New year starts with tax breaks for B.C. businesses

More money in employers’ pockets from MSP, PST cuts could be a short-lived windfall

Kris Sims, B.C. director for the Canadian Taxpayers Federation, applauds new-year cuts to MSP, PST on power | submitted

More than a million British Columbians should see an extra $9.37 on their first paycheque in 2018, presuming they are paid every two weeks, thanks to a 50% cut to medical insurance plan (MSP) premiums that took effect January 1.

By the end of 2018, the reduction will work out to $900 in savings for the average two-income family, or $450 per person.

Businesses will also pay slightly less on their power bills, thanks to a 50% reduction in PST on BC Hydro bills that also went into effect January 1.

PST on power for business will be eliminated entirely in April 2019. For big power users, like pulp mills, the savings could be in the millions.

“We rarely get a chance to start off the new year with some good news,” said Kris Sims, B.C. director for the Canadian Taxpayers Federation. “So to have that cut happening January 1 was some good news to see.”

The bad news is that, starting in April, businesses that rely on transportation will be hit with a 17% increase in carbon taxes.

The per-tonne tax will rise to $35 from $30, which amounts to a $0.01 increase per litre of gasoline. The $5-per-tonne hike brings total carbon taxes on gasoline to about $0.08 per litre. The carbon tax hike also applies to natural gas used for heating.

“It’s very difficult to tell whether we’re better off or worse off because there’s so many moving pieces right now,” said Phil Ross, a tax partner with Grant Thornton.

Added Sims: “We hope that you’re coming out a little bit better this year than you did last because of the MSP, but that hike in the carbon tax is going to take a big bite out of that savings.”

For businesses that cover their employees’ MSP premiums, the savings from a 50% cut will accrue to them, rather than their employees. However, because MSP premiums covered by employers are considered a taxable benefit, the cut will also slightly lower the employee’s taxable income.

“If it’s on the employer side of things, hopefully that money can go back into the small business and create more investment opportunities there … or maybe they can actually give their employees a raise,” Sims said.

Generally speaking, businesses that reinvest any savings that accrue from things like cuts to MSP premiums or PST on power back into their business should be better off, Ross said. Those that retain those savings as earnings will be worse off because the corporate tax rate has gone up 1%.

“If they’re pushing their retained earnings back into their businesses, I think that they have a little bit more money to expand and grow their operating businesses,” Ross said. “But I think, when you look at their ability to take funds out to their pocket, I don’t think that they’re better off.”

Jock Finlayson, chief policy officer for the Business Council of British Columbia, has calculated the total costs to business of various taxes and fees, as well as the breaks they will get, for fiscal 2018-19.

He thinks that, overall, businesses will be in a slightly better position in 2018, with respect to fees and taxes, although that advantage is likely to be short-lived.

In 2018, bigger businesses will pay a 1% increase in corporate taxes – $306 million in total. On the other hand, small business in B.C. will pay $81 million less from a 0.5% reduction in the small-business tax rate.

Finlayson calculates the carbon tax increase will cost British Columbians $212 million, about half of which will be paid by business. On the other hand, a 50% reduction in PST on electricity sales will save business $82 million.

The biggest item, however, is MSP premium cuts. The 50% reduction will cost the government $1.24 billion.

“It’s clear that a substantial chunk of this $1.24 billion of MSP premium reduction will, in the first instance, accrue to employers – I would think at least half of it,” Finlayson said. “In net terms, there’s going to be, for employers in general, a cost saving in 2018-19, as a result of the combination of measures that were announced in the September 2017 budget update. How it plays out will vary by industry and by company. It’s a bit hard to generalize, but for business in aggregate, I would estimate some sort of net cost saving in 2018-19.”

The NDP government has promised public spending measures that will require either significant tax increases going forward or deficit spending, or a combination of the two.

The full phase-out of the MSP premiums is one of the big-ticket items that will likely require a substantial increase in general taxation to cover the revenue loss in the coming years. That would be occurring at a time when the U.S. is drastically slashing tax rates.

“On the business side, it’s the biggest overhaul of U.S. business taxation in half a century,” Finlayson said. “The net effect of this Republican tax plan signed by President [Donald] Trump is to make the U.S. much more competitive on a tax basis overall. It eliminates any tax advantage on the business side for Canada.

“One of the issues is how the government will finance the various commitments that have been made without resorting to what I would describe as ruinous tax increases. We’re already in dangerous territory, in light of what’s happened in the U.S.”

Richard Truscott, B.C. and Alberta vice-president of the Canadian Federation of Independent Business, fears the elimination of the MSP will result in new payroll taxes.

“If we’re looking at a new payroll tax for small business, if that’s going to affect smaller firms, that’s a huge red flag for us,” Truscott said.

Val Litwin, president of the BC Chamber of Commerce, said a recent chamber survey found nine out of 10 businesses in B.C. to be very upbeat about the business climate. Litwin said the cut to PST on electricity is especially welcome.

“This is good news,” he said. “That translates into immediate savings that you as a business now can reinvest back into your operations. Ditto for the MSP premiums.”

Business is not so happy with increasing carbon taxes, however, especially now that they are no longer revenue neutral.

“Losing neutrality is a big deal,” he said. “The fact that the tax is increasing with no corresponding tax relief for business ... is going to have impacts on business, especially those ones in the energy-intensive and trade-exposed industries.”