Nova Scotia Payroll Tax Rebates – Let’s look at broad relief rather than just picking winners and losers

Nova Scotia has a long history of government funding for private business. It has taken many forms and over the years and has been subjected to varying degrees of public scrutiny and accountability.

While supporting growing firms and providing for their ability to grow is an appropriate role for government, the question is how should this be done? More specifically, is doling out funds to specific companies, in whatever form, payroll rebates, grants or loans, putting the role of picking winners and losers in the hands of politicians and government officials.

The payroll rebate has been an area of considerable debate. The McNeil government came under some criticism when Nova Scotia Business Inc. (NSBI) agreed to offer the Royal Bank of Canada up to $22 million in payroll rebates in 2015 to open a financial services centre in Halifax. Government argues these rebates are justifiable because the haul from provincial income and consumption tax revenues would far outweigh any expenditure. What cannot be argued is that this is still a significant public subsidy to a large profitable corporation.

In another example, the 2018-2019 reporting year, NSBI reported almost $23.6 million in payroll tax rebates being made available from its Strategic Investment Fund with almost $10 million of that earmarked for Manulife over five years.

To be clear, a payroll rebate is an earned incentive, paid out each year a company achieves its agreed upon employment targets. The rebate is a return on a company’s eligible gross payroll. For every dollar a company spends in salaries and benefits, NSBI rebates back a percentage. Of all government support schemes it has a degree of accountability but the net effect remains the same. It provides some companies with an advantage over others trying to compete on the same playing field.

Perhaps this indicates a recognition by government of the payroll tax burden, but its implementation is uneven and unfair.

The weight of payroll taxes is especially an issue for small business in Nova Scotia. The average level of payroll taxes faced by employers in Nova Scotia is $4,831 per employee earning $50,000 which is an effective payroll tax rate of 9.66%. It should be noted, this burden is tied to the highest WCB premiums in Canada as the Board works to eliminate its $217 million unfunded liability.

CPP premiums started going up earlier this year and will continue to rise for the next four years for all Canadians and will increase for an additional two years for those earning over $56,000. This will reduce an employee’s take home pay by up to $1,050 per year when fully phased in, and reduce the payroll budget of every employer.

Additionally, small businesses will have to tighten their belts to deal with a host of new taxes.  In addition to the Canada Pension Plan increases, many family businesses may be facing higher taxes due to new income sprinkling rules implemented in 2018, and small businesses with passive investment income above $50,000 per year will pay significantly higher corporate taxes starting in 2019.

Much of this is not the direct responsibility of the provincial government, however, Nova Scotia has the option of following New Brunswick’s lead by rejecting the new federal passive investment rules which could provide some relief.

As preparations begin for the next Nova Scotia budget, CFIB is recommending government look at how it can reduce the overall tax burden on all small businesses in the province, rather than only focusing on subsidies to large corporations and picking winners and losers in specific sectors.

This commentary originally appeared in the July 26, 2019 Chronicle Herald

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