The 2009 Ontario Budget (the "Budget") was released on March 26, 2009. Despite forecasting combined deficits of $36 billion for the period 2009 through 2012, the Budget begins wryly: "Ontario is feeling the effects of the global economic crisis."
The Budget contains significant spending measures attempting to stimulate Ontario’s economy, including proposing to spend $32.5 billion on infrastructure over two years. In relation to tax matters, the most significant proposal in the Budget relates to harmonizing Ontario’s Retail Sales Tax ("RST") with the federal Goods and Services Tax ("GST"). Further, the Budget proposes a variety of corporate tax rate reductions, personal tax measures, and pension reform.
Sales Tax Harmonization
As widely predicted, the Budget announced that Ontario will adopt a multi-stage sales tax effective July 1, 2010. While the Budget is thin on technical detail respecting implementation of the tax, it appears that, unlike Quebec (which has its own separate legislation for its GST-style sales tax), Ontario will permit the federal government to impose a harmonized sales tax ("HST") in the province at a combined rate of 13% (with Ontario taking 8% of the 13%) on a much broader base of goods and services.
The justification for transitioning to the HST is largely presented as the enhancement of export competitiveness, although more sceptical observers will recognize the creation of a powerful government revenue generating tool for better economic times. The Budget details numerous incentives offered to make the transition palatable to voters, including an enhanced new housing rebate, cash payments to middle and lower income families and individuals, and extraordinary point-of-sale rebates on politically sensitive purchases such as books and children’s products. The Budget also promises that public service bodies such as municipalities, hospitals, schools, and universities, as well as charities and qualifying non-profit organizations, will be permitted to claim rebates that essentially make them indifferent to the imposition of the HST.
The clear losers in the move to the HST are financial institutions, such as banks and insurance companies, that are highly constrained in their ability to claim input tax credits by reason of the fact that they make supplies of predominantly tax-exempt services. Many of the services that these institutions consume (such as legal and accounting services and often outsourced information technology services) were not subject to the existing RST. These services will now attract an additional 8% tax that is largely unrecoverable. In the case of the insurance industry, Ontario will also impose a new insurance premium tax (to replace the RST that applied to insurance premiums) on most types of insurance other than automobile coverage, which seems rather unfair given that the denial of input tax credits is supposed to be the quid pro quo in situations where tax-exempt supplies are made. A further point of interest as regards financial institutions is whether Quebec will continue to maintain zero-rating of financial services (which allows for input tax credits to be claimed) in that province given that financial services will now be tax-exempt in Ontario.
Transition to the HST
On a technical level, a key issue for the introduction of the HST in Ontario will be the need for transitional rules to deal with transactions that straddle the July 1, 2010 implementation date such as sales of new residential housing and pre-payment arrangements. The Budget documents do not contain any details on these rules and only state that additional information will be released in the coming months. The transitional rules for Ontario are likely to be similar to those that were introduced when Nova Scotia, New Brunswick, and Newfoundland entered into the harmonized tax system on April 1, 1997. Certain types of businesses will be well served in seeking advice on the timing for the acquisition of goods and services in the period running up to the proposed implementation date.
Corporate Income Tax
The Budget announced certain significant corporate income tax rate reductions for manufacturers, small business corporations, and general rate corporate taxpayers, as follows:
The M&P rate applies to taxpayers earning income from manufacturing and processing, mining, logging, farming, and fishing. The Small Business rate applies to the first $500,000 of active business income earned by Canadian-controlled private corporations ("CCPCs"). The Small Business Deduction Surtax currently ‘claws-back’ the benefit of the low rate on small business income, such that corporations with earnings in excess of $1.5 million do not benefit from the Small Business rate.
The general corporate and M&P rate reduction proposals will compare very favourably with other Canadian and worldwide jurisdictions competing for jobs and investment. Interestingly, the general corporate rate reduction from 14% to 12% largely restores the corporate rate that was in force (12.5%) prior to the McGuinty government taking power in 2003.
The Budget affirmed Ontario’s previously announced commitment to accelerate the elimination of Ontario’s capital tax. Pursuant to the accelerated schedule, the general capital tax rate will decrease to 0.15% (from the current 0.225%) on January 1, 2010, and will be eliminated on July 1, 2010.
Corporate Minimum Tax
Ontario’s corporate minimum tax ("CMT") is a tax on a corporation’s adjusted net income. A corporation pays the greater of the CMT and the corporate income tax otherwise determined. The Budget proposes to amend the CMT effective for taxation years ending after June 30, 2010 to correspond with the corporate income tax rate reductions and, further, to exempt corporations with less than $50 million of assets or $100 million of gross revenues (measured on a consolidated basis with associated corporations).
Industry Targeted Tax Measures
Ontario included several measures in the Budget targeting certain Ontario sectors with a view to creating jobs growth:
- Film Industry: to extend indefinitely the 35% Ontario Film and Television Tax Credit ("OFTTC") and the 25% Ontario Production Services Tax Credit ("OPSTC").
