On March 26, 2009, Ontario’s Finance Minister, the Honourable Dwight Duncan, tabled the Ontario government’s 2009 Budget, “Confronting the Challenge: Building Our Economic Future”. Acknowledging that Ontario’s economy is in a recession and that the current global economic crisis has created “real challenges for Ontarians”, the Budget seeks to build upon the government’s ongoing five-point economic plan through investments in skills and knowledge, infrastructure, innovation, key partnerships and lowering business costs.
Earlier in March, the government had announced two significant stimulus measures: a $32.5 billion investment in Ontario infrastructure over the next two years, with the goal of creating and sustaining an estimated 146,000 jobs in 2009-10 and 168,000 jobs in 2010-11 across Ontario; and a further $50 million for investments in the Emerging Technologies Fund. To complement those stimulus measures, the Budget outlines the government’s strategy “to preserve and create jobs today and to position Ontario to be more competitive tomorrow”. In addition to proposing a comprehensive tax reform package (details of which are described below), highlights of the Budget include:
- An investment of $700 million over the next two years to expand skills training;
- More than $300 million investment in new initiatives to support Ontario’s move towards a greener economy, including the new Emerging Technologies Fund that will invest in clean technology, retrofits to public-sector buildings and a Green Jobs Skills Strategy; and
- An investment of over $700 million to boost innovation, including $300 million in capital funds over six years for research infrastructure and $100 million over four years in additional operating funds for biomedical research.
The Budget also outlines key elements of the Ontario government’s plan to balance the budget and eliminate Ontario’s deficit, currently projected to be $14.1 billion in 2009-2010, by no later than 2015-2016. The plan is based on the forecast that the Ontario economy will recover to its historical trend GDP in 2015-16.
Sales Tax Reform
Effective July 1, 2010, Ontario will follow in the footsteps of Nova Scotia, New Brunswick, and Newfoundland and Labrador, by converting its current provincial sales tax to a value-added tax which will be combined with the federal goods and services Tax (GST) to create a harmonized, federally administered sales tax. The single sales tax will have a combined tax rate of 13%.
Businesses selling taxable or zero-rated goods and services will be able to claim input tax credits on their purchases, as under the federal GST, with limited exceptions. To simplify administration, the harmonized sales tax will generally use the same rules and tax base as the federal GST.
The Budget notes that the new harmonized sales tax is intended to benefit Ontario businesses by reducing:
- business costs, most noticeably in areas that are taxable under the current provincial sales tax system, by reimbursing businesses for the tax they pay in the course of commercial activities; and
- the compliance burden of having to deal with two separate sets of tax rules. (According to the Budget documents, Ontario businesses will save more than $500 million a year in compliance costs under the new system.)
To provide targeted relief while maintaining the single administration of the harmonized sales tax and preserving retailers’ ability to claim input tax credits, point-of-sale rebates will be introduced for the Ontario portion of the tax (8%) for certain goods, including books and basic children’s items. The Budget also proposes a new housing rebate which would allow home buyers to claim a rebate of part of the Ontario portion of the sales tax for new homes priced up to $500,000. Resale homes will not be subject to the harmonized sales tax.
The impact of the increased tax costs will be felt directly in everyday expenditures such as the cost of electricity and heating for homes. It will also be imbedded more subtly in the impact higher management fees will have on Ontario residents’ investment portfolios.
There is an important transitional rule for large businesses (annual taxable sales in excess of $10 million) and financial institutions to consider. During the implementation phase of the harmonized sales tax, such taxpayers will be restricted from claiming input tax credits in respect of the Ontario portion of the sales tax on certain key expenditures such as the cost of energy and certain telecommunication services. After the first five years of implementation, full input tax credits will be phased in over a three year period.
Ontario municipalities, hospitals, universities, colleges, school boards, charities and qualifying non-profit organizations will be able to claim rebates for the Ontario portion of the harmonized sales tax so that the net effect of the tax will be fiscally neutral to them.
Business Tax Measures
The Budget has proposed several business tax measures which are to take effect on July 1, 2010. These measures are intended to provide tax relief to lower business costs, enhance Ontario’s competitiveness and support growing small businesses.
Corporate Income Tax Rate Reductions
The Ontario government is proposing to lower corporate income tax rates, effective July 1, 2010, as follows:
- the general corporate tax rate will be reduced from 14% to 12% (with a further reduction to 10% over three years);
- the corporate tax rate on manufacturing and processing (M&P) and resource profits will be reduced from 12% to 10%;
- the small business tax rate will be reduced from 5.5% to 4.5%; and
- the small business deduction surtax of 4.25% will be eliminated, so that all CCPCs will be taxed at the 4.5% rate on the first $500,000 of active business income, regardless of income level. (The Budget notes that, based on legislation currently in place in other provinces, eliminating the surtax would make Ontario the only province not to claw back the benefit of the small business deduction.)
