FRANCAIS

June 05, 2006

Finance Minister Greg Selinger today announced a proposed increase in the Dividend Tax

Credit to 11 per cent from five per cent on dividends received from corporations not eligible for the small business tax rate, which would result in savings of $7.5 million for Manitobans. The legislation would also include provisions which would raise the purchase limit for shares of new labour funds to $12,000 from $5,000 per year.

The proposed changes are included in the Budget Implementation and Tax Statutes Amendment Act which was introduced today in the legislature.

The dividend tax credit enhancements would reduce the maximum effective tax rate on dividend income by one-quarter, while complementing the measures related to the taxation of dividends the federal government included in its recent budget. The change would be retroactive to Jan 1.

"The higher-dividend tax credit will reduce the personal taxes individuals pay on taxable dividends," said Selinger. "The changes we are making complement changes by the federal government, fulfilling the commitment we made in our most recent budget."

Manitoba would introduce two dividend tax credit rates: one for taxable dividends distributed by Canadian-controlled private corporations (CCPCs) on income eligible for the small business deduction, and the enhanced rate of 11 per cent on dividends received from publicly-traded corporations and those received from private corporations on income that exceeds the small-business threshold.

The Dividend Tax Credit for taxable dividends received from CCPCs with taxable income below the small business limit would be reduced to 4.87 per cent in 2006 and 3.67 per cent in 2007. These rates would correspond to reductions in the small business tax rate and would ensure that there continues to be tax neutrality for the small business owner, Selinger said.

The legislation would also raise an individual’s annual purchase limit for shares of labour funds registered after July 1, 2006, to $12,000 from $5,000.

"By increasing the limit, we are making labour fund investments more accessible to high net worth individuals," said Selinger. "This would enable new labour funds to raise more capital to support venture investments in Manitoba companies."

Selinger noted this increase would complement legislative amendments, passed in 2005 and proposed in the current legislative session, that modernize labour fund governance, strengthen investor rights and bolster monitoring of labour funds.

After consulting with industry stakeholders, the Crocus Investment Fund Implementation Team recommended the province consider an increase in the annual individual purchase. The team was co-chaired by John MacDonald, retired senior partner of Deloitte and Touche, and Winston Hodgins, current president and CEO of Manitoba Lotteries.

More information on the tax treatment of dividends and other taxation measures is available at http://www.gov.mb.ca/finance/fedprov/majortaxes.html.

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• The personal income tax system, through the gross-up and dividend tax credit (DTC) mechanism, currently provides recognition for corporate taxes paid, based on a 20-per-cent national federal-provincial rate to taxable individuals resident in Canada.
• Both the federal and provincial taxation systems provide for a two-stage mechanism that minimizes double taxation:

- First, the dividends are grossed up by 25 per cent to reflect the dividend amount that would have been available before federal and provincial corporate income tax was paid. The grossed-up income is taxed at the marginal rate applicable to personal income tax.

- Second, to recognize the corporate income tax already paid, the amount of personal income tax payable is reduced by the dividend tax credit, currently five per cent in Manitoba and 13.33 per cent federally.

• As the combined federal-provincial income tax rate that applies to most income (other than small business income) is higher than 20 per cent, income distributed as dividends received by shareholders of large corporations can be subject to a combined corporate/personal rate that is in excess of that payable on distributions from income trusts.
• In order to improve the neutrality of the tax system, the federal government will implement a reduction in income taxes payable on eligible dividends through a higher gross-up rate (45 per cent, up from the current 25 per cent) and an increased DTC (19 per cent, up from 13.33 per cent).
• Taxable dividends paid by the following corporations would be considered eligible dividends:

- a public corporation resident in Canada,

- any other resident corporation that is not a Canadian Controlled Private Corporation (CCPC) and that is subject to tax at the general corporate tax rate, and

- a CCPC resident in Canada to the extent that its income (other than investment income) is subject to tax at the general corporate tax.

• Manitoba provided in its 2006 Budget that it would wait until the federal budget released details of any changes. The province can now announce its proposed dividend tax credit structure.
• Manitoba would have a two-tier dividend tax credit with a rate of 11 per cent for dividends received from publicly-traded companies and from CCPCs whose active business income exceeds the small-business threshold. The estimated cost of this measure is $7.5 million on an annualized basis.
• For taxpayers in the top bracket, increasing the DTC to 11 per cent from five per cent would reduce Manitoba’s effective tax rate on dividend income to 9.3 per cent from 15.5 per cent, which would create substantial savings for recipients of eligible dividends.
• This change would affect approximately 113,000 Manitoba taxpayers. In 2004, Manitobans reported $412 million in taxable Canadian dividends (actual dividends received, before gross up, were $330 million). It is estimated that 35 per cent of dividends received by Manitobans would qualify for the higher-dividend tax credit. Approximately 93,000 Manitoba taxpayers, or 82 per cent of taxpayers reporting dividend income, fall into the lower and middle tax brackets.
• The DTC for CCPCs would be set at a rate which achieves integration with the personal tax system at the top bracket tax rate of 17.4 per cent. In other words, a business owner in the top personal tax bracket would pay the same total personal and corporation income taxes to Manitoba, whether income is received from the corporation as salary or as dividends. This would translate into the rates shown in the following table.