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 – Ter ms 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

5 April 2004 Saskatchewan Finance Targeted Tax Expanditures Small 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 BCABSKMBON 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 M 0.6% $5 M 0.5% $5 M 0.3% Provincial Sales Tax 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 Capital Investment in SK Lagging

Comparison - Business Tax Load SK has a very high business tax load

Current METRs on Investment High METR discourages SK investment

Current Business Taxes % GDP SK relies heavily on business tax revenues

Business Investment in Sask SK is not capturing profits for reinvestment

Change in Total Employment Annual Percentage Change BC(0.4) AB SK(2.7) MB ON 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 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

22 April 2004 Saskatchewan Finance Corporate Tax Reform - CCT General CCT rate of 0.6% reduced: July 1/06-0.3% July 1/ % July 1/08-eliminated Resource Surcharge converted to the royalty system July 1, 2008 No change for financial institutions & provincial Crown corporations

23 April 2004 Saskatchewan Finance 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

24 April 2004 Saskatchewan Finance 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

Corporate Tax Reform Impact General CIT Rates

27 April 2004 Saskatchewan Finance Combined Federal/Provincial Tax Rates on Small Business Income * 2009 Taxation Year Up to $300K $300K - $400K $400K - $500K Over $500K BC17.6%26.6%34.1% AB16.1%25.1%33.6% SK (current)18.1%39.1% SK (reformed)18.1%27.1% 34.1% MB17.1%26.1%36.1% ON18.6%27.6%36.1% * Assumed to be the active business income of CCPCs.

Corporate Tax Reform Impact Business Tax Load

Corporate Tax Reform Impact METRs on Investment

Corporate Tax Reform Impact Business Taxes as a % of GDP

Corporate Tax Reform Impact Economic Impacts (% change) Medium TermLong 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 Current2006*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 Reform Estimated Fiscal Impact ($M) 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 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

35 April 2004 Saskatchewan Finance 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 - U naffordable 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 Federal transitional assistance and on- going fix to Equalization required Public dialogue on harmonization to explain economic benefits Announce results in Budget

Combined Impact of All Reforms Business Tax Rates BCAB SK (pre) SK (post) MBON CIT General Rate 12%11.5%17%12%14% CCT General Rate --0.6%-0.5%0.3% Sales Tax Rate 7%- 5%7%8%

Combined Impact of All Reforms Business Tax Load

Combined Impact of All Reforms METRs on Investment

Combined Impact of All Reforms Business Taxes as a % of GDP

Combined Impact of All Reforms Economic Impacts (% change) Medium TermLong 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 Reform From 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 Reform From Good to Great