2006 Ontario Budget Report
March 23, 2006
Highlights
- Deficit of $1.4 Billion Projected for 2005-06
- Deficit of $2.4 Billion Forecast for 2006-07
- Capital Tax Reductions Accelerated
- New Transportation Funding Announced
Overview
"Building Opportunity"
Today, the Honourable Dwight Duncan presented his first budget as Minister of Finance. With better than expected tax revenues due to a stronger than expected economy, the government set aside money to invest in the province's transportation infrastructure (as had been rumoured in the days leading up to the budget). This decision continues to leave the province with a deficit, unlike most other Canadian jurisdictions.
The budget deficit for the 2005-06 fiscal year, originally budgeted to be $2.8 billion, is now forecast to be $1.4 billion. However, this includes a one-time investment of $1.2 billion in transportation infrastructure, over two-thirds of which is targeted for public transit in the Greater Toronto Area, including funds for the extension of the subway system into York Region. Without this investment, the province would have been very close to balancing its books. For the 2006-07 fiscal year, a deficit of $2.4 billion has been forecast - however, this includes a $1 billion reserve meaning that the actual deficit is expected to be $1.4 billion. The budget documents indicate that the province plans to balance its budget in 2008-09, but it is widely expected that next year the government will announce that the budget will be balanced one year ahead of that time, in advance of the next election.
In addition to infrastructure spending, new money was announced for health care, education, research and innovation, and programs for the province's most vulnerable citizens. As expected, the budget contained no new taxes. In addition, the government announced a rate reduction for the corporate capital tax, which will be eliminated by 2010 if the province's fiscal situation allows for it, two years ahead of schedule.
The following summarizes the tax measures included in today's budget that are of the most interest to our clients.
Ontario Budget Projections (in billions $)
|
|
|
|
Original Forecast 2005/06 |
Revised Forecast 2005/06 |
Projected
2006/07 |
|
|
Revenue |
81.7 |
83.9 |
85.7 |
|
|
Program Expense |
(73.7) |
(76.2) |
(77.7) |
|
|
Interest on Debt |
(9.8) |
(9.1) |
(9.4) |
|
|
Reserve |
(1.0) |
-- |
(1.0) |
|
|
Deficit |
(2.8) |
(1.4) |
(2.4) |
|
|
Personal Tax Changes
Taxation of Dividends
Last year, the Federal Liberal government announced plans to amend the income tax rules for individuals who receive dividends from Canadian corporations. Under current rules, when an individual receives a dividend, that dividend is grossed-up by 25% to reflect the pre-tax corporate profit, and a credit is allowed to the individual to reflect taxes paid by the corporation. Despite this gross-up and credit system, the Federal tax system and the tax systems in most provinces were not "integrated" with respect to business income not eligible for the corporate small business deduction as less overall tax would be paid where an individual earns income directly when compared with the combined corporate and personal tax payable where the same income is earned by a corporation and the net income after tax is paid as a dividend to the individual. Under the Federal proposal, the gross-up factor will be increased to 45%, and there will also be an increase to the Federal dividend tax credit. These changes will ensure that a similar amount of overall tax is paid on income earned directly and income passing through a corporation.
Due to the fact that many details still need to be sorted out, the Finance Minister announced that the Ontario government will review the Federal legislation on this initiative when released and respond at that time.
Property and Sales Tax Credit for Seniors Enhanced
Currently, property and sales tax credits for Ontario seniors are reduced when a couple's income exceeds $22,250. The government announced that for 2006, this income threshold for couples will continue to be linked to the income level where full benefits are allowed under Federal and Ontario guaranteed annual income programs so that couples qualifying for full income supplements won't be subject to a reduction in their credits. The new level will be set once the guaranteed annual income programs are finalized by the Federal government.
Corporate Tax Changes
Non-Capital Loss Carryforwards
In November 2005, the Federal government announced that the carryforward period for non-capital losses would be extended from 10 years to 20 years. Ontario has announced that it will adopt this change for Ontario purposes, subject to Federal implementation.
Capital Tax Reductions Accelerated
Under announced changes in 2004, the government committed to eliminating the corporate capital tax by 2012. Today, the Finance Minister announced that capital tax rate cuts will be accelerated, beginning on January 1, 2007. In addition, it has been proposed that the capital tax will be eliminated in 2010, if financial conditions allow. Proposed rates and deductions are summarized in the chart on page 3 (rate changes announced today are highlighted).
