2004 Ontario Budget Report
May 18, 2004
Highlights
- Health Premiums Reintroduced
- Deficit of $6.2 Billion for 2003-04 and $2.2 Billion for 2004-05
- Budget to be Balanced by 2007-08
- Capital Tax Reductions Implemented at a Slower Pace
The Plan for Change
Today, Minister of Finance Greg Sorbara presented the Liberal government's first budget since winning last year's provincial election. Given the change in government and the worsening of Ontario's financial situation, there has been a great deal of anticipation and speculation about today's budget since its presentation date was announced in April.
As has become apparent in recent months, the government will not meet the balanced budget for 2003-04 predicted last year by the previous Progressive Conservative government. The budget deficit for 2003-04 is now estimated to be $6.2 billion. For 2004-05, the deficit is expected to decline to $2.2 billion. The government now estimates that they'll balance the books during the 2007-08 fiscal year (or perhaps one year earlier if budget contingency reserves are not needed). Spending initiatives will be focused on health, education, municipalities and children.
As predicted in the media, the government has reintroduced health premiums. Despite the reference to the levy as a premium, the amount payable will vary by income and will be collected by the Canada Revenue Agency in a manner similar to personal income tax. Consequently, it will be difficult for the government to argue that the levy is not a new tax. The premium becomes payable where taxable income exceeds $20,000 and when fully phased in, the maximum premium of $900 will be payable by individuals with income in excess of $200,000. The Minister promises that funds raised under the new premium will be dedicated to health care. Also, certain services such as routine eye exams and physiotherapy will no longer be covered as health spending is prioritized.
There was some good news today, as the Minister announced that the much maligned Ontario capital tax will be eliminated, albeit at a slower pace than first announced. For taxpayers in general, the fact that personal, corporate and sales tax rates have remained unchanged may be seen as good news in what was otherwise a tough budget for Ontario.
The rest of this budget report summarizes the tax measures that are of the most interest to our clients.
Ontario Budget Projections (in billions $)
|
|
Original Forecast 2003/04 |
Revised Forecast 2003/04 |
Projected
2004/05
|
Revenue |
71.6 |
68.3 |
78.4 |
Program Expense |
(59.4) |
(62.5) |
(66.7) |
Capital & Restructuring |
(2.5) |
(2.2) |
(2.6) |
Interest on Debt |
(8.7) |
(9.8) |
(10.3) |
Reserve |
(1.0) |
-- |
(1.0) |
Deficit |
0.0 |
(6.2) |
(2.2) |
Personal Tax Changes
Health Premium Introduced
As expected, the Minister announced that Ontario residents will be subject to a new health premium beginning for the 2004 taxation year. The amounts payable are set out below:
Ontario Health Premium |
Taxable Income
|
2004 Taxation Year
|
2005 and Subsequent Taxation Years |
Up to $20,000 |
-- |
-- |
$20,000 - $36,000 |
$150 |
$300 |
$36,000 - $48,000 |
$225 |
$450 |
$48,000 - $72,000 |
$300 |
$600 |
$72,000 - $200,000 |
$375 |
$750 |
More than $200,000 |
$450 |
$900 |
The premium increase at each level will actually be phased in. Where an individual's taxable income exceeds $20,000, the premium will be phased in at a rate of 6% of taxable income over $20,000. At the other thresholds, the increase will be phased in at a rate of 25% on the first $600 of taxable income over the threshold. The phase in rates are 3% and 12.5% respectively for 2004.
The premium will be payable by individuals who are a resident of Ontario at the end of the year, and it appears that premiums will be collected by the Canada Revenue Agency as a tax as part of an individual's personal tax return. For individuals who are employed, the premium will be withheld from salaries beginning on July 1, 2004, and for individuals subject to instalments, the premium will become part of the individual's instalment base.
