Ontario Finance Minister James Flaherty introduced his first Budget on May 9, 2001. In an environment where the most recent fiscal year generated a record $3 billion surplus, Ontario has continued its program of tax reduction initiatives.
The Minister announced a commitment of funds to transportation infrastructures and environmental projects, services and facilities for the disabled and abused, increased operating grants to colleges and universities (to address anticipated enrolment increases) and the creation of a new post-secondary institution, the Ontario Institute of Technology.
It was expected that personal tax rates would continue to decline, and the 2001 Ontario Budget lives up to that expectation.
The 2001 Budget proposes to continue reducing the tax rates for the low and middle income tax brackets. As with the 2000 Budget, the 11.16% rate applicable to the top tax bracket will remain unchanged.
Ontario taxpayers calculate their provincial tax using a “tax on income” method, rather than the “tax on tax” mechanism used up until the 1999 tax year. In 2000, Ontario taxpayers paid tax of 6.37% on the first $30,004 of income, 9.62% on the next $30,005, and 11.16% on income earned in excess of $60,009. The 2001 rates for the three brackets are 6.2%, 9.24% and 11.16% respectively, with the tax bracket thresholds fully indexed to inflation.
Effective January 1, 2002, the lowest Ontario tax rate will be reduced to 6.05% of taxable income up to $30,814. The middle Ontario tax rate will be reduced to 9.15% for taxable income between $30,814 and $61,629. Effective January 1, 2003, the low and middle income tax rates are reduced to 5.65% and 8.85% respectively.
Ontario also applies a two-tier surtax, calculated as a percentage of Ontario tax in excess of specified amounts. Ontario residents earning less than $53,650 in 2001 pay no Ontario surtax. The 2001 Budget proposes to eliminate, on January 1, 2003, the first-tier surtax altogether by increasing the first-tier threshold to the same level as the second tier. Only individuals with taxable income higher than $61,826 will pay the Ontario surtax. It will be calculated as 56% of Ontario income tax in excess of $4,491.
|
|
2000 |
2001 |
2002 |
|
Ordinary Income |
47.9% |
46.4% |
46.4% |
|
Canadian Dividends |
31.9% |
31.3% |
31.3% |
|
Capital Gains |
32.3%* |
23.2% |
23.2% |
*Assumes a two-thirds inclusion rate.
Effective for 2002 and subsequent years, the Budget introduces a refundable tax credit for tuition fees paid to Ontario independent schools for kindergarten, elementary and secondary education. The credit will be based on up to $7,000 of annual tuition fees per child. Charges for books, uniforms, sports, travel, boarding and the like will not be eligible for the credit. It will be phased in over a five-year period. The credit will be 10% of eligible tuition fees in 2002, and will increase by 10% per annum reaching 50% for 2006 and subsequent years. The framework for establishing eligibility for the credit will be determined through a consultative process.
Claims for medical expenses paid for a dependent other than a spouse must be reduced if the dependent’s net income exceeds the amount of the basic personal exemption. As a result of the changes introduced by this Budget, the claim made by an individual for a dependent’s medical expenses for 2002 would be reduced by 25.71% of the amount by which the dependent’s net income exceeds the basic personal exemption. This is reduced from 26.35% in 2001 as a result of changes to federal and provincial personal income tax rates.
Enhancements to certain Ontario non-refundable tax credits are proposed to be effective on January 1, 2001. The credits are calculated by applying the rate for the lowest tax bracket to the amounts below. The following table summarizes these enhancements.
Tax Credit
|
Proposed
2001 Amount
($) |
2000 Amount ($) |
|
Disability
credit |
6,000 |
4,293 |
|
Caregiver
credit |
3,500 |
2,386 |
|
Infirm
dependant credit |
3,500 |
2,386 |
|
Disability credit
supplement for children with severe disabilities |
3,500 |
2,941 |
|
Education
credits |
|
|
|
Amount per month of full-time enrolment |
400 |
200 |
|
Amount per month of part-time enrolment |
120 |
60 |
The Budget confirms that, as previously announced, the inclusion rate for capital gains on dispositions of property after October 18, 2000, is reduced to 50%, harmonizing provincial and federal taxation.
