2005 Ontario Budget Report
May 11, 2005
Highlights
- Deficit of $3 Billion Projected for 2004-05
- Balanced Budget Now Projected in 2008-09
- Incorporation Rules Improved for Doctors and Dentists
- Several Business Tax Credits Enhanced
"Investing in People / Strengthening our Economy"
Today, Greg Sorbara presented his second budget as Minister of Finance. After last year's tax increase (the much maligned Health Premium Tax) and the large provincial deficit, Ontario residents anxiously awaited today's budget, to see if there was more bad news. On the plus side, no general tax increases were announced today. Unfortunately, the news was not as good as far as the provincial deficit is concerned. The budget deficit for the 2004-05 fiscal year is now projected to be $3 billion, up from the original estimate of $2.2 billion in last year's budget. The result is actually even worse when one takes into account that the original estimate contained a $1 billion reserve for contingencies and the revised deficit estimate does not. Only a slight improvement is projected for 2005-06, as a deficit of $2.8 billion is projected. On a longer term basis, it appears that Ontarians will have to wait an additional year for a balanced budget. The Finance Minister now projects that the province will balance its books in the 2008-09 fiscal year, assuming contingency reserves are needed (one year later than last year's prediction, again assuming contingency reserves are needed).
With these large budget deficits, the Finance Minister had little room to announce new spending initiatives. However, new programs for education, student assistance, health care and infrastructure were announced. In addition, to help stimulate the economy, a number of tax credits have been enhanced.
There was some good news today for professionals, but the announcement may cause some controversy as well. The Ontario government will relax the shareholding rules for Ontario professional corporations, which would allow family members to hold shares. But, there is a catch - the change will only be made available to doctors and dentists. It is difficult to understand why the government would not level the playing field for all professionals so they can use corporations in the same way as other Ontario businesspeople and professionals in most other Canadian provinces.
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 2004/05 |
Revised Forecast 2004/05 |
Projected
2005/06
|
Revenue |
78.4 |
77.1 |
81.7 |
Program Expense |
(66.7) |
(67.6) |
(71.0) |
Capital |
(2.6) |
(2.9) |
(2.7) |
Interest on Debt |
(10.3) |
(9.6) |
(9.8) |
Reserve |
(1.0) |
-- |
(1.0) |
Deficit |
(2.2) |
(3.0) |
(2.8) |
Personal Tax Changes
Tax Credits for Seniors Enhanced
Under current rules, property and sales tax credits for Ontario seniors are reduced when a couple's income exceeds $22,000. Today, the government has announced that this income threshold for couples will be linked to the income level where full benefits are allowed under federal and Ontario guaranteed annual income programs. This change will be effective for the 2005 taxation year and will ensure that couples qualifying for full income supplements will not be subject to a reduction in their property and sales tax credits.
Harmonization with Federal Changes
The Ontario government proposes to parallel, with any necessary modifications, several changes announced in 2005 by the federal government (assuming that these federal changes are in fact made):
- enhancements related to amounts that can be claimed for dependants under the medical expense tax credit;
- a non-refundable tax credit for eligible adoption expenses;
- charitable donation changes for Asian tsunami relief donations; and
- various enhancements to the disability tax credit and medical expense tax credit.
Business Tax Changes
Corporate Tax Credits Enhanced
As proposed on December 21, 2004, the refundable Ontario Film and Television Tax Credit (OFTTC) rate is to be increased from 20% to 30% for labour expenditures incurred after December 31, 2004 and before January 1, 2010. The 10% regional bonus will continue to be available for filming outside the Greater Toronto Area, and first-time producers will be eligible for an enhanced rate of 40% on the first $240,000 of qualifying labour expenditures incurred after December 31, 2004 and before January 1, 2010.
The government also proposed on December 21, 2004 to increase the rate for the Ontario Production Services Tax Credit (OPSTC) from 11% to 18% for labour expenditures incurred after December 31, 2004 and before April 1, 2006. For labour expenditures incurred after December 31, 2004, it is proposed that the 3% regional bonus for filming outside the Greater Toronto Area will be eliminated.
Legislative amendments will be introduced, in order to create regulatory authority to prescribe OFTTC and OPSTC rates.