Termination of Credit Programs
The Minister announced today that the Ontario Home Ownership Savings Plan (OHOSP) program and the Ontario Research Employee Stock Option Credit program will both be eliminated. In the case of the OHOSP program, no new contributions can be made after May 18, 2004 and plan funds can be used to purchase a home by the end of 2005.
Ontario Tax Reduction
Effective for the 2004 and subsequent taxation years, the Ontario Tax Reduction will apply prior to a claim for a foreign tax credit. Under current rules, a reduction is available if foreign tax credits reduce Ontario tax below the reduction thresholds.
Business Tax Changes
Capital Tax Elimination
Today, the government announced a revised plan to gradually eliminate the capital tax by 2012. To start the elimination, the current $5 million deduction from taxable paid-up capital will be increased by $2.5 million effective January 1, 2005. The deduction will continue to be increased by $2.5 million each year until it reaches $15 million on January 1, 2008. The next phase of the elimination will see the capital tax rate reduced each year until the capital tax is fully eliminated on January 1, 2012. The rate will be reduced as follows: from 0.300% to 0.225% on January 1, 2009, to 0.150% on January 1, 2010, to 0.075% on January 1, 2011 and to nil on January 1, 2012. The proposed increases in the deduction and the cuts to the tax rate will be prorated for taxation years straddling the effective dates. Reductions will also apply for financial institutions.
Capital Tax Base Change
In the QEW 427 Dodge Chrysler (1991) Inc. court case, it was held that current accounts payable include amounts owed to creditors and not just suppliers. As a result, certain financing was not required to be included in taxable paid-up capital for capital tax purposes. An amendment is proposed, which changes this decision. Effective for taxation years ending after May 18, 2004, current accounts payable will include only amounts payable to a supplier for purchases of goods and services. The proposed amendments will also clarify that liabilities incurred in connection with the purchase or trading of shares, bonds, or other securities are not considered current accounts payable. This latter change will be effective for taxation years ending after May 19, 1993.
Ontario Film and Television Tax Credit
To enhance the OFTTC, it is proposed that qualifying labour expenditures will not be reduced by equity investments from Canadian government film agencies, effective for productions commencing principal photography after March 27, 2003. The OFTTC will also be amended to parallel certain enhancements to the federal Canadian Film or Video Production Tax Credit announced on November 14, 2003.
Apprenticeship Training Credit
The Liberal government has proposed the introduction of a revised Apprenticeship Training Tax Credit for corporations and unincorporated businesses in Ontario. The tax credit would be a 25% refundable tax credit on eligible expenditures incurred in respect to eligible apprentices. For businesses with total payroll costs not exceeding $400,000, the tax credit rate would be increased to 30%. An employer would be eligible for a tax credit of up to $5,000 per year per eligible apprentice to a maximum of $15,000 over the first 36 months of the apprenticeship. There will be a proration of the maximum annual credit for the number of days the apprentice is employed with the employer during the year.
Eligible expenditures would be salaries and wages paid after May 18, 2004 and before January 1, 2011 to an eligible apprentice in a qualifying skilled trade, which will include designated construction, industrial and motor power trades, as well as the service trades eligible under the present apprenticeship component of the Co-operative Education Tax Credit. Rules will be introduced to provide a transition to the proposed new tax credit for existing apprenticeships under the Co-operative Education Tax Credit. Finally, the effectiveness of the program will be reviewed by the end 2007.
Resource Allowance
The federal government has implemented legislation which replaces the 25% resource allowance with a deduction for Crown royalties and mining taxes paid. The Ontario government will not follow this measure, maintaining the resource allowance and the non-deductibility of Crown royalties and mining taxes.
Elimination of Tax Incentives
It has been proposed that the Workplace Accessibility Tax Incentive, Workplace Child Care Tax Incentive and Graduate Transitions Tax Credit will expire for eligible expenditures made after December 31, 2004. Otherwise eligible employment commencing after July 5, 2004 will no longer qualify for the Graduate Transitions Tax Credit, as there is a minimum six consecutive month employment eligibility requirement. Finally, effective January 1, 2005, donations, sales or licences will no longer qualify for the Educational Technology Tax Incentive. For licences granted prior to that date, no amount will be deductible in respect of the licence after December 31, 2004.