Ontario
Capital Tax Elimination Plan
|
|
Deduction ($ mil.)
|
Rates (%)
|
Regular Corporations
|
Financial Institutions
|
First $400 mil. of Taxable Capital
|
Taxable Capital Over $400 mil.
|
Non-Deposit Taking
|
Deposit Taking
|
Jan. 1, 2004
|
5
|
0.3
|
0.6
|
0.72
|
0.9
|
Jan. 1, 2005
|
7.5
|
0.3
|
0.6
|
0.72
|
0.9
|
Jan. 1, 2006
|
10
|
0.3
|
0.6
|
0.72
|
0.9
|
Jan. 1, 2007
|
12.5
|
0.285
|
0.57
|
0.684
|
0.855
|
Jan. 1, 2008
|
15
|
0.285
|
0.57
|
0.684
|
0.855
|
Jan. 1, 2009
|
15
|
0.225
|
0.45
|
0.54
|
0.675
|
Jan. 1, 2010
|
15
|
0.15
|
0.3
|
0.36
|
0.45
|
Jan. 1, 2011
|
15
|
0.075
|
0.15
|
0.18
|
0.225
|
Jan. 1, 2012
|
Eliminated
|
Rates and deductions are prorated for taxation years straddling the effective dates.
|
The Ontario Production Services Tax Credit
Ontario provides tax incentives to support film and television production in the province. The incentives are in the form of refundable tax credits, based on eligible Ontario labour expenditures. The 30% Ontario Film and Television Tax Credit is available to Ontario-based, Canadian-controlled corporations for eligible film and television productions. This credit expires at the end of 2009. The 18% Ontario Production Services Tax Credit is available to Ontario-based corporations for foreign-based and domestic productions not claimed under the 30% credit. As announced on February 9, 2006, the 18% credit, which was to have expired on March 31, 2006, has been extended to March 31, 2007.
The Ontario Interactive Digital Media Tax Credit (OIDMTC)
The OIDMTC is a 20% refundable tax credit for eligible expenditures incurred by qualifying corporations, with annual gross revenues of up to $20 million and total assets of up to $10 million, to develop eligible interactive digital media products in Ontario. The Budget proposes to raise the tax credit rate from 20% to 30% for corporations qualifying under the existing OIDMTC provisions. It is also proposed to extend eligibility for the OIDMTC at a rate of 20% to multimedia developers that exceed the current size test and to fee-for-service work done in Ontario. These measures are effective for expenditures incurred after March 23, 2006 and before January 1, 2010. Prior to 2010, the government will consult with stakeholders on the effectiveness of the OIDMTC.
Mining Tax Act
The Mining Tax Act will be harmonized with recent Federal tax changes which disallow certain fines and penalties as a deduction. This change will apply to fines and penalties imposed after March 23, 2006.
Electricity Act Changes
Two changes were proposed that will affect municipal electricity utilities (MEUs):
Payments-in-Lieu of Tax - Under provincial rules, MEUs are required to make payments-in-lieu of tax (PILs), equal to the Federal and provincial income tax that would have been payable without a tax exemption. To ensure that the rules are consistent for public and private electricity utilities, the rules for PILs will be amended so that MEUs cannot deduct the value of gifts made to an Ontario municipality on or after March 23, 2006.
Refund of Transfer Tax - Under current rules, a 33% transfer tax applies on electricity assets that are sold or transferred by a municipality or MEU to another entity. As this tax applies on each transfer, cascading of tax can occur where a municipality or MEU sells electricity assets and uses the proceeds received to acquire other electricity assets. The government will introduce a draft regulation to relieve this cascading, with a view to finalizing the proposal by this summer.
Federal Harmonization
Ontario has announced that it will harmonize Ontario rules with recent Federal proposed changes, as follows:
Agricultural Cooperative Corporations - Under a Federal announcement, where a patronage dividend is received from an agricultural cooperative corporation in the form of eligible shares, the income inclusion related to the dividend will be deferred until the share is disposed of. Ontario will parallel this change for both individual and corporate shareholders.
Expenses Incurred in Issuing Shares, Options and Other Interests - Under Federal changes announced on November 17, 2005, the amount that can be claimed as a tax deduction or a tax credit on the issue of shares, options and other interests is restricted to the actual cash outlay. Ontario will adopt these changes, with the same effective date.
Co-Generation Capital Cost Allowance - Ontario will parallel recent Federal CCA changes related to co-generation systems that use black liquor.
Sales Tax Changes
Hybrid Electric Vehicles
Currently, there is an 8% retail sales tax rebate on eligible hybrid electric vehicles, to a maximum of $1,000. The government proposes to increase this rebate to $2,000, effective for vehicles delivered to purchasers after March 23, 2006. The government also announced that the rebate will be available only to March 31, 2012. However, they will consult with stakeholders prior to 2012 to review the effectiveness of this rebate.
Marketing Fee Exemption
To support the hotel industry, the 2004 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 and last year's budget extended this to June 30, 2006. This budget proposes a further extension of this exemption, to fees billed on or before June 30, 2007.
