Budget Bulletin: Tax Credit Review

A review of personal and corporate income tax credits and sales tax rebates was announced in the 1999-2000 budget address. The objective of the review was to ensure that Nova Scotia's tax credits and rebates are meeting the intentions they were created for and at a reasonable cost.

Tax credits and rebates are tax dollars the government foregoes collecting in order to create a social or economic benefit. The review began last fall with an inventory of the credits and rebates and collection of relevant information. A website was then developed inviting public comment and response on the review process. Consultation was also held with credit and rebate users and accounting and legal professionals, and direct input was received from interested individuals and organizations.

Because of scope of the review, the task was divided into phases. Phase I decisions dealt with the following six credits and rebates.

Equity Tax Credit The Equity Tax Credit is a 30 per cent non-refundable personal income tax credit for investing in new, eligible businesses. The objective was to provide capital to small- and medium-sized Nova Scotia businesses and Community Economic Development Investment Funds (CEDIF). CEDIFs assist with economic development initiatives in rural Nova Scotia. The Equity Tax Credit was established in 1994 and is due to expire on Dec. 31, 2001. The credit cost $1.9 million in 1998-99.

Decision:
The expiry date for the CEDIF portion of the credit will be extended two years to Dec. 31, 2003. The general Equity Tax Credit portion is still scheduled to expire at the end of 2001, but will be reviewed again to determine if an extension is warranted.

Film Industry Tax Credit The Film Industry Tax Credit was created in 1995 to encourage increased film production in Nova Scotia. The credit is a 32.5 per cent refundable corporate tax credit based on salaries of Nova Scotians employed in film production in the province. Since its inception, 80 film productions have resulted in $16 million being paid in credits.

Decision:
The asset cap, which excludes production companies with assets over $25 million from accessing the Film Industry Tax Credit, will be removed. The credit will be reduced to 30 per cent for films being produced in urban areas, and increased to 35 per cent in rural Nova Scotia. The expiry date is to be extended for two years, to Dec. 31, 2002. An intensive review of all government assistance to the film industry will be undertaken.

Research and Development Tax Credit The Research and Development Tax Credit was introduced in 1984 to encourage investment in research and development in Nova Scotia. It provides for a 15 per cent refundable corporate income tax credit on eligible R and D expenditures. In 1997, 166 companies from many different industries received $7.1 million in credits. Most eligible firms were involved in manufacturing or business services.

Decision:
The credit will be maintained as it is currently structured. However, in order to eliminate the practice known as "stacking," research and development work that is funded by government will no longer be eligible for a credit. This is in line with federal government rules.

Manufacturing and Processing (M&P) Investment Tax Credit The M&P credit is a 30 per cent non-refundable corporate income tax credit on qualifying investments in new manufacturing and processing equipment. It was introduced in 1997 to encourage new and expanded manufacturing and processing activity in Nova Scotia. The credit is due to expire Dec. 31, 2002.

From the credit's inception in 1997 to October 1998, $202.4 million of eligible investments were reported in a broad range of industries. This represents a potential cost to the province of $60.7 million.

Decision:
The M&P credit has accomplished its objective and will expire on its due date. The credit rate will be reduced to 15 per cent on Jan. 1, 2001. Projects that were largely completed by that date will qualify for the 30 per cent rate.

Harmonized Sales Tax Rebates Phase I of this review dealt with Harmonized Sales Tax Rebates to municipalities, universities, colleges, schools, and hospitals, as well as to qualifying non-profit organizations and charities. The rebates started with the introduction of the harmonized sales tax in 1997 and are based on certain percentages of harmonized sales tax paid on purchases made by the institutions.

The percentages are as follows: municipalities, 57.14 per cent; universities and colleges, 67 per cent; schools, 68 per cent; hospitals, 83 per cent; and non-profit organizations and charities, 50 per cent. In 1998, $44.7 million was rebated back to qualifying institutions and organizations.

Decision:
As this rebate was designed to ease the sales tax burden on public institutions and charitable organizations, it has been largely successful and will continue.

ISO 9000/ISO 14000 Tax Credits These credits are non-refundable corporate income tax credits designed to assist Nova Scotia corporations with the cost of becoming International Standards Organization (ISO) certified. ISO 9000 is a standard of quality management, and certification is often a prerequisite for companies wishing to compete for contracts. ISO 14000 certification indicates a company has a recognized environmental management system, meaning that it minimizes harmful effects to the environment caused by its activities. This is also a common prerequisite for prospective contractors.

From 1994 to 1999, $1.1 million was credited to 121 Nova Scotia companies under the ISO 9000 credit. Two companies have qualified for the ISO 14000 credit for a total of $30,000. Companies surveyed indicated that competitive reasons were behind their obtaining certification, and not the tax credit.

Decision:
While the credit was an economic benefit to the companies that qualified for it, it did not in itself provide an incentive to obtain ISO 9000 or ISO 14000 certification. The credit will expire at the end of 2000.

NOTE: For other 2000-01 budget information, visit the Department of Finance website at www.gov.ns.ca/finance .