B.C. budget proposes new payroll tax

Beginning next year, employers in British Columbia will have to pay a payroll-related health tax to help fund the province’s health-care system.

Finance Minister Carole James announced the new measure when she delivered the province’s 2018 budget on Feb. 20. The employer health tax will help replace some of the revenue that the government will lose when it eliminates premiums for the province’s Medical Services Plan (MSP), which the government said generated about $2.6 billion in revenue in 2016-17. In the budget speech, James said the government would do away with the premiums on Jan. 1, 2020.

“B.C. is an outlier in Canada as the only province that levies unfair, regressive MSP premiums that penalize families and individuals. Whether a person earns $60,000 or $200,000 a year, they pay the same amount. And MSP fees have more than doubled over 16 years,” she said. “MSP premiums also impact businesses. They are complex and expensive to administer.”

Provincial residents pay monthly premiums to the government on their own or through source deductions under an employer group plan. Some employers pay the premiums on behalf of their workers as a taxable benefit.

In January, the government reduced premium rates from $75 per month to $37.50 for single adults and from $150 per month to $75 for adult couples. It announced in last year’s budget that it wanted to eliminate MSP premiums and replace their revenue by 2021.

The new employer health tax would apply to employers with an annual payroll of more than $500,000. The government forecasts that it would generate about $1.9 billion a year in revenue in 2019-20 and 2020-21.

Budget documents propose that the tax rate would vary, depending on the size of an employer’s payroll (see chart). Employers whose annual payroll was $1.5 million or more would pay the full tax rate of 1.95 per cent on their total payroll.

Budget documents state that the government will table legislation this year to implement the tax. It will include rules covering remitting frequency, installment payments, and the way in which payroll will be calculated for associated businesses for determining deductions and tax rates.

James announced the elimination of MSP premiums and the introduction of the employer health tax despite the fact that a task force she set up last fall to study ways to eliminate the premiums and replace their revenues had not yet delivered its final report, due at the end of March.

In an interim report presented to James in early February, the task force said it was leaning towards a combination of options to replace MSP revenue, including a payroll tax and a personal income tax surcharge.

Other options suggested during consultations included raising corporate income tax rates, broadening the base for the provincial sales tax, replacing the sales tax with a value-added tax, and introducing new taxes on sugary drinks and junk food, as well as on cannabis.

The principles were fairness, efficiency, business competitiveness, simplicity, and revenue stability. James instructed the task force not to recommend keeping MSP premiums or increasing the provincial sales tax.

“All revenue options that have been identified represent trade-offs among the criteria, each having some positive and some negative implications. Therefore, we feel that it is important the revenue be replaced by a combination of measures in order to best mitigate the negative impacts of each,” the report said.

During consultations, the task force said it received more than 1,500 submissions from individuals and 26 from stakeholders, including business, labour, and public policy groups.

The report advised that whatever measures the government decided to use to replace the MSP revenue, the changes should not be phased-in.

“(W)e suggest that MSP be eliminated as at a specific date and that the new revenue measures take effect fully at the same time,” the report said.

It also suggested that the government give residents and businesses reasonable notice of when changes would occur.

“MSP premiums are paid by many employers as an employee benefit, which represents part of the compensation of those employees. Reasonable notice will provide time for employees and employers to agree upon how that compensation will be replaced when MSP premiums are eliminated,” the report said.

“For unionized employees where the collective agreement does not already address this issue, that may require collective bargaining, which takes time. We believe that at least one year’s lead time should be allowed,” said the report.

Although the government is moving ahead with changes before the task force’s work is done, James said it is important that the task force complete and submit its final report.

“The province will benefit from receiving the task force’s analysis and recommendations to inform future efforts to improve the progressivity, fairness and competitiveness of the tax system,” budget documents said.

After James announced the budget proposals, business groups said they were concerned that the employer health tax would drive up the cost of doing business in the province.

“Our initial assessment is that this new tax will increase overall payroll costs for our members by several hundred million dollars a year,” said Greg D’Avignon, president and CEO of the Business Council of British Columbia.

The Canadian Federation of Independent Business (CFIB) said the exemption threshold for the tax was too low and would mean that businesses with only 10 to 20 employees would have to pay the tax if their payroll was above $500,000.

The budget also included proposed changes to some of the non-refundable tax credits claimed on a British Columbia Personal Tax Credits Return (TD1BC). One measure would replace the province’s caregiver and infirm dependent tax credits with a new B.C. caregiver credit. The change would apply for 2018 and later years.

Similar to the Canada caregiver credit on the federal TD1, the B.C. credit would be available to provincial residents caring for an eligible adult relative who depends on them because of a mental or physical infirmity.

For 2018, the maximum amount for the B.C. caregiver credit would be $4,556 per infirm dependant. It would be indexed to inflation in later years. The caregiver would not have to live with the dependant to claim the credit.

Individuals who care for an infirm spouse or common-law partner would be eligible for the greater of the new credit or the spousal tax credit. Single individuals who care for an infirm adult relative would be allowed to claim the greater of the new credit or the eligible dependant tax credit.

The budget also proposed to eliminate the B.C. education tax credit claimed on the TD1BC, beginning next year. The move follows the federal government’s elimination of its education tax credit for 2017 and later years.

The Canada Revenue Agency normally updates TD1 forms to incorporate budget changes. It is expected that the agency will revise the TD1BC to incorporate the 2018 tax credit changes.