INTRODUCTION

Ontario Finance Minister Janet Ecker introduced her first Budget on June 17, 2002.  Although Ontario’s economy grew by just one per cent in 2001, the Ontario government introduced its fourth consecutive balanced budget, one that focused on growth and prosperity, while at the same time making significant commitments to increased spending on core social programs.  Increased spending on education, health care, environmental concerns and infrastructure projects figured prominently in the Budget, while the implementation of certain income tax reductions announced in prior years was delayed by one year.

PERSONAL TAX MEASURES

Tax Rates

The final stages of the tax reductions outlined in the 2001 Budget are proposed to be rescheduled to January 1, 2004, so that there will be no personal income tax reductions for 2003.

In 2001, Ontario taxpayers paid tax of 6.16% on the first $30,814 of taxable income, 9.22% on the next $30,814 and 11.16% on income in excess of $61,629. 

On January 1, 2002, the bracket thresholds changed to $31,893 and $63,786.  The lowest and middle Ontario tax rates were reduced to 6.05% and 9.15%, respectively.  The top rate for income in excess of $63,786 remained unchanged.

The 2001 Ontario Budget had proposed to reduce the low and middle Ontario brackets to 5.65% and 8.85% respectively, effective January 1, 2003, again leaving the top Ontario rate unchanged.  The 2002 Budget proposes to defer these reductions until January 1, 2004.

Ontario also applies a two-tier surtax, calculated as a percentage of Ontario tax in excess of specified amounts.  The 2001 Budget had proposed to eliminate the first tier surtax altogether on January 1, 2003 by increasing the first tier threshold to the same level as the second tier. The 2002 Budget proposes to defer this proposal to January 1, 2004.  The surtax will remain the same for 2002 and 2003, at 20% of Ontario tax in excess of $3,685 and 36% of Ontario Tax in excess of $4,648.  These surtax tiers apply on taxable incomes in excess of $56,161 and $66,164 respectively.

The Ontario Tax Reduction eliminates or reduces Ontario personal income tax otherwise payable by individuals earning less than $13,008.  The 2002 Budget proposes that the basic reduction be increased from $161 to $178 plus an increase for inflation, effective January 1, 2003.

Equity in Education Tax Credit

The 2001 Budget introduced a refundable tax credit for tuition fees paid to Ontario independent schools for kindergarten, elementary and secondary education.  The credit for 2002 is 10% of annual tuition fees of up to $7,000 per child.  The credit was to be increased at 10% a year until reaching 50% in 2006.  The 2002 Budget proposes to delay the rate increase to 20% until 2004, and the final increase to 50% will be reached in 2007.

CORPORATE TAX MEASURES

Income Tax Rates

In prior Budgets, the government announced its intention to reduce the general corporate income tax rate to 8% by 2005.  These reductions have been delayed by one year and are now intended to be implemented in a manner which will reduce the general rate to 11% on January 1, 2004, 9.5% on January 1, 2005, and 8% on January 1, 2006.

The rate applicable to manufacturing and processing (M&P), mining, logging, farming and fishing income will be reduced to 10% on January 1, 2004, 9% on January 1, 2005, and 8% on January 1, 2006.  The general corporate income tax rate and the M&P rate will therefore be the same as of January 1, 2006.

This delay does not affect the implementation of rate reductions for small business corporations.  As a result, the small business corporate tax rate will be reduced to 5.5% on January 1, 2003, 5% on January 1, 2004, and 4% on January 1, 2005.

Other Measures

The Budget also contained other corporate tax related initiatives, such as:
·        A declaration that Ontario would now parallel applicable federal income tax treaties when determining whether non-residents have a permanent establishment in Ontario for corporate income tax purposes, effective for taxation years ending after June 17, 2002.
·        A reduction in the mining tax rate to 12% on January 1, 2003, and to 10%, on January 1, 2004, as previously announced.
·        Elimination of the existing requirement that corporations must apply to be prescribed as a “financial institution” for capital tax purposes.  As a result, financial institutions prescribed federally will be automatically deemed to be financial institutions for Ontario purposes.  However, it will be possible to request that this provision not apply.
·        Undertaking to announce in next year’s Budget a new, multi-year tax reduction plan, including the next steps to be taken towards eliminating the Ontario capital tax.

RETAIL SALES TAX MEASURES (RST)

Alternative Fuel Vehicle Rebate

Qualifying electric-hybrid light trucks and sport utility vehicles delivered after June 17, 2002 are eligible for the alternative fuel RST rebate of up to $1,000 per vehicle.

Donations of Admission Tickets

Admission tickets donated after June 17, 2002 to registered charities by owners and operators of places of amusement are exempt of RST.

Production Machinery and Equipment RST Exemption

Ready-mixed concrete purchased after June 17, 2002 for on-site use to make integral component parts of production machinery and equipment will qualify for RST exemption.

Computer Software

As announced in last year’s Budget the province has been considering improvements in RST rules and definitions for computer software. Consultations have identified potential improvements. These changes will be incorporated into draft legislation which will be posted on the Ministry’s web site for industry comment, with the intent of introducing the necessary RST amendments in the legislature this fall. Of particular interest is the fact that the proposed effective date of the amendments is the release date of the draft legislation.

Exempt Food Products

Legislation will be introduced to confirm that exempt food products packaged with taxable premiums may be purchased RST exempt in specified circumstances.

Motor Vehicle Dealers

This fall unspecified RST amendments will be introduced to assist motor vehicle dealers with outstanding retail sales tax accounts.

OTHER MEASURES

Property Taxes

Commencing in 2003, the government will prescribe standard percentage deductions in the valuation of hotels for property tax purposes to ensure that all hotels are fairly assessed relative to other commercial property in Ontario.  The standard deduction for management expenses will be 5% and the standard deduction for chattels will be 15%.  The Municipal Property Assessment Corporation will have the discretion to apply different percentages in unique circumstances.

In addition, the name of two property classes will be changed from the  “residential/farm property class” to the “residential property class” and from the “farmlands property class” to the “farm property class”.

Municipalities will be provided with the flexibility to lower municipal property taxes on farm properties commencing in 2003.   Upper-tier and single-tier municipalities will be able to lower the municipal portion of the tax rate below 25% of the residential rate.  This reduction applies to both the upper-tier and lower-tier portions of the municipal property tax rate.

In addition, government-owned farms are currently not eligible for inclusion in the farmlands property class.  These farms will become eligible for inclusion in the farm property class (formerly the farmlands property class) if they are occupied by tenant farmers.

Tobacco Taxation

The rate of tax on cigarettes and cut tobacco will be increased by 2.5 cents per cigarette or gram of cut tobacco, effective 12:01 a.m., June 18, 2002.  For cigarettes, this increase amounts to $5 per carton of 200 cigarettes. 

To address tax evasion, Ontario proposes to amend the structure of tobacco taxation by exempting tobacco products from the Retail Sales Tax Act and recovering the revenues through an equivalent increase in rates under the Tobacco Tax Act.  The new proposed tax rates, in combination with this restructuring, are 8.6 cents per cigarette, tobacco stick or gram of cut tobacco and 56.6% of the retail price of cigars.

Fuel Taxes

Purchases of biodiesel fuel made after June 17, 2002 are exempt from the 14.3 cent per litre tax under the Fuel Tax Act. This exemption is available regardless of whether the biodiesel fuel is mixed with diesel fuel.

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.