Federal Measures Paralleled
The Ontario government proposes to parallel the following measures announced in the March 23, 2004 federal budget as they apply to corporations:
- the extension of the carry-forward period for business losses from 7 to 10 years;
- the limits on the deductibility of fines and penalties, patronage dividends and unused charitable donations;
- the amendments to the general anti-avoidance rules and the affiliate persons rules; and
- the increase in capital cost allowance rates for newly acquired computer and data network infrastructure equipment to 45% and 30% respectively.
For purposes of the Ontario Innovation Tax Credit, the federal budget measure to relax the associated corporations rule for the $2 million expenditure limit under the refundable portion of the federal investment tax credit for SR&ED will be followed. The effective dates of the above measures for Ontario purposes will follow those announced in the federal budget.
Sales Tax Changes
Related Party Transfers
New rules will be introduced to provide an exemption for the transfer of assets between related corporations and for transfers between partnerships and their principals. Draft regulations will be introduced for comment by the public and it is hoped that the final rules will be in place in the fall.
Vehicles for the Disabled
As more funding will be provided for the Home and Vehicle Modification Program, the government will eliminate the sales tax rebate for vehicles used to transport persons with a handicap. The rebate will be eliminated for vehicles purchased after May 18, 2004. However, where a contract was entered into before May 19, 2004, the rebate will be allowed provided delivery occurs on or before July 31, 2004. This change will not affect the current exemption for equipment designed for chronic invalids and individuals with disabilities.
Marketing Fee Exemption
To support the hotel industry, destination marketing fees will be exempt from the 5% accommodations tax for fees billed after May 18, 2004 and before May 19, 2005.
Rebate for Energy Alternatives
The current rebate for residential solar energy systems will be expanded to include wind energy systems, micro-hydroelectric systems and geothermal heating/cooling systems. Purchases after March 27, 2003 and before November 26, 2007 will be eligible for the rebate
Other Measures
Employer Health Tax Changes
A number of changes to the Employer Health Tax (EHT) have been proposed:
- For 2005, EHT will be payable on the 15th of each month based on the actual payroll for the previous month. With the elimination of estimates, most year-end overpayments and underpayments will be eliminated. No instalment will be required for January 2005.
- In response to a recent case, the EHT rules will be amended retroactive to 1990 to clarify that all remuneration is subject to EHT for Ontario sports team players.
- The EHT rules will be amended retroactive to 1990 to clarify that all taxable benefits under federal income tax rules will be subject to EHT.
- The EHT exemption for stock option benefits provided to research employees will be eliminated so that all stock option benefits will be subject to EHT as of May 18, 2004.
Electricity Act Changes
Several changes have been proposed to improve the policy and administrative effectiveness of the transfer tax and payments in lieu of corporate taxes under the Electricity Act.
- Municipal electricity utilities will include holding companies that acquire, hold, dispose of or otherwise deal with shares of a corporation established pursuant to section 142 of the Electricity Act, effective at certain set dates.
- The Finance Minister will be given authority to prescribe exceptions to the rule that underpayments or non-payment of transfer tax voids a sale of electricity assets.
- The Finance Minister will be authorized to set rules to relieve “cascading” of transfer tax.
- Effective November 7, 1998, the transfer tax offset of federal capital gains tax incurred on a transfer of electricity assets will be extended to include federal tax payable on gains arising from the transfer of eligible capital property.
Electricity Incentives Eliminated
Legislation will be introduced to repeal the 10-year corporate income tax holiday and the 10-year property tax holiday effective November 26, 2002. In addition, the government will not proceed with the corporate income tax deduction for self-generation announced in the 2003 Ontario budget and the 100% income tax write-off for electrical energy-efficient equipment announced in November 2002.
