2009 ONTARIO BUDGET

The 2009 Ontario Budget was presented on March 26, 2009 by Finance Minister Dwight Duncan. The Budget projected a $3.9 billion deficit for 2008-2009, and increased deficits of 14.1 billion for 2009-2010, $12.2 billion for 2010-2011, and $9.7 billion for 2011-2012, with the next balanced budget forecast for 2015-2016.

 The Budget also announced a “comprehensive tax reform package” which includes adoption of the harmonized sales tax in Ontario, planned reductions in corporate and personal income tax rates, and other targeted tax measures.

Highlights of these tax-related measures announced in the 2009 Ontario Budget are outlined below.

 ADOPTION OF HARMONIZED SALES TAX

The Budget contained the much anticipated announcement of the adoption of Harmonized Sales Tax (HST) in Ontario, to replace the existing Ontario Retail Sales Tax (ORST) regime, effective July 1, 2010. The HST rate in Ontario will be 13%, consisting of an 8% provincial tax rate (the same as the current ORST rate) combined with a 5% federal GST rate. This combined sales tax will be administered by the Canada Revenue Agency.

 The adoption of the HST system in Ontario will generally follow the same rules and tax base as the federal GST (with certain exceptions as noted below), reducing overall compliance costs for business. Businesses will generally be eligible to claim input tax credits for sales tax paid in the course of carrying out commercial activities, reducing the cost of supplies where they are taxable under the current RST system. Small supplier rules under the federal GST system will also be paralleled, so that businesses with total taxable revenues below $30,000 annually ($50,000 for public service  bodies) will not be required to register for HST purposes.

 As a first step towards execution of the adoption, the Budget announced the signing of a Memorandum of Agreement Concerning a Canada-Ontario Comprehensive Integrated Tax Co-ordination Agreement between the federal and Ontario Finance Ministers. Under the Memorandum, Ontario will receive $4.3 billion in transfer payments to support the transition. Both the Memorandum and Budget contained a few high-level details of specific Ontario exemptions and provisions which will be adopted with the implementation of HST, as outlined below. Further details as to transitional and technical rules, however, are to be released at a later date. It was also noted that an implementation panel will be established to assist with the transition to the new tax system.

 Point-of-Sale Exemptions

Point-of-sale exemptions from the 8% provincial portion of the HST will be introduced for:

• books;

• children’s clothing and footwear;

• children’s car seats and car booster seats;

• diapers; and

• feminine hygiene products.

New Housing Rebate

A New Housing Rebate for the 8% provincial portion of HST will be introduced for new homes costing up to $500,000. Purchasers of newly constructed homes will be eligible to claim a rebate of 75% of the 8% provincial portion of tax paid on the purchase price of a home to be used as a primary residence. The rebate will be reduced for homes costing between $400,000 and $500,000.

 Public Service Body Rebates

Public service body rebates will be introduced for the provincial portion of HST, similar to current GST rebates. Rebate rates for the provincial portion of tax paid will be 78% for municipalities, 78% for universities and colleges, 93% for school boards, 87% for hospitals, and 82% for charities and qualifying non-profit organizations.

 Small Business Transition Credit

To support small business in making necessary changes to point-of-sale and accounting systems as a result of the HST adoption, a Small Business Transition Credit will be introduced, providing a one-time credit of up to $1,000 for eligible businesses. The credit will be available to businesses, other than financial institutions, with annual revenues from taxable sales of less than $2 million. 

Credit amounts will be based on businesses’ total taxable revenues in the first full fiscal quarter commencing after June 30, 2010, as follows:

• businesses with taxable revenues up to $15,000 will be eligible to

receive a $300 credit;

• businesses with taxable revenues over $15,000 and up to $50,000 will

be eligible to receive a credit amount based on 2% of taxable revenues

for the quarter;

• businesses with taxable revenues over $50,000 and up to $500,000

will be eligible to receive a credit of $1,000.

