% - 7% 5% 7% 8%

Combined Impact of All ReformsBusiness Tax Load

117% 120%

53%

107% 111%

56%

0%

100%

BC AB SK MB ON

Combined Impact of All ReformsMETRs on Investment

44%40%

32%

39%41%

30%

0%

10%

20%

30%

40%

BC AB SK MB ON

Combined Impact of All ReformsBusiness Taxes as a % of GDP

4.1%3.8%

2.1%

3.2%

4.2%

2.4%

0%

1%

2%

3%

4%

BC AB SK MB ON

Combined Impact of All ReformsEconomic Impacts (% change)

Medium Term Long Term

Real GDP 2.2% 5.0%

Investment:

Primary sector

Goods producing

Services sector

9.2%

9.4%

8.1%

15.1%

13.3%

11.7%

Wages 3.0% 6.0%

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

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

Conclusion

“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 Saskatchewan’s youth

Business Tax ReformFrom Good to Great

• Business tax reforms will add to Saskatchewan’s 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”

Business Tax ReformFrom Good to Great