In the previous Budget, the government
announced its intention to reduce both the general and manufacturing and
processing (M&P) rates to 8% by 2005.
At that time, however, only the first two stages were announced (and
sub-sequently enacted into law). These
reductions resulted in a lowering of the general rate from 15.5% to 14% and the
M&P rate from 13.5% to 12%. There
were no further details of the timing of future cuts.
However, in today’s competitive economy, it is
important that companies which operate in an inter-jurisdictional environment
have certainty of tax rates prior to making a decision on investment
options. It was understood that
businesses would not factor tax promises into these decisions. In response to such concerns, the Budget
outlines the government’s plan to legislate a firm schedule to deliver the
corporate tax cuts.
The following table outlines the government’s
proposed schedule for implementing the remaining cuts.
|
|
General Rate |
M&P Rate |
Current
Tax Rate
|
14% |
12% |
|
|
|
|
Proposed Rate
|
|
|
|
January
1, 2002 |
12.5% |
11% |
|
January
1, 2003 |
11% |
10% |
|
January
1, 2004 |
9.5% |
9% |
|
January
1, 2005 |
8% |
8% |
The Budget proposes to replace the current
capital tax exemption with a $5 million deduction from taxable capital,
effective January 1, 2002. This
exemption is an increase from the previous $2 million and also replaces the
small business rate reductions applicable to taxable capital between $2 million
and $4 million.
It is also proposed that, effective January 1,
2002, the $2 million capital deduction applied in determining paid-up capital
for financial institutions would be increased to $5 million.
As a consequence of the 2000 federal Budget
proposals to treat the Ontario R&D Super Allowance as taxable government
assistance, the 2000 Ontario Budget proposed to not follow the proposed federal
provisions, recognizing the concern of Ontario’s R&D industry.
In order to alleviate the adverse effect of the
federal proposals on R&D investment, Ontario is proposing to suspend the
R&D Super Allowance for a 24-month period.
In its place Ontario will allow corporations to exclude from taxable
income the portion of the federal investment tax credit that relates to
qualifying Ontario Scientific Research and Experimental Development (SR&ED)
expenditures.
The net effect of this change should be to
place those companies utilizing the Super Allowance in approximately the same
tax position as they were prior to the 2000 federal proposals.
This measure will begin with the first taxation
year to which the federal Budget provision applies. To qualify for these proposals, the investment tax credit must be
included in federal taxable income during the 24-month period and be in respect
of qualifying Ontario SR&ED expenditures incurred during the 24-month
period, or in the taxation year immediately preceding the 24-month period.
This does not appear to be the final volley in
the battle between Ontario and Ottawa over the R&D Super Allowance. In the Budget, Ontario calls upon the
federal government to revisit its 2000 Budget proposal to ensure that federal
legislation does not target Ontario’s R&D Super Allowance.
The 2000 Budget provided for the incorporation, with certain restrictions, of businesses operating in regulated professions. The 2001 Budget proposes amendments to the Business Corporations Act to clarify that a shareholder’s liability for professional negligence is not affected by the existence of the corporation. Amend-ments will also be made to the statutes governing regulated professions to ensure they equally apply to professional corporations.
Retail Sales Tax
MEasures (RST)
Retroactive to July 1, 2000, the late filing penalty for late RST payments will be waived where the taxpayer has had no previous late-filed returns over the last 4 years. As the province removed the $1,000 cap on such penalties last July, this change should be well received by the business community. The removal of the cap meant that penalties were imposed for 10% of the amount of the late-filed tax even if the return was filed one day late.
In recent months the RST application on sales of computer software has been a source of substantial taxpayer confusion. As part of Ministry of Finance’s simplification initiatives, it will consult with taxpayers and other interested groups regarding measures which would result in a simpler RST.
