Ryan Tax Alert - British Columbia Budget 2008

On February 19, 2008, British Columbia Finance Minister Carole Taylor presented Balanced Budget 2008.  This year’s budget focused primarily on addressing climate change issues, and included the highly anticipated introduction of a carbon tax, as well as several other climate action programs and tax incentives designed to promote green initiatives.  In keeping with the trend in British Columbia over the past few years, many of the proposed environmental measures will take the form of commodity tax changes.  

Carbon Tax

The 2008 budget includes a proposal for a revenue-neutral carbon tax.  The new tax, which is to be effective July 1, 2008, will apply to the purchase and use of most fossil fuels in British Columbia, including gasoline, diesel, jet fuel, natural gas, propane, coal and other types of heating fuel. 

The intention is to keep the carbon tax revenue-neutral by returning revenues generated from it to taxpayers through personal and corporate income tax reductions and other tax measures, such as a low-income Climate Action Tax Credit.  The government has been sure to point out that carbon tax revenues will not be used to fund spending programs.  In addition, the province is planning a one-time $100 climate action dividend payment to all residents of British Columbia as of December 31, 2007.  The dividend is designed to encourage individuals to embrace the program and make choices that will reduce greenhouse gas emissions. 

The carbon tax is a consumption tax that will be administered in the same fashion as the province’s motor fuel tax.  It will be payable by consumers at the time of retail sale or use in British Columbia and will be collected by fuel sellers at the time of sale, with collectors being required to pay security equal to the tax payable on final retail sales.  This security will be reimbursed through amounts collected as security from wholesalers or retailers, or as tax from consumers. 

The proposed rates for the carbon tax are based on $10 per tonne of carbon dioxide equivalent emissions, with increases of $5 per tonne each year for the next four years.  Specific tax rates will vary for each type of fuel, depending on the amount of carbon dioxide equivalent emissions released upon combustion.  For example, effective July 1, 2008, the following carbon tax rates will apply:

• Gasoline - 2.41 cents per litre;
• Diesel fuel - 2.76 cents per litre;
• Natural gas - 49.88 cents per gigajoule; and
• Coal (Canadian bituminous) - 20.79 dollars per tonne.

As is the case with the motor fuel tax, certain fuel types and uses of fuel in specific circumstances will not be subject to the carbon tax, such as biofuels and renewable energy sources, fuel exported for use outside of British Columbia, and certain fuel purchases by commercial air and marine service providers. 

The proposed legislation is expected to have provisions with respect to refunds, audits, assessments, penalties and appeals that are similar to those in place for the province’s other consumption taxes.

Climate Change Related Commodity Tax Measures

Social Service Tax Act

Fuel-Efficient Vehicles

Effective February 20, 2008, a point-of-sale reduction of social service tax equal to the amount of the federal ecoAUTO rebate will apply to new gasoline, diesel-powered or flex fuel vehicles that meet the fuel efficiency requirements of the provincial program and qualify under the federal rebate program.  This program will not apply to hybrid electric vehicles, as these vehicles continue to be eligible for a social service tax reduction as an alternative fuel vehicle.  This provincial program will expire on March 31, 2011.

Exemption for Bicycles and Tricycles

Beginning February 20, 2008, the social service tax exemption for non-motorized two wheeled bicycles will be expanded to include non-motorized, adult-sized tricycles, electric power-assisted bicycles and tricycles, and kits for converting non-motorized bicycles and tricycles into electric power-assisted cycles.  The exemption for power-assisted cycles will expire on March 31, 2011.

Tax Reduction for Electric Motorcycles

The purchase or lease of new two-wheeled electric vehicles, such as electric motorcycles and scooters, will be eligible for a social service tax reduction of 50 per cent of the tax payable, to a maximum of $1,000.  This reduction will be in effect from February 28, 2008 to March 31, 2011, inclusive.

Hydrogen Fuel Cell Bus Tax Reduction

Effective February 20, 2008, purchasers will be eligible for a 50 per cent reduction in the amount of social service tax payable on the purchase or lease of hydrogen fuel cell passenger buses, to a maximum of $10,000.  This reduction, which is set to expire on March 31, 2011, parallels the reductions currently available for other alternative fuel passenger buses.

Aerodynamic Devices Exemption

The budget includes a proposed exemption for certain aerodynamic devices that are believed to improve the fuel efficiency of commercial tractor-trailers, including:  tractor or trailer gap faring devices; tractor roof faring; trailer side skirts; and aerodynamic bumper and tank skirts.  The exemption, which is effective February 20, 2008, will also apply to installation charges for eligible devices.  

Emission Control Devices for Diesel Vehicles

Effective February 20, 2008, emission control devices for diesel vehicles that are verified to reduce particulate emissions by at least 20 per cent will qualify for exemption from social service tax when purchased prior to January 1, 2009.  An exemption will also apply to emission control devices that reduce emissions by at least 50 per cent and are purchased before April 1, 2011.