Complimentary Admissions Tickets
To support the entertainment sector, under current rules, there is an exemption for donations of admissions tickets to registered charities by owners and operators of places of amusement. The government proposes to extend this exemption to include complimentary tickets donated to community colleges, schools and universities, effective for tickets donated after March 23, 2006. As well, not-for-profit organizations would also be eligible to receive exempt complimentary tickets.
Clearance Certificates
Amendments to the clearance certificate provisions are proposed to ensure that any outstanding taxes may be collected from vendors after the certificate has been issued. These changes will not impact a purchaser's protection associated with the clearance certificate.
Other Measures
Land Transfer Tax
Under current rules, land transfer tax can be deferred or cancelled on transfers between affiliated companies if certain conditions are met and the transfer isn't registered. However, courts have interpreted the rules in such a way to allow their application to registered transfers. As this was not intended, changes will be made to specify that if a document is:
- registered during the deferral period, the deferred tax would become payable, and
- registered after the deferred tax is cancelled, tax would become payable on the registration based on the earlier unregistered transfer of beneficial ownership.
Streamlining Tax Compliance and Administration Costs
A number of initiatives are underway that are aimed at reducing businesses' compliance costs and the government's administration costs with respect to the tax system, including the changes made to simplify the monthly remittance process for the Employer Health Tax and the introduction of electronic filing of refund applications of the Land Transfer Tax for qualifying individuals. The government has also announced a pilot project to simplify the retail sales tax determination for small businesses providing computer program-related services.
In 2004, the Ontario and the Federal government had entered into an agreement to collaborate on an integrated Federal collection and processing system for Ontario's corporate taxes. The government announced their intention to introduce legislation to authorize the province to enter into a corporate income tax collection agreement with the Federal government (which will also allow other Ontario corporate taxes to be included in the process).
Labour-Sponsored Investment Funds Tax Credit Phase-Out
The Labour-Sponsored Venture Capital Corporation tax incentive program was implemented in 1988 by the Federal government to help increase venture capital investment. In 1991, Ontario joined the Federal program by introducing the Labour-Sponsored Investment Fund (LSIF) program. A moratorium on new LSIF registrations was announced in the 2004 Ontario Budget so the government could review the status of this program. After consultations with industry, the government determined that this incentive is no longer required due to the healthier state of the province's venture capital market. Last fall, the government announced its intentions to phase-out the LSIF tax credit by the end of the 2010 tax year. The Federal government continues to offer its own tax credit for labour-sponsored venture capital corporations.
Changes to the Gasoline Tax Act Regarding Ethanol
With the goal of reducing greenhouse gas emissions, gasoline will require an average of 5% ethanol content beginning in 2007. In support of this goal, the government previously announced funding to support the production of ethanol in the province by removing the exclusion of ethanol from the definition of gasoline under the Gasoline Tax Act so that ethanol would then be subject to the same tax treatment as gasoline. The proposed changes will be effective January 1, 2007.
How Ontario Compares
The following chart compares top personal and corporate tax rates and sales taxes for all provinces and territories, as announced to March 23, 2006.
|
Top 2006
Personal Rates
% |
Top Corporate Rates for 2006 |
Retail Sales
Tax
% |
General
% |
M&P
% |
Small Business
% |
BC |
43.70 |
34.12 |
34.12 |
17.62 |
7.0 |
Alta. |
39.00 |
33.62 (7) |
33.62 (7) |
16.12 |
- |
Sask. |
44.00 |
39.12 |
32.12 |
18.12 |
7.0 |
Man. |
46.40 |
36.62 (4) |
36.62 (4) |
17.62 |
7.0 |
Ont. |
46.41 |
36.12 |
34.12 |
18.62 |
8.0 |
Qué. |
48.22 |
32.02 |
32.02 |
21.62 |
7.5 (1) |
N.B. |
46.84 |
35.12 |
35.12 |
15.12 (5) |
8.0 (2) |
N.S. |
48.25 |
38.12 |
38.12 |
18.12 |
8.0 (2) |
P.E.I. |
47.37 |
38.12 |
38.12 |
19.62 |
10.0 (1) |
Nfld. |
48.64 |
36.12 |
27.12 |
18.12 |
8.0 (2) |
Yukon |
42.40 |
37.12 |
24.62 |
17.12 (3) |
- |
N.W.T. |
43.05 |
36.12 (6) |
36.12 (6) |
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.
-
As part of the HST (combined rate is 15% with GST).
-
The tax rate for M&P profits eligible for the small business deduction is 15.62%.
-
The general and M&P tax rate will now be reduced to 36.62% effective January 1, 2006.
-
The small business tax rate will be reduced to 14.62% on July 1, 2006.
-
The general and M&P tax rate will be reduced to 33.62% on July 1, 2006.
-
The general and M&P tax rate will be reduced to 32.12% on April 1, 2006.
Ontario Budget Report 2006 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.
