On August 22, 2017 the Honourable Tom Osborne, Minister of Finance and the President of Treasury Board, announced a review of the Province’s tax system. The main objectives of the tax review are to:
- Ensure the Province’s tax system is competitive and fair
- Identify ways to simplify the tax system
- Reduce costs for both government and tax payers
- Consider whether the appropriate tax mix is applied to taxpayers as well as the progressivity of the tax system
A five-person independent committee has been established to lead this review with the expectation to complete this review and submit a final report of recommendations to the Honourable Tom Osborne by November 2018. Operational support for the Committee is provided by the Tax and Fiscal Analysis Division of the Department of Finance.
Scope of Tax Review
The independent tax review will include an evaluation of select personal and business taxes, which will include the following:
- Personal Income Tax
- Gasoline Tax
- Tobacco Tax
- Retail Sales Tax on Insurance Premiums
- Retail Sales Tax on Used Vehicles
- Harmonized Sales Tax
- Corporate Income Tax
- Health and Post-Secondary Education Tax (known as Payroll Tax)
- Insurance Companies Tax
- Financial Corporations Capital Tax
Personal Income Tax – Personal income tax is levied directly on taxable income. Taxable income is calculated using the same definition of federal taxable income. However, a separate set of tax brackets and tax rates are used to calculate provincial tax. Tax brackets, non-refundable tax credits (except education, pension, volunteer firefighters’ amounts and most expenditure based credits) and the Low Income Tax Reduction is indexed annually utilizing the Consumer Price Index for Newfoundland and Labrador. Personal income tax is administered on behalf of the Province by the Federal Government.
Gasoline Tax – A person who acquires gasoline products through retail sale in the Province is required to pay gasoline tax. It is noted however that gasoline consumed in certain equipment within specified industries may be exempted from the tax.
Tobacco Tax – A person who purchases tobacco products (i.e. cigarettes, fine-cut tobacco and cigars) through retail sale in the Province are required to pay tobacco tax. A reduced rate of tobacco tax is applied in the Labrador Border Zones (Labrador City, Wabush and the south coast of Labrador).
Retail Sales Tax on Insurance Premiums – A retail sales tax applies to the taxable premiums for contracts of insurance relating to property, risk, peril or events in the Province. Accident and sickness insurance, life insurance, marine insurance (other than marine insurance on sport watercraft, when sport watercraft are 20 tons gross or less) and surety, guarantee or fidelity type insurance are excluded from tax.
Retail Sales Tax on Used Vehicles – A retail sales tax (RST) applies to the private sale of vehicles in this Province. For the purpose of RST, a vehicle includes not only a motor vehicle, but also an ATV, snowmobile, aircraft, boat, ship, trailer or vessel. Vehicles sold by a HST registrant would not be subject to RST as the 15% HST would apply to those sales.
Harmonized Sales Tax – The Harmonized Sales Tax (HST) is a value added tax that combines the provincial sales tax with the federal Goods and Services Tax (GST), to create a single, federally administered HST. Most goods and services supplied in Newfoundland and Labrador are subject to the HST.
Corporate Income Tax – The provincial corporate income tax (CIT) rate is applied to the same taxable income as is calculated for the purposes of the federal CIT system. Businesses paying CIT in this Province may be eligible for various tax credits. CIT is administered on behalf of the Province by the Federal Government.
Health and Post-Secondary Education Tax (Payroll Tax) – Payroll tax is payable by employers whose annual remuneration in this Province exceeds a predetermined exemption threshold which is currently set at $1.2 million for all employers. Employers who are associated with other corporations, or who are in partnership with other employers and remuneration to employees, are required to file an allocation agreement for the purposes of allocating the exemption threshold.
Insurance Companies Tax – Insurance companies’ tax applies to the premium revenue of insurance companies. Effective July 1, 2016, insurance companies are required to remit to the Province a tax of 5% of premiums generated in Newfoundland and Labrador during a particular year.
Financial Corporations Capital Tax – Banks, loan and trust companies with permanent establishments in Newfoundland and Labrador are subject to a capital tax. For companies with aggregate capital less than $10 million, the first $5 million is exempt from the tax. The provincial Financial Corporations Capital Tax is harmonized with the federal (capital) tax base.
The principal function of the tax system is to raise the revenues necessary to fund government expenditures in a manner that is both efficient and equitable. The tax system is also an instrument of policy that serves to advance a wide range of economic, social and other public policy objectives. Tax measures that reflect such objectives include exemptions, deductions, rebates, deferrals and credits, and are typically referred to as “tax expenditures”. Tax expenditures are foregone revenues that serve as alternatives to direct program spending.
While there is no common paradigm for tax expenditure evaluation due to the relative weight that may be placed on each principle (i.e. the trade-off between principles to achieve the best outcome), the following principles will guide the Committee’s review of the tax programs identified above:
- Equity – a measure of fairness particularly as it relates to the distribution of wealth or burden of taxation, which infers that taxpayers in identical circumstances should be treated the same (horizontal equity) and that the tax system applies a progressive tax burden by requiring people with higher incomes to pay a higher proportion of their income in tax (vertical).
- Competitiveness – a measure of fiscal burdens used to either encourage the inflow of productive resources or discourage the exodus of those resources. This measure may consider tax rate, the tax base, and the overall complexity associated with complying with the tax system.
- Effectiveness – a measure of the program’s ability to meet its stated goals.
- Economic Efficiency – a measure of the tax distortions created in the economy. Designing an optimal tax system means keeping tax distortions to a minimum, subject to restrictions introduced by the need to raise revenue and maintain an equitable tax burden.
- Utilization – a measure of the degree to which a targeted group avails of the tax expenditure.
- Administration Efficiency – a measure of the degree of administration that exerted to deliver the tax program in terms of compliance, cost, and resources required.
- Budgetary Impact – a measure which assesses the tax program within the broader context of Government’s commitment to sound fiscal management.
- Relevance – a measure used to determine whether or not there remains a need to continue with a particular tax expenditure program.
- Simplicity – a measure of the additional burden imposed by a tax program. This burden may manifest itself in the form of increased administration, red tape and/or costs. An increased compliance burden associated with availing of a tax expenditure program may be prohibitive for some individuals.
The Independent Tax Review Committee submitted its report to the Honourable Tom Osborne, Minister of Finance and President of Treasury Board, as follows: