On March 26th, 2009 Dwight Duncan, Ontario’s Minister of Finance, delivered a budget designed to stimulate Ontario’s faltering economy through a number of tax measures for individuals and businesses. The measures, for the most part, do not take effect until 2010 and beyond. However, the budget builds upon the government’s announcements earlier in the month which committed large amounts of funding for infrastructure spending over the next two years and investments in the Emerging Technologies Fund.
As anticipated, the budget proposes that effective July 1, 2010, Ontario will move towards a single harmonized sales tax (“HST”) to replace the existing retail sales tax. In addition, it announced planned reductions in corporate income tax rates over a three year period and changes in personal income tax rates. The following is an overview of the relevant tax measures included in the budget.
Sales Tax Harmonization
The government has entered into a Memorandum of Agreement for Ontario to join a framework agreement for the federal collection of a harmonized sales tax. The agreement calls for the federal government to collect an HST starting on July 1, 2010 at a rate of 13% (consisting of a federal component of 5% and a provincial component of 8%). Some of the highlights of the new proposed tax are listed below. Due to the length and complexity of these new rules, we will be issuing a more comprehensive, detailed analysis that outlines the rules surrounding the new tax at a later date.
Impact on Businesses
Some of the details regarding the HST proposals, as they pertain to businesses, are as follows:
- Businesses selling taxable or zero-rated goods and services will be able to claim input tax credits (“ITC’s”) on their purchases, as under the current GST system (with some limited exceptions)
- Businesses selling tax-exempt goods and services will be unable to claim ITC’s on their purchases, as under the current GST system
- The former small supplier threshold found in the GST legislation will be the same for the HST
- Public service bodies in Ontario will be able to claim rebates on both the federal and Ontario portion of the HST
- Large businesses (sales in excess of $10 million) and financial institutions will have some restrictions on claiming ITC’s on the provincial portion of the HST. These restrictions will be phased out after five years
- Most smaller businesses (sales less than $2 million) will be eligible for a one-time transition credit of up to $1,000
Impact on Individuals
- A Sales Tax Transition Benefit will be provided to eligible individuals and families as follows:
- available to Ontario tax filers over the age of 18
- eligible single people with an income of $80,000 or less will receive three payments totalling $300
- eligible families with an income of $160,000 or less will receive three payments totalling $1,000
- The three payments will be received in June 2010, December 2010 and June 2011
- Certain items that are currently exempted from Ontario Retail Sales Tax will be exempted at the point of purchase from provincial portion of the HST. These items include: children’s clothes and footwear, car seats, diapers and books
- Individuals who purchase new homes with a purchase price of $400,000 or less will be eligible for a rebate of 75% of the provincial portion of the HST. Homes costing between $400,000 and $500,000 will receive a reduced rebate and homes with a purchase price of greater than $500,000 will receive no rebate
- Resale homes will not be subject to the new tax
Business Tax Measures
Corporate Income Tax
The government proposes to reduce the Small Business income tax rate to 4.5% from its current level of 5.5%, effective July 1, 2010. This rate applies to the first $500,000 of Active Business Income earned by a Canadian-controlled private corporation (“CCPC”). The 4.25% surtax (also known as the small business deduction claw-back) that currently applies on active business income earned above $500,000 will be eliminated, also effective July 1, 2010.The corporate income tax rate on manufacturing and processing (“M&P”) income will be reduced by 2% to 10%, also effective July 1, 2010.
The general corporate income tax rate which is currently 14% will be reduced over the next three years as follows:
|July 1, 2010||12.0%|
|July 1, 2011||11.5%|
|July 1, 2012||11.0%|
|July 1, 2013||10.0%|
As a result of these rate reductions, the combined federal and Ontario corporate income tax rates for corporations with taxation years ending December 31, 2010 will be as follows:
|Active Business Income < $500,000||16.00%|
|Active Business Income > $500,000 but < $1,880,000||33.34%|
Capital Tax and Corporate Minimum Tax (“CMT”)
It is proposed that the Capital Tax rate, currently at .225% be reduced to .15% as of January 1, 2010 and be eliminated as of July 1, 2010.
