Budget Bulletin: Tax Credit Review Completed

Tax Credit Review Completed

• HST rebate on new homes capped at $1,500; available only to first-time home buyers.
• Small Business Tax Credit retained with refinements.
• Equity Tax Credit extended to Dec. 31, 2003.
• Labour-Sponsored Venture Capital Corporation Tax Credit to continue with minor changes.
• HST rebates for fire departments, printed books, and persons with disabilities to continue unchanged.

In the 1999-2000 budget address, the Minister of Finance announced a review of all provincial tax credits and rebates. The review was intended to ensure that any tax loopholes were closed and that the credits were still meeting the intention for which they were created. Tax credits and rebates are revenues government declines to collect in order to create a social or economic benefit to the province.

The review process began with an inventory of credits and rebates. Consultations were then held with credit and rebate users and accounting and legal professionals. Phase I of the process was completed in April 2000, and changes to six credit and rebate programs were included in the 2000-01 budget. The second and final phase of the review dealt with the following credits and rebates.

HST Rebate for New Housing The objective of this rebate is to make home ownership more affordable for low- to middle-income Nova Scotians and to encourage construction of new housing. The rebate is available to buyers of newly constructed homes, regardless of price, and is equivalent to 18.75 per cent of the provincial portion of the HST (or 1.5 per cent of the purchase price), to a maximum of $2,250 per home. This maximum is reached at a home valued at $150,000. Since its creation in 1997 through 1998, this credit has cost $6.6 million. Most claims (86.5 per cent) were for homes costing less than $150,000.

Decision A major intention of this rebate was to assist low- and moderate- income Nova Scotians become homeowners. As the rebate currently applies to anyone, regardless of the value of the new home, it is not meeting the intention for which it was created. At a time of scarce resources, fairness and equity dictate that government assistance should be directed to those who most need the rebate to become homeowners. The rebate will therefore be limited to first-time home buyers, and the maximum rebate will be reduced to $1,500. The maximum will be reached at a home price of $100,000.

These new rules will be effective Jan. 1, 2002. Transition rules will be developed to ensure that individuals building homes during the current construction period will not be affected.

New Small Business Tax Credit The credit was created in 1986 to assist small businesses during the critical early years of operation by freeing up more working capital. It effectively eliminates the provincial corporate income tax for the first three taxation years of a new small business (two years for those incorporated between 1986 and 1992). Through 1998, more than 1,700 small businesses had qualified for $7-million worth of credits. Surveys have shown that recipient firms had a 72 per cent survival rate, compared to 55 per cent for all businesses. These firms have reported that the most significant benefit of the credit is that it increases the level of working capital available to the company.

Decision The New Small Business tax deduction will continue, as it is meeting its intention of providing working capital to new small businesses. In order to maximize the credit’s impact on job creation, the following changes will be made: -- The credit will be limited to companies with at least two employees, one of whom cannot be related to a shareholder of the firm. -- Applicants will be required to claim all possible corporate deductions and credits in the year prior to calculating the NSB tax deduction. -- If companies have received a refundable credit for a given tax year, they will not qualify for the NSB deduction. -- Companies will have three years following the end of a tax year to apply for a rebate for that year.

Equity Tax Credit The Equity Tax Credit was introduced in 1994 and provides a 30 per cent non-refundable tax credit for investments in qualified Nova Scotia small businesses, co-operatives, and Community Economic Development Funds (CEDIF). The credit serves to reduce the amount of taxable income and has a maximum value of $9,000 per individual.

From 1994 to February 2000, almost 3,000 individuals invested $31.5 million in 277 companies and three CEDIFs. These investments resulted in $9-million worth of tax credits. The Equity Tax Credit is due to expire at the end of 2001. As part of Phase I of the tax credit review, the credit for investing in CEDIFs alone was extended by two years to 2003. Surveys have indicated that the Equity Tax Credit encourages companies to obtain equity financing rather than go into debt. The vast majority of respondents (89 per cent) indicated that the Equity Tax Credit enabled them to obtain equity financing that was otherwise unavailable.

Decision By all measurements, this credit is meeting the needs for which it was created and will be extended to Dec. 31, 2003.

Labour-Sponsored Venture Capital Corporation (LSVCC) Tax Credit The LSVCC tax credit is a non-refundable, 15 per cent personal income tax credit for investments in registered labour-sponsored venture capital corporations. The maximum provincial credit is $525 per year, and there is an additional federal income tax credit of $750 per year. An LSVCC is a venture capital fund sponsored by a labour organization with the overriding goal of creating jobs by making capital available to small- and medium- sized businesses. LSVCCs differ from conventional venture capital funds in that the LSVCCs have mandates other than achieving the highest return for investors.

Since its inception in 1994 through 1999, approximately $7.5 million in tax credits have been claimed. Funds registered in Nova Scotia have raised about $38.6 million in venture capital in this time. The funds are required to place 60 per cent of all investments raised in the province with Nova Scotia businesses within four years of receiving the investment. This has resulted in a minimum investment pool of approximately $23.2 million (60 per cent of $38.6 million) for Nova Scotia.

The LSVCCs have reinvested $15.8 million of this pool in seven different companies for an average placement of $2.3 million. On average, it takes the LSVCCs 3.5 years to reinvest funds raised in Nova Scotia. As most venture capital deals are made with long- term growth in mind, it could take an additional four or five years before the reinvestment begins to show significant returns to the province in the form of corporate tax revenue on job creation. In other words, almost a decade could pass before the government realizes any benefit from the tax credit expenditure.

Decision The LSVCC credit is due to expire at the end of 2003. It will be evaluated again to determine whether it should be extended. To hasten the credit’s benefit to the province, the reinvestment time frame will be reduced from four years to two years. Venture capital funds are becoming an increasingly important source of equity for Nova Scotia businesses. The Department of Finance will consult with the investment community to identify other options to improve venture capital tax credits.

HST Rebate for Volunteer and Municipal Fire Departments Municipal and volunteer fire departments provide a vital public service. To help these departments purchase equipment, this program offers a full rebate of the provincial portion of the HST paid on purchases of firefighting vehicles and heavy equipment. The maximum rebate is $7,400 and is reached at a purchase price of $185,000. Vehicles and equipment costing more than this amount are still eligible for the maximum rebate. Since 1997, this credit has cost $179,000.

Decision The rebate will continue unchanged.

HST Rebate for Printed Books This program offers a point-of-sale rebate of the provincial portion of the HST on purchases of printed books, audio recordings of printed books, religious scriptures, and periodicals with less than 5 per cent of total printed space dedicated to advertising. This program costs approximately $5 million per year.

Decision This rebate will continue unchanged.

HST Rebate for Persons with Disabilities This rebate recognizes the higher cost of obtaining personal transportation incurred by persons with physical disabilities. The rebate is 100 per cent of the provincial portion of the HST and applies to purchases of passenger vehicles for individuals with a physical impairment that deprives them of the use of both their legs. From 1997 to 2000, this program has cost $540,000.

Decision This rebate will continue with no changes.

NOTE: For other 2001-02 budget information, visit the Department of Finance Web site at www.gov.ns.ca/finance .