Today, the government proposed enhancements to several other refundable corporate tax credits:
- Currently, the Ontario Computer Animation and Special Effects Tax Credit is based on the lesser of Ontario labour expenditures and 48% of the cost of the production net of certain government assistance. As proposed today, the credit will be based only on Ontario labour expenditures net of certain government assistance reasonably related to those expenditures, effective for eligible expenditures after May 11, 2005.
- To improve the accessibility of the Ontario Interactive Digital Media Tax Credit, the requirement that eligible corporations demonstrate a minimum 90% copyright ownership in the eligible product will be relaxed, as long as the product is not developed under a fee-for-service arrangement. This change will be effective for eligible products completed after May 11, 2005.
- The Ontario Sound Recording Tax Credit will be enhanced in three ways. For taxation years ending after May 11, 2005, the minimum period required by the corporation to carry on a sound recording business would be reduced to 12 months from 24 months. For master tapes completed after May 11, 2005, the minimum total playing time will be reduced to 15 minutes from 40 minutes, and the sound recording company will be required to have a distribution plan approved by the Minister of Culture. The latter change replaces the requirement of a sound recording company to market its copies of eligible sound recordings through an established national distributor.
- The Ontario Book Publishing Tax Credit related to children's books will be expanded. An author is currently eligible for the first three children's books published. Effective for literary works published after May 11, 2005, a children's book author will be an eligible author for the first three works published in each of the children's writing categories, which include fiction, non-fiction, poetry and biography.
Resource Allowance
Ontario provides a resource allowance to corporations in the oil and gas and mining sectors, which is generally equal to 25% of resource profits. In last year's budget, the government announced that it would maintain this resource allowance and the rules restricting the deduction of Crown royalties, even though these provisions are being phased out by the federal government.
Today, an amendment to the resource allowance provisions was proposed which will clarify that income computed for Ontario purposes must be used in determining Ontario resource profits. This amendment will prevent corporations from claiming both an Ontario incentive deduction and additional resource allowance on that incentive, and will be effective for taxation years beginning after May 6, 1997.
Capital Cost Allowance
The federal government announced changes to capital cost allowance (CCA) rates in its 2005 budget. Subject to federal implementation, Ontario will parallel these changes, which better align the CCA rates with the useful life of assets, as well as encourage investment in assets used to generate efficient and renewable energy.
Assets used to generate electricity from clean, alternative or renewable sources, and acquired before January 1, 2008, will continue to be eligible for Ontario's 100% CCA rate.
Tax Avoidance
The Ontario government announced that it is reviewing arrangements designed to avoid provincial corporation taxes. Under current rules, the amount of corporate income that is taxable in a province is generally based on the revenue and salaries attributable to permanent establishments in each province in which a corporation carries on business. The government believes that these rules are subject to manipulation, and the province will discuss this issue with other provincial governments and the federal government.
In addition, under current rules, a corporation's liability for Ontario tax is based in part on whether the corporation was incorporated inside or outside Canada. The government announced that this rule will be changed, and Ontario tax will now be based on whether a corporation is resident inside or outside Canada. This rule would make Ontario's rules consistent with the federal rules, and rules for the other provinces. This change will be effective for taxation years ending after May 11, 2005.
Sales Tax Changes
Marketing Fee Exemption
To support the hotel industry, last year's budget announced an exemption for destination marketing fees from the 5% accommodations tax for fees billed after May 18, 2004 and before May 19, 2005. This budget proposes to extend this exemption to fees billed on or before June 30, 2006.
Retail Sales Tax Exemptions Updated
The current exemption for publications produced or purchased by religious, charitable or benevolent organizations will be updated to include CD-ROMs and DVDs used to promote the objects of the organization. Further, educational DVDs will be included in the exemption for publications purchased by schools, school boards, community colleges, universities and public libraries. These changes will be effective for purchases after May 11, 2005.
Retail Sales Tax Exemption for Booster Seats
The government proposes to expand the retail sales tax exemption for child car seats to include booster seats. This change has been introduced due to legislation passed in December 2004 to enhance the safety of children and youth on Ontario's roads. Under the new legislation, regulations will make booster seats mandatory for children who are too big for child car seats, but too small for properly protected seat belts. The retail sales tax exemption for booster seats will be effective on proclamation, to coincide with the implementation of the requirement to use booster seats.