When these rate reductions are fully implemented, the Budget indicates that Ontario’s combined federal– provincial corporate tax rate of 25% will be lower than the current average OECD corporate tax rate of 26.7%, and lower than the average combined federal–state general corporate tax rate and the average combined manufacturing rate for Ontario’s key competitors for jobs and investment, the U.S. Great Lakes states. Moreover, when the proposed rate reductions and the conversion to the harmonized sales tax are fully phased in, Ontario’s marginal effective tax rate on new capital investment will be cut in half, making Ontario one of the most competitive jurisdictions in the industrialized world in terms of the taxation of new capital investment by corporations.
Corporate Minimum Tax Reduction
Corresponding with the reductions in corporate tax rates, the corporate minimum tax rate will be reduced, effective for taxation years ending after June 30, 2010, from 4% to 2.7%. The proposed rate reduction will be pro-rated for taxation years straddling the effective date. In addition, the Budget proposes to exempt a corporation or an associated corporate group with less than $50 million in total assets or less than $100 million in annual gross revenues from paying corporate minimum tax.
Capital Tax Elimination
In the last phase of its plan to eliminate Ontario’s capital tax, the Ontario government proposes to cut current capital tax rates by one-third on January 1, 2010, and to fully eliminate the capital tax on July 1, 2010.
Ontario Innovation Tax Credit (OITC)
The OITC, a 10% refundable tax credit for small and medium-sized corporations performing eligible scientific research and experimental development (SR&ED) in Ontario, will be extended to more small and medium-sized corporations by increasing the current taxable income phase-out range of $400,000– $700,000 to a new range of $500,000-$800,000. The effective date of this proposal will parallel the enactment of the Canadian government’s enhancement of the federal investment tax credit for SR&ED as announced in the 2009 federal budget.
Accelerated Capital Cost Allowance (CCA) for Computers
The Ontario government also proposes to parallel the 2009 federal budget proposal to provide a temporary 100% accelerated CCA rate for eligible computers and software acquired after January 27, 2009 and before February 2011, subject to federal implementation. As with the federal proposal, the accelerated CCA rate will not be subject to the half-year rule and, as such, the full cost of eligible computers and software may be deducted in the first taxation year that they are available for use.
Accelerated CCA for M&P Machinery and Equipment
Both Ontario and the federal government currently provide a temporary accelerated CCA rate for M&P machinery and equipment acquired after March 18, 2007 and before 2012. Eligible assets acquired before 2010 qualify for a 50% straight-line accelerated CCA rate, while those acquired in 2010 and 2011 are eligible for accelerated CCA rates on a declining-balance basis.
Ontario proposes to match the 2009 federal budget proposal to extend the 50% straight-line accelerated CCA rate for eligible assets acquired in 2010 and 2011, subject to federal implementation. The Budget also reiterates the Ontario government’s call on the federal government to extend the 50% straight-line CCA rate to all M&P machinery and equipment acquired before 2014 to benefit businesses making longer-term investments.
Apprenticeship Training Tax Credit (ATTC)
The ATTC is a 25% refundable tax credit available to businesses (30% for small businesses) on the salaries and wages paid to eligible apprentices in designated construction, industrial, motive power and service trades for the first 36 months of an apprenticeship program, to a maximum credit of $5,000. The ATTC is available for apprentices that begin their apprenticeship program before January 1, 2012 and salaries and wages paid before January 1, 2015.
The Budget proposes to increase: the 25% rate to 35%, the 30% rate to 45%, the $5,000 annual maximum credit to $10,000, and the 36 month period to 48 months. The ATTC will also be made a permanent tax incentive. The Ontario government states that its proposed enhancements will make the ATTC the most generous tax credit of its kind currently legislated in Canada.
Co-operative Education Tax Credit (CETC)
Enhancements are also proposed to the CETC, a 10% refundable tax credit available to businesses (15% for small businesses) for salary and wages paid to employed postsecondary students enrolled in qualifying cooperative education programs at eligible educational institutions, to a maximum credit of $1,000 per work placement. The Ontario government proposes to increase the 10% and 15% rates to 25% and 30%, respectively, and to increase the maximum tax credit available to $3,000 per work placement.
Refundable Tax Credits for Specific Business Sectors
Film and Television
The Budget proposes to make the enhanced rates of both the 35% refundable Ontario Film and Television Tax Credit (OFTTC) and the 25% refundable Ontario Production Services Tax Credit (OPSTC) permanent. The OFTTC is made available to qualifying corporations for labour expenditures related to certified domestic film and television productions in Ontario, while the OPSTC is made available to qualifying corporations for labour expenditures related to qualifying foreign film and television production services and non-certified domestic film and television productions in Ontario.
The Ontario government also proposes to make permanent enhancements to the Ontario Interactive Digital Media Tax Credit (OIDMTC), a refundable tax credit available to qualifying corporations for expenditures related to the creation, marketing and distribution of eligible interactive digital media products. Currently, a 30% refundable tax credit is available to small corporations that develop their own eligible products and a 25% refundable tax credit is available to large corporations that develop their own eligible products or to corporations that develop eligible products under a fee-for-service arrangement. The Budget proposes permanent enhancements to the OIDMTC to enhance the tax credit rates to 40% and 30%, respectively, to expand eligible labour expenditures, and to extend the tax credit to more fee-for-service arrangements.