 Temporary Restriction on Input Tax Credits

Temporary restrictions will be placed on input tax credits claimable by large businesses (with annual taxable sales in excess of $10 million) and financial institutions. These restrictions will apply to the 8% provincial portion of tax, for the first five years after implementation of the HST system, after which full input tax credits will be phased-in over a three-year period. The temporary ITC restriction will apply to:

- energy, except where purchased for use by farms or to produce goods for

sale;

- telecommunication services, other than internet access or toll-free

numbers;

- food, beverages and entertainment; and

- road vehicles weighing less than 3,000 kg, along with parts, certain

services, and fuel to power such vehicles.

 Tax on Accommodations

The current ORST rate of 5% on transient accommodation will increase to the 8% provincial tax rate with the adoption of HST. The province will allocate approximately $40 million received from the difference in rates annually to destination marketing in Ontario tourism regions.

 Tax on Private Transfers of Motor Vehicles

An Ontario sales tax will continue to apply to private sales of used motor vehicles, to which GST does not apply. This imposition of a provincial tax is similar to other HST provinces.

 Tax on Insurance Premiums

Insurance premiums which are currently taxable under the ORST system (such as for group insurance), will continue to be taxable at the 8% provincial rate.

 Tax on Alcohol

Current ORST rates on sales of alcoholic beverages of 10% and 12% (applicable to sales through licensed establishments and retail stores, respectively) will be reduced to the 8% provincial rate with the adoption of HST. As a result, adjustments will be made to increase various other alcohol fees, levies, and charges.

 Vendor Compensation Arrangements

Vendor compensation currently available for the collection and remittance of ORST will be eliminated for returns filed for periods ending after March 31,  2010.

PERSONAL INCOME TAX MEASURES

New Ontario Sales Tax Transition Benefit

Related to the announcement of the adoption of HST, the Budget announced the introduction of an Ontario Sales Tax Transition Benefit. The Benefit will provide up to $300 for single persons and up to $1,000 for couples and single parents, payable to taxpayers in three instalments issued in June 2010, December 2010, and June 2011. Maximum benefit amounts will be reduced by 5% of adjusted net income in excess of $80,000 for single persons and $160,000 for families. To qualify for a benefit payment, an individual must have filed a tax return for the prior taxation year.

 Reduction in Personal Income Tax Rates

The Budget announced a reduction in the lowest personal income tax rate from 6.05% to 5.05%, effective January 1, 2010.

 Broadening of the Ontario Tax Reduction

The Ontario Tax Reduction, which provides tax-relief to low income individuals and families by reducing or eliminating Ontario income tax payable, will not be adjusted for the reduction in the lowest personal income tax rate, with the result that additional taxpayers will qualify for the reduction.

 Adjustment to Ontario Surtax Thresholds

Ontario surtax thresholds will be adjusted as a result of the reduction in the lowest personal income tax rate. Effective for 2010, the surtax will be applied at the following rates and thresholds:

• 20% on basic Ontario tax over $3,978; and

• 36% on basic Ontario tax over $5,091.

 New Ontario Property and Sales Tax Credits

The current combined Ontario Property and Sales Tax Credits will be replaced with two new separate Ontario tax credits.  The new Ontario Sales Tax Credit will provide a credit of up to $260 for each adult and each child. This amount will be reduced by 4% of adjusted net income in excess of $20,000 for individuals and $25,000 for families. These income thresholds will be indexed annually. The credit will be refundable through advance payments issued quarterly starting in July 2010.

 The new Ontario Property Tax Credit will be available for property tax paid (or 20% of rent paid) in the amounts of $625 for seniors or $250 for other individuals, plus 10% of occupancy cost. The credit amount will be reduced by 2% of adjusted net income in excess of $20,000 for individuals and $25,000 for families. The maximum credit that will be able to be claimed will not be able to exceed $1,025 for seniors or $900 for other individuals. Credit amounts and income thresholds will be indexed for inflation.