- Technology: to enhance the rates for the Ontario Interactive Digital Media Tax Credit ("OIDMTC") for corporations that develop and/or market eligible products and to enhance the portion of expenditures eligible for the Ontario Computer Animation and Special Effects Tax Credit ("OCASE").
The Budget also included enhanced tax incentives for book publishing, co-operative education employment tax credits, and apprenticeship training.
The Budget contains a variety of relieving measures to parallel certain federal announcements, including: (i) the temporary 100% capital cost allowance ("CCA") rate for eligible computers and software; (ii) the extension through 2011 of the enhanced 50% straight line CCA rate for M&P machinery; and (iii) the enhancement of the Ontario Innovation Tax Credit ("OITC") for businesses undertaking eligible scientific research and experimental development ("SR&ED").
Personal Income Tax
The Budget proposes several personal tax measures, some of which are highlighted here.
The Budget proposes to reduce the personal income tax rate applicable to the lowest income bracket (taxable income up to $36,848) from 6.05% to 5.05%, effective January 1, 2010. The rates for the middle and high income brackets remain unchanged. The cost of this relief will be borne, in part, by high income taxpayers who will be subject to increased Ontario surtax, effective 2010 when the thresholds for both tiers of Ontario surtax will be lowered.
As a result of the proposed corporate income tax rate reductions discussed above, the Budget proposes to increase the effective personal tax rate on dividends from taxable Canadian corporations, by reducing the dividend tax credit.
Pension and Related Matters
In light of recent circumstances, including the recent Ontario Expert Commission on Pensions report and the negative effect of stock market performance on the health of pension funds, it is not surprising that issues relating to registered pension plans ("RPPs") were given special attention in the Budget.
Solvency Funding Relief for Defined Benefit RPPs
Consistent with its December 2008 announcement, Ontario proposes to adopt regulations in respect of the first valuation dated on or after September 30, 2008 to (a) allow consolidation of existing solvency deficiencies to start a new 5 year funding schedule, (b) defer for one year the start of special payments for newly arising going-concern or solvency deficiencies, and (c) provided no more than one-third of plan participants refuse to consent, allow any newly identified solvency deficiency to be funded over 10 years instead of 5 years. Other technical matters are also to form part of the relief package. Additional measures to inform plan members of the funded status of the RPP will be introduced as well as a prohibition on contribution holidays for fiscal periods ending in 2010 to 2012, unless certain conditions are satisfied. Finally, the recently adopted commuted value standard from the Canadian Institute of Actuaries (the "CIA") may be used in solvency valuations commencing as of December 12, 2008 rather than the CIA’s formal effective date of April 1, 2009.
The Budget describes Ontario’s continuing commitment to pension modernization but in general terms for the most part. Specific measures identified are (i) changes to pension division on marriage breakdown proposed in November 2008 legislation, (ii) legislation to facilitate phased retirement (enabling retirement aged employees to collect a partial pension while continuing to work and accrue pensions) complementing recent Federal tax law changes, and (iii) legislation to enable the Superintendent of Financial Services to "review certain pension arrangements in restructuring proceedings" – a power which seems to complement the provisions of the not-as-yet-in-force subsection 6(7) of the Companies’ Creditors Arrangement Act (Canada) which provides an exception to the proposed conditions that no restructuring plan may be approved by the court unless the plan includes terms to pay delinquent employee and normal cost contributions to the RPP.
Pension Benefits Guarantee Fund ("PBGF")
Other measures include a review of the PBGF to inform long term policy with a view to possibly establishing a separate agency to oversee the PBGF. This innocuous step follows a recommendation of the Expert Commission but it may be noteworthy that the Budget papers propose to introduce legislation:
"… to clarify that the PBGF is a self-sustaining fund, independent of the government. The amendments would give the government the flexibility to make grants to the PBGF, while also confirming that the government is not required to make either grants or loans. The amendments would also confirm the existing regulatory requirement that the PBGF’s liability to guarantee pensions is limited to the assets of the PBGF."
It is unclear whether these statements reflect a desire of Ontario to distance itself from the PBGF and the pressing solvency funding issues it may face.
The Budget contains the following miscellaneous matters:
- amendments to allow the Ontario Teachers Pension Plan Board to provide administrative and investment services to other public sector pension plans and public sector institutional investors – on the first count at least, this appears to mirror legislative amendments adopted for OMERS in 2006;
- propose greater access to otherwise "locked-in" funds that originated in RPPs by (a) increasing the amount that may be withdrawn on a transfer to a new Life Income Fund from 25% to 50% effective January 1, 2010 (and allowing the same for earlier forms of locked-in RRIFs) and (b) waiving application fees under the financial hardship withdrawal rules from April 1, 2009 to March 31, 2011; and
- responding to industry requests by agreeing to amend legislation to permit beneficiary designations under Tax Free Savings Accounts outside of a will, as currently exists for RRSPs.