Payroll professionals may be dealing with income tax alterations if the government accepts report’s recommendations
"Fundamental tax changes are required to create a more competitive and ultimately more prosperous economic climate in Nova Scotia," says the Laurel Broten, author of Charting a Path for Growth: Nova Scotia Tax and Regulatory Review.
The review, which the government says is "the first comprehensive assessment" of the province’s tax and regulatory system, made 22 recommendations for changing the tax system and 20 suggestions for revising regulations, fees and related areas. It also suggests the government hold the line on spending to help improve economic conditions in the province.
A key premise underlying the report is that the province needs to move the tax burden away from personal and corporate income taxes and towards consumption taxes like the Harmonized Sales Tax (HST).
"Tax reform is necessary to lift the high personal income tax burden off Nova Scotia families in order to reduce disincentives to work and encourage entrepreneurs to emerge and to take the risks that build dynamic economies," Broten says.
Broten recognizes this is contrary to traditional thinking about taxes. "Conventional wisdom has always been that income taxes are progressive and consumption taxes regressive. Conventional wisdom won’t save Nova Scotia. It is time to turn such thinking around," she says in the report.
"The regressive nature of consumption taxes can be corrected. Nor is it progressive to shift the tax burden — and the debt
load that exacerbates the problem — from many older established citizens to fewer, younger Nova Scotians who are trying to establish their careers, their families and their lives."
As part of the reform, the report recommends the government eliminate the fifth personal income tax bracket. It applies to taxable income over $150,000. The tax rate for the bracket is 21 per cent of taxable income. The provincial government implemented the fifth bracket as a temporary measure in 2010 when it suspended a high-income surtax that applied to basic provincial tax payable over $10,000.
The government said the measures would remain in place until the province eliminated its deficit. In the 2013 budget, the government announced it had eliminated the deficit, but that the "temporary" tax measures would stay in place.
In addition to eliminating the fifth bracket, Broten recommends the government reduce provincial personal income tax rates and the number of tax brackets. She does not suggest that this happen immediately, but rather over time "as funds become available, as spending targets are met, as new tax revenue becomes available, and as transformation of government reduces costs and captures previously untapped revenue sources."
Currently, the following tax brackets and rates apply for Nova Scotia:
Taxable income Tax rate
$0.01 – $29,590.00 8.79 per cent
$29,590.01 – $59,180.00 14.95 per cent
$59,180.01 – $93,000.00 16.67 per cent
$93,000.01 – $150,000.00 17.50 per cent
$150,000.01 and over 21.00 per cent
Besides eliminating the fifth bracket, Broten recommends combining the third and fourth brackets, with the rate for the top bracket being set at 17 per cent.
Broten also recommends the province index its personal income tax brackets to annual inflation rates. Nova Scotia is one of only three provinces in Canada that does not use indexation. Manitoba and Prince Edward Island are the other two jurisdictions.
A spokesperson for the P.E.I. Department of Finance, Energy and Municipal Affairs said the province is not currently considering indexing its tax system as it would mean additional spending restraints in health, education and social programs. Once the province balances its budget, the government may look at forms of tax relief. Officials in Manitoba did not reply to requests about indexation.
Other governments in Canada all automatically index tax brackets to match inflation. Every fall, the Canada Revenue Agency releases the updated income tax brackets for the following year for all jurisdictions except Quebec in its T4127 guide, Payroll Deductions Formulas for Computer Programs. Quebec releases information separately for its tax system.
The Canadian Federation of Independent Business (CFIB) has criticized provinces for not using indexation. In a news release last year, Elliot Sims, the CFIB’s Manitoba director of provincial affairs, said, "When your salary goes up, even if it’s just keeping up with inflation, you pay more taxes. ‘Bracket creep’ is a big reason why your money doesn’t go as far as it used to. Indexing would ensure that taxpayers continue to have the same buying power from year to year."
Broten also recognized this in the report: "Bracket creep occurs when inflation drives income into higher tax brackets, resulting in higher income taxes but no real increase in purchasing power. Tax indexing is an attempt to eliminate the potential for bracket creep by altering the tax brackets before the creep occurs."
She also recommends the government increase the province’s basic personal amount to $11,000. Employees claim this amount on a TD1NS, Personal Tax Credits Return, as well as other tax credits to reduce the amount of income tax taken through payroll deductions.
For Nova Scotia, the basic personal amount has been $8,481 since 2012. This is one of the lowest amounts in Canada, with only P.E.I.’s being lower, at $7,708. As with the income tax brackets, all other jurisdictions except Nova Scotia, Manitoba and P.E.I. index most of the amounts claimed on a TD1. As a result, the amounts change every year based on inflation. The highest basic personal amounts for 2015 are in Alberta ($18,214) and Saskatchewan ($15,639). The federal basic personal amount for this year is $11,327.
Broten also recommends the government eventually increase the basic dependent amount claimed on the TD1 in line with the increase to the basic personal amount once the province’s finances allow for it. In the meantime, she suggests the province increase the basic dependent amount by the cost of living.
Although the report recommends the government shift from an emphasis on personal and corporate income taxes to consumption taxes, Broten does not advise the government to raise the HST rate. The rate is currently set at 15 per cent, made up of five per cent GST and 10 per cent the Nova Scotia sales tax portion.
The previous provincial government raised the HST rate to 15 per cent from 13 per cent, then promised to lower it to 14 per cent in 2014 and to 13 per cent in 2015. The current government cancelled the rate reductions, saying it could not afford the loss of revenue.
Instead of rate changes, Broten suggests the government broaden the base for the tax by removing exemptions that currently apply to certain goods and services. She acknowledges this may be difficult for the government to do.
"Reducing the provincial income tax, while maintaining the 15 per cent consumption tax and broadening its base to include more goods may be a hard political sell. But it is the right thing for Nova Scotia to do."
Broten also recommends the government phase in a pollution tax over the next 10 years, with revenue from the measure going towards support for low-income families and lower corporate and personal income taxes. It would be similar to the carbon tax in British Columbia, where the provincial government is required by law to use the carbon tax revenue to reduce personal and business taxes.
In addition to new tax measures, the report recommends that the government reduce red tape for businesses and individuals by repealing outdated or inefficient regulations and amending other regulations to make them easier with which to comply and to reduce overlap and redundancies.
Broten does not recommend the government make the changes overnight or all at once. She suggests a 10-year window, with incremental changes being introduced each year, beginning in 2015.
Reaction to report
Reaction to the report has been mixed. The Halifax Chamber of Commerce says it agrees with the report’s recommendations for a revenue-neutral shift from personal to consumption taxes, lower personal and corporate income taxes and the indexing tax brackets.
The CFIB says it likes the indexation recommendations and the plan to raise the basic personal amount. However, it has concerns with a recommendation calling for a small business tax hike.
A union representing public sector workers in the province says it "strongly opposes" the report’s recommendations and sees them as a step backwards for the province. "How else can you describe an economic plan that proposes freezing program spending, moving away from a progressive tax system to increased consumption taxes, and tax breaks for higher income Nova Scotians and big business? This plan will adversely affect most Nova Scotians," says Joan Jessome, president of the Nova Scotia Government and General Employees Union.
Nova Scotia Finance and Treasury Board Minister Diana Whalen has not yet indicated which, if any, of the recommendations the government would implement. She said the government wants feedback from provincial residents before announcing any possible changes.
"The next step is a full discussion about how best to make the necessary changes to strengthen Nova Scotia’s future. I will outline the first steps in a long-term plan in budget 2015-16."