Tax Facts

Personal income taxes are a major deterrent in attracting (and keeping) talent in B.C. especially in comparison to our neighbors. Alberta's top marginal rate is 45.6% vs 51.84% in B.C. Washington State's is 37.2% but this kicks in at a much higher income level.
 

In 1998, $1.00 of personal income at the top marginal rate resulted in a tax of 31.32 cents (i.e. 29 cents at the top rate plus a surtax of 8% on that tax). The B.C. tax is another 22.85 cents (i.e. 50.5% of the federal tax plus additional provincial surtaxes) for a total tax of 54.17 cents. The Province has committed to a 49.9% marginal rate by the year 2001. British Columbia has  the sixth highest marginal tax rate in Canada. The top 4% of British Columbian income earners will pay over 28% of total provincial income tax revenue.

The three Federal tax brackets (1999) for taxable income are: $0-$29,590: 17%; $29,590 -  $59,180: 26%; $59,180 and over: 29%. The Provincial tax then gets calculated as noted in rows 3 & 4 in the above chart.

One sore point with respect to personal taxation that affects technology companies is the tax treatment of stock options. Taxes must be paid on unrealized paper profits when options are exercised, effectively discouraging employees from retaining shares (i.e. investing in their companies).

Corporate taxes are higher (10% or so on average) relative to the U.S., but are reasonably uniform across Canada. Sales taxes are approximately twice as high in B.C. as in Alberta and Washington - also a deterrent in attracting talent.
 

R&D Tax incentives are necessary for technology company development. In comparison to other provinces, B.C. offers the least attractive environment for high technology companies. Ontario and Quebec offer very attractive incentives for technology ventures. Ontario, for example, offers three programs to stimulate technology development and investment. Quebec has similar incentives. An Ernst and Young study summarizing the after tax costs of performing research in Canada shows that the costs are higher in B.C. by a range of from 10 to 20% (depending on size of corporation) as compared to Ontario and Quebec. As an example, it costs a small high technology CCPC (Canadian Controlled Private Company) in B.C. $50.62 on an after tax basis to do $100 of R&D. It would cost the same company only $33.51 in Ontario and $33.90 in Quebec!

Investment tax incentives such as flow-through shares, investment tax credits (as offered to labor-sponsored investment funds) or capital gains exemptions will stimulate investment in the technology sector. For example, offer reduced capital gains on investments which are made in treasury shares of technology ventures and held for long periods of time. (Capital gains on a 10-year holding would not be taxed whereas a 9 year holding would be 90% tax-free, and 8 year holding would be 80% tax-free and so on.) There are presently no provincial incentives to encourage more early stage long term risk capital investments.

An incentive tax credit proposal initiated by the VSE has been made (Feb'99) to the Minister of Finance. This is similar to the VCC (Venture Capital Corporation) 30% tax credit incentive, except that it would be extended  to apply to individual investors, encouraging early stage equity investments needed to fuel new venture creation. This is strongly supported by various industry organizations. It is a "tax neutral" proposal in that the tax credits are offset by immediate tax revenues due to the increased investment. It could offset the tax paid on the exercise of stock options by those wishing to keep, not sell, their shares.

Recommendations

1) a balanced approach must be taken. Marginal rates should not be cut at the expense of Science and Technology program spending. Investment tax incentives (to encourage investment) and marginal income tax rate reductions (to prevent brain drain) are equally essential.
2) align the task force with other organizations to lobby for federal personal tax reductions
3) back the BC Business Summit to eliminate the personal income tax surtaxes and to reduce the B.C. basic rate from 49.5% in 1999 to 46.5% in 2001
4) back the BC Business Summit to reduce small business income tax rate from 8.5% in 1999 to 6.0% by 2002
5) provide competitive R&D tax incentives without compromising on S&T program spending (e.g. Science Council, BC/ASI)
6) provide equity investment incentives - e.g. tax credits (as on labor funds) or reduce or eliminate capital gains on long-term equity holdings (similar to the $500,000 life-time capital gains exemptions for private companies)
7) change the way in which stock options are taxed so that taxes are payable on disposition, not aquisition.

Budget Updates

In the March'99 Budget, the BC Government accommodated only recommendations #4 and #5, to a certain extent. The small business rate was actually cut from 8.5% to 5.5%, slightly more than what was recommended. As for incentives, a relatively toekn amount of $20 million was committed to Science and Technology (specific use to be determined by the province's tech task force), but at the same time the S&T base was cut by $1 million to approx. $17.5 million.