Exemption for ENERGY STAR® Qualified Appliances

Effective February 20, 2008, the purchase of qualifying residential refrigerators, freezers and clothes washers will be exempt from social service tax.  This exemption applies to the purchase or lease of residential appliances listed as ENERGY STAR® qualified by the Office of Energy Efficiency, Natural Resources Canada.  This exemption will expire on March 31, 2010.

Exemption for Energy Efficient Residential Gas-Fired Water Heaters

Effective from February 20, 2008 to December 31, 2009, the purchase or lease of a residential gas-fired water heater with an energy factor of 0.80 or greater will be exempt from social service tax.  This exemption will apply to both qualifying gas-fired storage and instantaneous water heaters.

Insulation Exemption for Hot Water Tanks, Pipes and Ductwork

Insulation designed to prevent heat transfer to or from hot water tanks, hot or cold water pipes, and ductwork will be exempt from social service tax, effective February 20, 2008.  The exemption will apply to items such as insulation blankets for hot water tanks, pre-formed insulation sleeves for hot and cold water pipes, and insulation wrap for air ducts, but will exclude tape or sealants.

Biodiesel Heating Fuel Exemption

The budget is proposing a social service tax exemption for biodiesel fuel, including any portion of biodiesel used in a furnace oil blend that is used for heating or other non-motive purposes, effective February 20, 2008. 

Change in Tax Status of Coal and Coke

In a measure designed to encourage greater use of cleaner energy sources, the existing social service tax exemption for coal and coke will be repealed, effective February 20, 2008, with the exception of purchases for use in a residential dwelling unit.  This measure includes a one-year transitional refund for purchases of coal and coke under fixed-price contracts which cannot be adjusted to account for the tax and were entered into before the effective date of the change.

Production Machinery and Equipment Exemption for Local Governments

Effective February 20, 2008, local governments and eligible local government corporations may qualify for exemption on the purchase or lease of production machinery and equipment used to generate electricity at a manufacturing site, or generate electricity and heat at a cogeneration plant.  In order to qualify for this exemption, the local government or local government corporation must meet the same minimum sales or manufactured cost levels as other qualifying manufacturers.

Motor Fuel Tax Act

Classification of Biodiesel and Ethanol

Effective February 20, 2008, biodiesel and ethanol will be classified as alternative motor fuels for all purposes.  This change will allow biodiesel and ethanol to be exempt from motor fuel tax when used as coloured fuel, marine diesel, locomotive fuel, jet fuel or aviation fuel, including any portions used in fuel blends.  Previously, only use in a motor vehicle on a highway qualified for exemption.   

Other Commodity Tax Measures

Social Service Tax Act

Passenger Vehicle Rental Tax

Effective April 1, 2008, the passenger vehicle rental tax (PVRT) will not apply to passenger vehicles leased for eight consecutive hours or less.  As of February 20, 2008, PVRT should not be charged on vehicles leased by members of membership-based vehicle sharing organizations or on courtesy vehicles provided to customers by an automotive service facility.

Samples of Prescription Dental and Optical Appliances

Samples of prescription dental and optical appliances will be exempt from social service tax, effective February 20, 2008.  This exemption applies to appliances, such as disposable contact lenses, provided to optometrists, opticians, dentists or physicians for promotional purposes and parallels the existing social service tax exemption for prescription drug samples.

Trade-in Allowance on Motor Vehicles Purchased Outside British Columbia

The budget has clarified that the trade-in allowance will apply to purchases of motor vehicles from other Canadian jurisdictions for use in British Columbia.  The trade-in allowance permits purchasers to pay social service tax on the difference between the value of the new vehicle and the value of the trade-in.  To qualify, social service tax must have been paid on the trade-in and the vehicle traded in must be licensed in British Columbia.

Dedicated Telecommunication Services

The social service tax status of dedicated telecommunication services has been clarified to exclude distances to, and from, satellites in order to calculate the tax payable.  Effective February 20, 2008, the total distance of a dedicated line is to be calculated using only the most direct land distance between originating and receiving transmitters. 

Tokens Provided by Charities

Under the proposed measures, effective February 20, 2008, token gifts of tangible personal property with a nominal value, such as pins and ribbons, provided by registered charities in exchange for donations will not be subject to social service tax.  Instead, registered charities will be required to pay tax on the purchase of such gifts.  However, this measure will not apply to sales by charity-operated thrift stores or to items sold by, or on behalf of, charities for a fixed price.

Clarification on Medical Equipment Refund for Charities

The budget clarifies that, effective February 21, 2007, the definition of charity funds includes bingo affiliation grants for the purposes of the medical equipment social service tax refund available to registered charities or eligible hospital auxiliaries.  