Tobacco/Alcohol Levy Increases
Effective May 19, 2004, tobacco taxes will increase to the national average. The rate of tax on cigarettes and cut tobacco will increase to 11.1 cents per cigarette or gram of cut tobacco. Effective June 21, 2004, a number of alcohol levies and basic fees for brewers will also be increased.
Property Tax Amendments
A number of initiatives have been developed as a result of the consultative process concerning improvements to the stability, fairness, flexibility and simplicity of the property tax system. These initiatives will be implemented starting in the 2005 taxation year and include changes to the timelines of the assessment cycle, the deferral of assessment averaging, providing municipalities with a range of options to modify the tax-capping program in order to increase progress towards current value assessment and enhancing mechanisms available to municipalities for targeting tax reductions to smaller and lower-valued properties.
The government also plans to enhance the eligibility criteria for the conservation land property tax exemption program for lands with natural and environmental significance owned by conservation authorities and conservation land trusts. Finally, a new financing tool is to be provided to help municipalities provide financial support for the clean-up of brownfield sites.
Seniors Property Tax Credit
Effective for 2004, the property tax credit for seniors will be enhanced. The enhancement will increase the maximum possible credit from $1,000 to $1,125.
LSIF Changes
Effective May 18, 2004, the government proposes a moratorium on new Labour Sponsored Investment Fund (LSIF) registrations, as well as a number of changes for existing funds.
Qualifying Environmental Trusts
The tax rate for environmental trusts will be increased to 14% effective January 1, 2004.
Other Fees
The driver's licence fee will be increased to $75 from $50, for a five-year period, effective September 1, 2004. Also, as a result of public consultations and the government's budgeting process, a number of changes and increases will be made to certain user fees and charges.
How Ontario Compares
The following chart compares top personal and corporate tax rates and sales taxes for all provinces and territories, as announced to May 18, 2004.
|
Top 2004 |
Top Corporate Rates |
Retail Sales |
|
Personal Rates
% |
General
% |
M&P
% |
Small Business
% |
Tax
% |
BC |
43.70 |
35.62 |
35.62 |
17.62 |
7.5 |
Alta. |
39.00 |
33.62 (1) |
33.62 (1) |
16.12 (1) |
- |
Sask. |
44.00 |
39.12 |
32.12 |
18.62 |
7.0 |
Man. |
46.40 |
37.62 |
37.62 |
18.12 |
7.0 |
Ont. |
46.41 |
36.12 |
34.12 |
18.62 |
8.0 |
Qué. |
48.22 |
31.02 |
31.02 |
22.02 |
7.5 (2) |
N.B. |
46.84 |
35.12 |
35.12 |
16.12 (4) |
8.0 (3) |
N.S. |
48.25 |
38.12 |
38.12 |
18.12 |
8.0 (3) |
P.E.I. |
47.37 |
38.12 |
29.62 |
20.62 |
10.0 (2) |
Nfld. |
48.64 |
36.12 |
27.12 |
18.12 |
8.0 (3) |
Yukon |
42.40 |
37.12 |
24.62 |
19.12 (5) |
- |
N.W.T. |
42.55 |
36.12 |
36.12 |
17.12 |
- |
Nunavut |
40.50 |
34.12 |
34.12 |
17.12 |
- |
- Effective April 1, 2004, the Alberta corporate rates were reduced. Prior to the reduction, the combined general rate and M&P rate was 34.62% and the combined small business rate was 17.12%.
- Provincial sales tax applies on GST. Effective combined rate is 15.025% in Québec and 17.7% in PEI.
- As part of the HST (combined rate is 15% with GST).
- The small business rate will be reduced to 15.62% on July 1, 2004.
- The tax rate for M&P profits eligible for the small business deduction is 15.62%.
Ontario Budget Report 2004 is a publication of BDO Dunwoody LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. Additional information can be obtained from your nearest BDO Dunwoody LLP office or through our Internet World Wide Web home page at www.bdo.ca.
