Tax Introduction: Competitive Corporate Tax Environment

Canada’s tax system is competitive and businesses can count on the government to keep the tax system stable and predictable over the longer term. Numerous programs at the federal and provincial levels offer attractive tax incentives for businesses.

Examples of recent changes to federal and provincial tax legislation, which enhance the competitiveness of Manitoba’s tax environment include:

Federal

• Reduction of the Corporate Income Tax Rate -- The 2005 Federal Budget proposed a 2% reduction in the general corporate income tax rate from 21% to 19%, by 2010.

• Changes to the corporate surtax and to capital cost allowance rates -- Budget 2005 proposed the elimination of the corporate surtax in 2008, and changes to capital cost allowance rates that will better align CCA rates with the useful life of assets.

• Elimination of Federal Capital (Large Corporations) Tax – Budget 2003 announced the phased elimination of the Federal capital tax for large businesses by 2008. It was eliminated for smaller businesses in 2004.

• Changes to Income Taxation of the Resource Sector – Budget 2003 announced the phasing in of a number of changes to the taxation of resource sector income over five years. Changes include a reduction of the Federal corporate income tax rate for resource sector income from 28% to 21% by 2007.

• Small Business Deduction – Budget 2003 announced an increase in the income threshold qualifying for the federal small business deduction, from $200,000 to $300,000 over four years. Budget 2004 accelerated the increase by one year to 2005.

• Capital Gains Rollover for Small Business Investors -- The small business capital gains rollover was introduced in 2000 and expanded in 2003 to make it easier for small businesses to access the risk capital needed to expand and grow.

Provincial

• Reduction of the General Corporation Income Tax Rate -- The general corporate income tax rate has been reduced from 17.0% in 1999 to 15.0% in 2005. Budget 2005 announced further reductions to bring the rate to 14.5% in 2006, and to 14.0% in 2007.

• Reduction of the Small Business Income Tax Rate -- The small business income tax rate has been reduced from 8.0% in 1999 to 5.0% in 2005. The threshold for eligibility for the small business tax rate has been increased from $200,000 in 1999 to $400,000 in 2005. Budget 2005 announced further reductions to bring the small business rate to 4.5% in 2006 and to 4.0% in 2007.

• Corporations Capital Tax – Budget 2003 changed the $5 million exemption to a deduction.

• Manufacturing Investment Tax Credit – Budget 2004 extended the carry-forward period for unused credits from 7 years to 10 years. Budget 2005 broadened the MITC to apply to purchases of both new and used buildings, machinery & equipment; and the first 2% has now been made refundable

• Manitoba Research and Development Tax Credit -- Budget 2004 extended the carry-forward period for unused credits from 7 years to 10 years. Budget 2005 increased the credit from 15% to 20% of qualifying expenses, making it one of the most generous in Canada.

Examples of significant federal and provincial tax incentives include:

Federal

• Scientific Research & Experimental Development (SR&ED) Program -- provides financial assistance, through investment tax credits, to Canadian businesses that undertake R&D activities in Canada

• Canadian Film or Video Production Tax Credit -- provides income tax incentives to qualified corporations that produce Canadian films or videos

• Film or Video Production Services Tax Credit -- encourages the production, in Canada, of foreign films and videos

Provincial

• Manufacturing Investment Tax Credit – provides a partially-refundable corporate income tax credit, for the purchase of new or used manufacturing buildings and equipment used in manufacturing

• Co-operative Education Tax Credit -- encourages employers to provide work placements for co-op education students

• Manitoba Research and Development Tax Credit -- provides a non-refundable tax credit against Manitoba corporate income tax, to Manitoba businesses that undertake R&D activities in Manitoba

• Community Enterprise Development Tax Credit -- a personal income tax credit to support local investment

• Manitoba Equity Tax Credit -- encourages local investors to purchase new shares of qualifying small- and medium-sized publicly-traded Manitoba companies

• Manitoba Film and Video Production Tax Credit -- provides a refundable corporate income tax credit of 45% of wages paid to Manitoba residents and deemed residents.

• Mining and Exploration Tax Incentives – A number of initiatives are in place to reduce direct and indirect mining taxation. Additionally, Manitoba offers a tax holiday on production from new oil wells and on production from existing wells that have undergone major work.

Since Manitoba tax legislation contains various exemptions, special provisions, and other important details, inquiries for full information should be directed to the following contacts:

For information on: the General Corporation Income Tax Rate, Small Business Income Tax Rate, Small Business Threshold, Manufacturing Investment Tax Credit, Co-operative Education Tax Credit, and the Manitoba Research and Development Tax Credit, please contact:

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