 Increase in Ontario Property and Sales Tax Credits for Seniors Income Threshold

The income threshold for the Ontario Property and Sales Tax Credits for Seniors applicable to senior couples will be increased for the 2009 taxation year, as a result of increases in benefit amounts under the Old Age Security and Guaranteed Income Supplement. The income threshold will be announced once benefit amounts for 2009 are finalized.

 Increase in Ontario Senior Homeowners’ Property Tax Grant

The Budget noted that the Senior Homeowners’ Property Tax Grant will increase to $500 in 2010. This increase was previously announced in the 2008 Budget when the grant was introduced.

 Adjustment to the Ontario Dividend Tax Credit

As a result of proposed reductions in corporate income tax rates, Ontario Dividend Tax Credit rates will also be adjusted. Effective January 1, 2010, the credit rate for eligible dividends will be reduced to 6.4% and the rate for other than eligible dividends will be 4.5%.

 Accelerated Phase-in of the Ontario Child Benefit

The phase-in of Ontario Child Benefit payments will be accelerated by two years, so that the maximum annual amount per child will be $1,100 as of July 1, 2009.

 Measures to Parallel Federally Announced Measures

The Budget announced proposals to parallel the following measures announced in the 2009 Federal Budget:

• an increase in Home Buyers’ Plan withdrawal limit from $20,000 to

$25,000, effective for withdrawals made after January 27, 2009; and

• carryback of RRIF post-death decreases in value against year-of-death

RRSP/RRIF income inclusions.

CORPORATE INCOME TAX MEASURES

 Reduction in Corporate Income Tax Rates

The Budget announced reductions in corporate income tax rates. Effective July 1, 2010, Ontario corporate income tax rates will be reduced as follows:

• the general corporate rate will be reduced from 14% to 12%;

• the rate applicable to income from manufacturing and processing, mining,

logging, farming, and fishing will be reduced from 12% to 10%; and

• the small business rate will be reduced from 5.5% to 4.5%.

 Further reductions in the general corporate tax rate are proposed as follows:

• effective July 1, 2011, the rate will be reduced to 11.5%

• effective July 1, 2012, the rate will be reduced to 11%; and

• effective July 1, 2013, the rate will be reduced to 10%.

 Rates are to be prorated for taxation years straddling the effective date of

changes.

 Elimination of the Small Business Deduction Surtax

In addition to a reduction in the small business tax rate, the Budget announced the long awaited elimination of the Ontario Small Business Deduction Surtax, effective July 1, 2010. Currently, the surtax is calculated at 4.25% on income above the small business threshold.

 Reduction in Corporate Minimum Tax

As a result of proposed reductions in corporate income tax rates, the Ontario corporate minimum tax rate will also be reduced from 4% to 2.7%, effective for taxation years ending after June 30, 2010. Corporations that have (together with associated corporations) total assets below $50 million and annual gross revenues below $100 million will be exempt from CMT.

 Extension of the Phase-Out Range for the Ontario Innovation Tax Credit

The taxable income phase-out range for the Ontario Innovation Tax Credit will be increased to $500,000 to $800,000 (up from $400,000 to $700,000). This measure parallels federally announced enhancements to the Investment Tax Credit for SR&ED.

 Enhancements to the Ontario Interactive Digital Media Tax Credit

Changes to the Ontario Interactive Digital Media Tax Credit were announced, including enhancements of the credit rates, expansion of eligible labour expenditures, and extension of eligibility. Effective for qualifying expenditures incurred after March 26, 2009, credit rates will be increased to 40% for corporations (regardless of size) that develop and market an eligible product and 35% for corporations that develop an eligible product under fee-for-service arrangements. Eligible expenditures will be expanded to include 100% (up from 50%) of amounts paid on account of eligible salaries and wages to arm’s length contractors. Eligibility for the credit will be extended to digital media game developers that incur a minimum of $1 million of eligible labour expenditures over a 36-month period for fee-for-service work done in Ontario in respect of an eligible product.