RST Application on Trucks and Buses Used in Multiple Jurisdictions
Ontario has become a member of the International Registration Plan (IRP) to improve the competitive position of Ontario’s truck and bus industries. The government is proposing to implement a modified RST system for multi-jurisdictional vehicles effective October 1, 2001.
This new sales tax system will provide for payment of prorated sales taxes, which are to be paid each year when registering trucks and buses used in multiple jurisdictions. As a result of this measure, owners of multi-jurisdictional vehicles will no longer have to pay RST on the full purchase value of the vehicles and cost of repair parts, trailers and labour services. The tax will now be calculated based on these costs, the year the vehicle was acquired, and the proportionate distance traveled in Ontario.
Electric hybrid cars delivered after May 9, 2001 will qualify for the alternative fuel vehicle RST rebate of up to $1,000. The Ministry of Finance is continuing to solicit input from industry; however, electric hybrid cars are typically defined as combining an electric traction motor with another power unit such as a conventional gas or diesel engine.
RST rulings with general applicability to a
wide audience will be made available via the internet. Reference will be further facilitated
through the incorp-oration of search engines.
The Budget proposes to give municipalities the ability to give property tax relief to the owners of properties designated to be of historical or architectural value under the Ontario Heritage Act. The relief mechanism, which is to be effective January 1, 2002, will be developed through consultations with involved parties.
In order to allow municipalities to apply a lower tax rate to newly built rental apartment buildings, the “new multi-residential property class” was introduced in 1998. Essentially, a lower tax rate is allowed for the first eight years following construction of the building. Effective January 1, 2002, properties in this class will now be eligible for a lower rate of tax for the first 35 years following construction.
The Budget includes measures intended to improve the efficiency and effectiveness of the administration of the provincial taxation system. Specific service standards will be developed in consultation with key stakeholders to permit the evaluation of the performance of the government in the discharge of its administrative responsibilities. These standards are intended to be finalized by September 1, 2001. A process for annually reporting the findings of these evaluations to the public will also be developed.
Specific initiatives in this area include:
·
Simplifying the payment of corporate tax installments
by reducing the frequency of required installments from monthly to quarterly for
corporations whose taxes payable in the current or preceding year are at least
$2,000, but less than $10,000. This
change would be effective for taxation years commencing in 2002.
·
Effective for taxation years ending after 2000,
companies filing Ontario corporate income tax returns would no longer be
required to file a copy of their federal T2 Corporation Income Tax Return and
related schedules if these forms have been filed with the Canada Customs and
Revenue Agency.
·
Effective immediately, it will not be necessary to
submit copies of supporting documentation with refund claims for gasoline, fuel
and tobacco taxes that are less than $500.
This information will instead be required to be provided on request.
·
The Ministry of Finance will accelerate its ongoing
review of all tax forms to eliminate unnecessary forms by introducing
multipurpose forms, and to improve the layout and ease of understanding of
these forms.
·
Audit procedures will be streamlined by undertaking
more consolidated audits of multiple provincial tax programs at the same time,
where this is feasible and the taxpayer is agreeable to the approach. The Ministry of Finance will also continue
to work closely with the federal government to arrange more joint,
multi-jurisdictional audits under the same conditions.
Recognizing the role that small businesses play in providing feedback on ways to eliminate red tape, the Budget announced the following measures to obtain and evaluate taxpayer input.
·
A Small Business Advisory Committee will be formed to
identify and discuss new ways of simplifying tax administration, with the goal
of implementing changes by 2002.
· Tax Information Forums will be held across the province to permit small businesses a “one-stop” opportunity to obtain information and ask questions on a variety of tax programs administered in Ontario.
Initiatives, which are intended to be implemented by 2002, have been introduced to take advantage of the internet and paperless media. These include:
·
An e-mail subscription service to provide new
publications, announcements of key dates, or notification of other events.
·
Introduction of a new “Tele-Tax” system that will
permit taxpayers to obtain recorded messages containing answers to frequently
asked questions from a self-serve telephone system.
·
Making customer service feedback and other survey tools
available via the internet.
·
Allowing taxpayers to submit general information
changes, such as business addresses or telephone numbers via the internet.