Simplified Calculation for Small Software Businesses
Businesses are required to determine the tax liability on the components of a software services contract, as these contracts often include both taxable and non-taxable services. In order to simplify the determination of tax on such contracts for small software businesses, a pilot project is proposed which will allow an optional method for the tax calculation. This optional method will allow participating businesses and purchasers to apply an unspecified blended tax rate to the total contract price.
Multijurisdictional Vehicle Tax
When transferring vehicles from multijurisdictional use to Ontario use, the budget proposes to allow owners to use appraisals to establish vehicle value. This measure will apply where pro-rated multijurisdictional vehicle tax was paid in lieu of the point-of-sale retail sales tax on vehicles purchased after September 30, 2001, which have been owned by the same person for more than 60 months.
Other Measures
In addition to a number of unspecified technical changes, several other changes were announced today and are summarized below.
Professional Corporations
Under current rules, the ability to incorporate has been extended to most Ontario professions. Under the strict share ownership provisions of these rules, only a professional can hold the shares of a professional corporation. Earlier this year, as part of the negotiations with the Ontario Medical Association, the government agreed to relax these rules for doctors so that other family members can hold non-voting shares. Today, the government has announced that this new rule will also apply to dentists. Although an effective date was not announced, we believe that these rules would not become effective until the necessary legal and regulatory changes have been made.
Streamlining Remission Orders
Currently, remission orders may be granted in special circumstances of public interest, and must be recommended by the Finance Minister and considered by the cabinet. It is proposed that these rules will be streamlined, so that the Finance Minister alone can authorize remissions involving amounts under $10,000. In situations involving personal income tax, the ability to issue remission orders under $10,000 will be delegated to the Minister of National Revenue, if there is mutual agreement between the two governments.
Tax Increment Financing
A number of municipalities have asked the province to explore the feasibility of Tax Increment Financing (TIF). In response, the government has agreed to examine options for the implementation of TIF as a tool to promote urban regeneration. Under this concept (which has been used widely in the U.S.), incremental property tax related to property value increases due to a specific project is applied to support that project. This review will take place during the 2005-06 fiscal year. Consultations with interested municipalities and others are planned for the summer/fall of 2005.
Brownfields Redevelopment
As crown liens have been identified as a barrier to the remediation of brownfields, the government will develop guidelines for the removal of outstanding provincial tax liens on brownfield properties in the coming year. The government will also work closely with the federal government to coordinate the removal of federal liens. Finally, the Municipal Act, 2001 will be amended to clarify requirements for the Brownfields Financial Tax Incentive Program.
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 11, 2005.
|
Top 2005 |
Top Corporate Rates |
|
|
Personal Rates
% |
General
% |
M&P
% |
Small Business
% |
Retail Sales
Tax
% |
BC |
43.70 |
35.62 |
35.62 |
17.62 |
7.0 |
Alta. |
39.00 |
33.62 |
33.62 |
16.12 |
- |
Sask. |
44.00 |
39.12 |
32.12 |
18.12 |
7.0 |
Man. |
46.40 |
37.12 |
37.12 |
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 (1) |
N.B. |
46.84 |
35.12 |
35.12 |
15.62 (2) |
8.0 (3) |
N.S. |
48.25 |
38.12 |
38.12 |
18.12 |
8.0 (3) |
P.E.I. |
47.37 |
38.12 |
38.12 (4) |
19.62 (4) |
10.0 (1) |
Nfld. |
48.64 |
36.12 |
27.12 |
18.12 |
8.0 (3) |
Yukon |
42.40 |
37.12 |
24.62 |
17.12 (5) |
- |
N.W.T. |
43.05 |
36.12 |
36.12 |
17.12 |
- |
Nunavut |
40.50 |
34.12 |
34.12 |
17.12 |
- |
- Provincial sales tax applies on GST. Effective combined rate is 15.025% in Québec and 17.7% in P.E.I.
- Rate will be reduced to 15.12% effective July 1, 2005.
- As part of the HST (combined rate is 15% with GST).
- Prior to April 1, 2005, the M&P rate and the small business rate were 29.62% and 20.62% respectively.
- The tax rate for M&P profits eligible for the small business deduction is 15.62%.
Ontario Budget Report 2005 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. For additional information, contact your BDO advisor or visit us at www.bdo.ca.