 Enhancements to the Computer Animation and Special Effects Tax Credit

The Computer Animation and Special Effects Tax Credit will be enhanced by expanding eligible expenditures to include 100% of labour expenditures paid in respect of freelance services provided by arm’s length individuals. In addition, administration of the credit will be streamlined by relaxing the eligibility requirement that an animation or visual effect be created primarily with digital technologies.

 Expansion of the Ontario Book Publishing Tax Credit

Eligible expenditures for the Ontario Book Publishing Tax Credit will be expanded to include any number of eligible books by a Canadian author and direct expenses related to the electronic publication of an eligible book, effective for expenditures incurred after March 26, 2009. This proposal removes the current restriction limiting the credit to the first three books by a Canadian author in an eligible writing category.

 Enhancements to the Co-operative Education Tax Credit

The Co-operative Education Tax Credit rate will be increased from 10% to 25% of eligible expenditures incurred after March 26, 2009. The enhanced rate available to small businesses will be increased from 15% to 30%. In addition, the maximum available credit will be increased from $1,000 to $3,000 per work placement.

 Enhancement to the Apprenticeship Training Tax Credit

The Apprenticeship Training Tax Credit rate will be increased from 25% to 35%, effective for expenditures incurred after March 26, 2009. The enhanced rate available to small business will be increased from 30% to 45%. The eligibility period for salaries and wages paid will be extended from 36 months to 48 months of an apprenticeship program. In addition, the annual maximum credit will be increased from $5,000 to $10,000. The credit, which was previously set to expire at the end of 2011, will also be made permanent.

 Enhancements to Ontario Film and Television Tax Credits

As previously announced in February 2009, the increase in the Ontario Film and Television Tax Credit rate from 30 to 35% and the increase in the Ontario Production Services Tax Credit rate from 18% to 25% will be made permanent. These rates have been in effect from January 1, 2008 and were previously scheduled to expire at the end of 2009.

 New Political Contributions Tax Credit

The Budget noted that a new non-refundable Ontario Political Contributions Tax Credit will be introduced to replace the existing Ontario corporate tax deduction, effective for taxation years ending after 2008. This measure was previously announced in December 2008, and is being introduced as a result of the recent Ontario-federal corporate tax harmonization. The new credit will provide a similar level of support as is currently being provided by the deduction.

 Measures to Parallel of Federally Announced Measures

The Budget noted that Ontario would parallel the following measures announced in the 2009 Federal Budget, subject to federal implementation:

- a temporary 100% accelerated capital cost allowance rate for eligible

computers and software purchased after January 27, 2009 and before

February 2011; and

- extension of the 50% straight-line capital cost allowance rate to

manufacturing and processing machinery and equipment purchased in

2010 and 2011.

OTHER TAX MEASURES

 Tobacco Tax Enforcement Measures

The Budget noted that proposals will be introduced to strengthen tobacco tax compliance and enforcement provisions. These measures will include additional enforcement provisions, court authority to suspend a person’s driver’s license upon conviction of an offence, prohibiting unauthorized possession of unmarked cigarettes, and requirements to mark fine-cut tobacco. 

Other Technical Amendments

The Budget also noted that other technical amendments will also be proposed to the following tax-related Acts: the Assessment Act, City of Toronto Act, 2006, Community Small Business Investment Funds Act, Corporations Tax Act, Education Act, Electricity Act, 1998, Employer Health Tax Act, Fuel Tax Act, Gasoline Tax Act, Income Tax Act, Land Transfer Tax Act, Mining Tax Act, Municipal Act, 2001, Provincial Land Tax Act, 2006, Retail Sales Tax Act, Taxation Act, 2007, and Tobacco Tax Act.

Copyright CCH 2009

The above information is general in nature. Please ensure that you contact Canham Rogers, Chartered Accountants to discuss any specific transactions prior to implementation. We would be pleased to assist you in these and other area’s of your business.