Exemption for Catalysts and Direct Agents

The current social service tax exemption for catalysts and direct agents will be expanded, effective February 20, 2008, to include chemical substances that produce or modify an essential reaction for the production or manufacture of a product for sale or lease.  This change, which is a direct result of a 2007 British Columbia Court of Appeal decision and past recommendations by the Provincial Sales Tax Review Committee, means that the exemption for catalysts and direct agents is no longer restricted to substances having direct contact with the material being processed or manufactured. 

To qualify as processing for the purposes of the expanded exemption, the process involved must be a series of operations or a complex operation that results in a substantial change in the form or physical or chemical characteristics of the tangible personal property, excluding changes in state created solely through temperature or pressure changes.

Motor Fuel Tax Act

Locomotive Fuel Use in Vehicles Run on Rails

Motor vehicles that are used on both highways and railway tracks will be authorized to use locomotive fuel while traveling on rails, effective February 20, 2008.  Purchasers will be required to self-assess and remit motor fuel tax at the higher clear fuel tax rate for the use of locomotive fuel on a highway.

Coloured Fuel Use in Crew Crummies

Effective February 20, 2008, logging and mineral mining companies using crew crummies to transport contractors, agents or employees will be authorized to use lower taxed coloured fuel.

Refund for Persons with Disabilities Expanded

Effective February 20, 2008, the refund of motor fuel tax available for persons with physical disabilities will be expanded to include persons with mental disabilities.  To qualify for the refund, a person must be certified by a doctor as suffering from a permanent mental disability which precludes them from safely using public transportation.  The refunds will be paid to guardians on behalf of eligible persons.

Victoria Regional Transit Tax

Effective April 1, 2008, the motor fuel tax on clear gas and clear diesel collected by the province on behalf of the Victoria Regional Transit Commission will increase from 2.5 cents per litre to 3.5 cents per litre.

Hotel Room Tax Act

Funding Increased to Tourism British Columbia

Effective April 1, 2008, the portion of hotel room tax transferred to Tourism British Columbia will increase from1.65 per cent to 3 per cent, in keeping with the province’s desire to fund a growing tourism industry.  There has, however, been no change in the hotel room tax rate.

Provincial Sales Tax Review

The 2008 budget also includes several commodity tax changes that stem from British Columbia’s ongoing Provincial Sales Tax Review process.  These changes, many of which were noted in the 2007 budget and earmarked for further consultations, are intended to reduce the burden of compliance for taxpayers, particularly small businesses, located in British Columbia by simplifying and enhancing the fairness of the provincial sales tax system.

The current round of changes, which are effective February 20, 2008 (unless otherwise indicated), may be summarized as follows:

• Bona fide farmers and aquaculturists will be entitled to a social service tax exemption on the purchase or lease of qualifying all-terrain vehicles acquired for use solely in farming and aquaculture activities.
  
  
•  All vehicles licensed as farm vehicles under the Commercial Transport Act will be authorized to use coloured fuel while operating on a highway for a farm purpose.  The Family Farm Truck Emblem Program, which restricted the use of coloured fuel on a highway to family farm trucks used for farming purposes, will be eliminated.    
  
  
• All work-related safety equipment and protective clothing designed to be worn by, or attached to, a worker will be exempt from social service tax, provided it passes provincial work safety legislation requirements and is purchased by:  an employer for use by its employees in the course of employment; a self-employed person for their own use in the course of employment; or a school board or similar authority for use in the instruction of students.  Purchases of safety eyewear, footwear, head protection and gloves by workers will continue to be exempt, as will purchases by anyone of general safety equipment, such as first-aid kits, life jackets, child restraint car seats and portable fire extinguishers. 
  
  
• Effective for contracts to improve real property entered into on or after October 1, 2008, the contractor will be responsible for paying social service tax on any materials used in the completion of the contract, unless the contract explicitly states that the customer is to pay the tax.  In addition, where a customer is exempt on the purchase of certain materials, the contactor will also be permitted to purchase those materials under the exemption.
  
  
• Effective April 1, 2008, eligible businesses may voluntarily apply for a Special Registration Number, which will replace the need to complete a Certificate of Exemption on purchases of exempt production equipment or apply for refunds on purchases made in British Columbia and subsequently removed from the province.  Participants in this program will be required to self-assess any social service tax owing on items subsequently put to a taxable use.
  
  
• In an effort to align the production machinery and equipment exemption with oil and gas industry practices, the term “well head” will be replaced with “well site”, which is the area identified when an application for drilling approval is submitted to the Oil and Gas Commission. 
  
  
• New bulletins are now available to outline the application of social service tax to transactions involving trusts, amalgamations, and partnerships.

Further information on British Columbia’s Balanced Budget 2008 may be found on the province’s web site at: http://www.bcbudget.gov.bc.ca/2008/default.htm.

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