Currently, the CMT is calculated as the amount by which 4% of “adjusted” net income for accounting purposes exceeds a company’s corporate income tax payable. Individual or associated groups of companies with total assets less than $5,000,000 and combined gross revenue under $10,000,000 are not subject to CMT.
For taxation years ending after June 30, 2010, the government proposes to reduce the CMT rate to 2.7% and to raise the thresholds at which CMT applies to $50,000,000 in assets and $100,000,000 in gross revenues.
The following changes are designed to parallel the measures introduced in the 2009 federal budget:
- The Ontario Innovation Tax Credit will be available to more small and medium-sized corporations by extending the lower and upper ends of the taxable income phase-out range by $100,000 to a range of between $500,000 and $800,000.
- Ontario will allow a temporary 100% Accelerated Capital Cost Allowance rate for eligible computers and software acquired after January 27, 2009 and before February, 2011. This CCA class will not be subject to the half-year rule, resulting in the full cost of eligible computers and software being deductible in the first taxation year that the assets are available for use.
- Ontario will extend the Accelerated Capital Cost Allowance rate applicable to Manufacturing and Processing equipment acquired after March 18, 2007 and before 2012 such that the 50% straight-line accelerated CCA rate will apply to assets acquired throughout this period. Previously, those assets acquired in 2010 and 2011 were supposed to have been subject to varying CCA rates on a declining balance basis.
This budget proposes to enhance the following provincial income tax credits:
- The Co-operative Education Tax Credit will be enhanced for eligible expenditures incurred after March 26, 2009. The credit available will be increased by 10% to a 25% tax credit (30% for small businesses) on eligible expenditures to a maximum of $3,000 (previously $1,000) per work placement.
- The Apprenticeship Training Tax Credit available on salaries and wages paid to eligible apprentices after March 26, 2009 will be enhanced as follows:
- The tax credit rate will increase from 30% to 45% for small businesses and from 25% to 35% for all others
- The annual maximum credit will double to $10,000 (previously $5,000) per eligible apprentice
- The credit will extend from 36 months to cover the first 48 months of an apprenticeship program
- The credit will be a permanent tax incentive, rather than only applying to salaries and wage paid to eligible apprentices prior to 2015
- The budget includes a number of measures to enhance a variety of available special credits including the following:
- Film and Television Tax Credit
- Ontario Interactive Digital Media Tax Credit
- Ontario Computer Animation and Special Effects Tax Credit
- Ontario Book Publishing Tax Credit
Personal Income Tax Measures
Personal Income Tax Relief
The budget proposes to cut the personal tax rate on the lowest personal income tax bracket by 1%, from 6.05% to 5.05%, effective January 1, 2010. This will give Ontario the lowest provincial tax rate in Canada on this tax bracket. This decrease in the tax rate will result in non-refundable tax credits being calculated by multiplying the credit amount by 5.05%.
Changes to the Ontario Surtax
Effective for 2010 and future taxation years, the budget proposes to change the thresholds to which Ontario Surtax is charged as follows:
- The 20% surtax rate will be applicable to basic Ontario tax in excess of $3,978 (currently $4,257)
- The 36% surtax rate will be applicable to basic Ontario tax in excess of $5,091 (currently $5,370)
Ontario Dividend Tax Credit
The budget proposes to adjust the dividend tax credit rates on dividends received from taxable Canadian corporations to maintain the integration of Ontario’s corporate and personal income tax systems as a result of the proposed decrease in corporate income tax rates. The dividend tax credit applicable to eligible dividends received was previously expected to be 7.4% in 2009 and 7.7% in 2010, but this budget proposes to decrease the rate applicable in 2010 to 6.4%. The dividend tax credit applicable to other than eligible dividends was previously expected to be 5.13% in 2009 and 2010, but this budget proposes to decrease the rate applicable in 2010 to 4.5%.
Sales Tax and Property Tax Relief
The Ontario budget proposes providing relief for low and middle income taxpayers and families by replacing the current combined sales tax and property credits with two new tax credits, the Ontario Sales Tax Credit and the Ontario Property Tax credit.
If you have any questions on these or any other measures contained in this Budget, please do not hesitate to contact your DJB advisor. As always, we thank you for the opportunity to serve you.