Computer Animation and Special Effects
The Budget proposes to enhance the 20% refundable Ontario Computer Animation and Special Effects tax credit, which is available to qualifying corporations for eligible labour expenditures related to digital animation and special effects in qualifying film and television productions. Effective for qualifying expenditures incurred after March 26, 2009, enhancements to the tax credit will:
- increase eligible labour expenditures to 100% from 50% of amounts paid to arm’s-length unincorporated individuals and partnerships providing freelance services;
- expand eligible labour expenditures to include 100% of amounts paid to arm’s-length incorporated individuals providing freelance services while ensuring that incorporated individuals cannot claim the credit directly; and
- streamline administration by relaxing the requirement that an eligible animation or visual effect be created primarily with digital technologies.
The Ontario government proposes to expand eligibility for the Ontario Book Publishing Tax Credit, which is a 30% refundable tax credit available to Ontario book publishing corporations for qualifying expenditures related to publishing and promoting the first three books by a Canadian author in an eligible category of writing. Eligibility will be expanded to qualifying expenditures incurred after March 26, 2009 for any number of books by a Canadian author in an eligible category of writing, and direct expenses that reasonably relate to publishing an electronic version of an eligible book.
Personal Tax Measures
Income Tax Rate Reduction
The Ontario government proposes to reduce the lowest personal income tax rate, which currently applies to the first $36,848 of an Ontario individual taxpayer’s annual taxable income, from 6.05% to 5.05%, effective January 1, 2010. The Budget notes that based on current legislation in other provinces, Ontarians will benefit from the lowest provincial tax rate in Canada on the first $36,848 of taxable income.
As a result of the rate reduction, various tax credits which are calculated based on the lowest income tax rate of 6.05%, such as the tax credit for the first $200 of qualifying charitable donations, will be modified to reflect the rate cut. The Ontario government has also indicated that it will adjust Ontario’s two-tiered surtax system to adjust both surtax thresholds to maintain the progressivity of the income tax system.
The Ontario dividend tax credit, which provides tax relief to Ontario investors and small business owners to reflect the fact that dividends from Canadian corporations are distributed from after-tax earnings, will also be adjusted to reflect the proposed reduction in corporate tax rates.
Sales Tax Transition Benefit
To smooth the transition to the new harmonized sales tax system, the Ontario government proposes to provide $4 billion in relief to low and middle income Ontarians. Single parents and couples will be paid a total benefit of $1,000 (based on a combined maximum annual income of $160,000), while single tax filers will be paid a total benefit of $300 (based on a maximum annual income of $80,000). The benefits will be paid in three instalments in June 2010, December 2010 and June 2011. To qualify for the payments, a tax return for the preceding tax year must be filed.
Sales Tax and Property Tax Relief
The Budget proposes to increase the amount of ongoing sales tax and property tax relief for low and middle income individuals and families by more than $1 billion per year. To better target this tax relief, the Ontario government proposes to replace the current combined sales and property tax credits with two new tax credits.
The new Ontario sales tax credit is proposed to provide advance payments to eligible taxpayers. The sales tax credit will be refundable and paid quarterly beginning in July, 2010, when the harmonized sales tax takes effect. For the period from July 2010 to June 2011, a single individual with income of $20,000 will receive the maximum credit of $260, a single parent with one child or a couple with $25,000 or less of annual income will receive the maximum credit of $520, and a couple with two children and family income of $25,000 or less will receive the maximum credit of $1040. Unlike the current tax credits, the maximum benefit and thresholds of this new tax credit will be indexed for inflation.
The new Ontario property tax credit will be based on occupancy cost (property tax or 20% of rent paid). For 2010, a single individual with income of $20,000 or less and $500 in monthly rent will receive a credit of $370, a couple with $1,500 in property tax and $25,000 or less of family income will receive a credit of $400; and a senior couple with $4,000 in property tax and $25,000 or less in family income will receive $1,025. As with the new sales tax credit, the maximum benefit and thresholds of this tax credit will be indexed for inflation.
Ontario Senior Homeowners Property Tax Grant
The grant, which provides a benefit of up to $250 to help low to middle income senior homeowners pay their 2009 property taxes, is proposed to be doubled to $500 starting in 2010. Eligible single seniors with $500 or more in property taxes and income of up to $35,000 a year will receive the maximum $500 grant in 2010. Eligible senior couples with $500 or more in property taxes and income of up to $45,000 a year will receive the maximum grant.
Matching 2009 Federal Budget Measures
The Ontario government will automatically adopt the following measures once enacted by the federal government:
- Effective for withdrawals from Registered Retirement Savings Plans (RRSPs) made after January 27, 2009, the Home Buyers’ Plan withdrawal limit will be increased from $20,000 to $25,000; and
- Where the final distribution of property from an RRSP or Registered Retirement Income Fund (RRIF) of a deceased annuitant occurs after 2008, the amount of post-death decreases in the value of the plan may be carried back and deducted against the RRSP/RRIF income inclusion in the year of death.