CANADA

BDO locations

• Overview
• CEO Poll
• BDO Publications
  • Corporate Publications
  • Articles
  • Assurance and Accounting Publications
  • Tax Publications
    • Articles
    • Tax Bulletins
    • Tax Alerts
    • Fast Facts
    • Tax Factors
    • Federal and Provincial Budget Reports
    • German Investors
    • Weekly Tax Tips
    • Tax Rates and Figures
    • International Tax Newsletters
  • Aboriginal Publications
  • Agriculture Publications
  • Family Business Publications
  • Financial Recovery Publications
  • Business Transition Publications
  • Natural Resources
  • Public Companies Publications
  • Risk Advisory Services Publications
  • IFRS Publications
• Financial Post Business Venture Case Series
• Weekly Tax Tips

March 22, 2007

Highlights

• Small Surpluses Projected for 2006-07 and 2007-08
• Elimination of Capital Tax Accelerated
• Partial Corporate Minimum Tax Relief and Simplification Measures Announced

Overview

“Investing in People, Expanding Opportunity"

Today, the Honourable Greg Sorbara presented his first budget since being reinstated as Minister of Finance. With an election scheduled for October and a strong economy, the government was finally able to present a budget with a modest surplus - the first time the province has not had a deficit in years.

The expected surplus for the 2006-07 fiscal year is now forecast to be $310 million (a deficit of $1.4 billion before providing for a $1 billion reserve was originally projected). For the 2007-08 fiscal year, a small surplus of $350 million has been forecast before providing for a $750 million reserve which, if included, will result in a deficit of $400 million.

As expected, the budget focused on children in low-income families. The government announced the introduction of the Ontario Child Benefit, which will reform the way benefits are provided to low-income families with children. This program is expected to cost $2.1 billion over the next five years, with qualifying low-income families receiving their first payments of up to $250 per child in July. The government also confirmed that it is raising the minimum wage from its current $8.00 level to $10.25 per hour by 2010.

The budget contained increases in funding for health care, education and research, and innovation. As expected, the budget contained no new taxes. The government did confirm that the much hated corporate capital tax will be eliminated in 2010, fulfilling a commitment made a year ago to eliminate this tax by then if the province's fiscal situation allowed for it.

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 2006/07	Revised Forecast 2006/07	Projected 2007/08
Revenue	85.7	89.1	91.5
Program Expense	(77.7)	(80.0)	(82.0)
Interest on Debt	(9.4)	(8.8)	(9.1)
Reserve	(1.0)	--	(0.8)
Surplus (Deficit)	(2.4)	0.3	(0.4)

Personal Tax Changes

Property and Sales Tax Credits for Seniors

Currently, low-income seniors receive a $625 property and sales tax credit which is reduced once a senior couple's income exceeds $23,090 for 2006. Because of increases to the Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) in 2007, the 2007 threshold when the credit starts to be reduced will be increased, once the federal government finalizes OAS and GIS amounts for 2007.

Universal Child Care Benefit

In addition to the new Ontario Child Benefit announced today, the government announced that legislation has been enacted to ensure that eligibility for the Ontario Child Care Supplement for Working Families, Ontario Property and Sales Tax Credits and other income-tested provincial programs is not affected by the new federal Universal Child Care Benefit. The government has also ensured that eligibility for means-tested programs, like social assistance, does not change because of the introduction of this federal benefit.

Changes for Business

Corporate Tax Harmonization

Last fall, the Ontario and federal governments signed an agreement to transfer the administration of certain Ontario corporate taxes, including corporate income tax and capital tax, to the Canada Revenue Agency, effective for taxation years ending after 2008. A move to a single corporate tax system in Ontario will be good news for Ontario businesses, resulting in a reduced tax compliance burden and eliminating the duplication of time and effort spent on dealing with two different sets of tax rules, tax auditors and forms. The budget papers estimate that the tax compliance savings to Ontario businesses would be close to $100 million per year. Bill 174 was introduced in the legislature on December 13, 2006 to implement this corporate tax harmonization.

Ontario has agreed, as part of this process, to harmonize their tax base with the one used for federal income tax purposes. Today's budget proposed further changes to two existing differences as follows:

• The current deduction for a portion of the federal investment tax credit that relates to scientific research and development in Ontario will be replaced with a 4.5% non-refundable tax credit (further details below).
• Ontario's existing resource allowance for the mining and oil and gas sectors will be replaced with a tax credit and debit mechanism.

According to the budget papers, these proposed changes would provide Ontario businesses with a $90 million corporate income tax cut. In an upcoming Fast Fact, we'll provide a full summary of what harmonization will mean for your corporation.

Capital Tax Elimination

The timing of the elimination of the corporate capital tax has been accelerated. The capital tax will now be eliminated on July 1, 2010 rather than 2012 (this possibility was announced in last year's budget, if financial conditions allowed). The chart below sets out capital tax rates that will apply until the capital tax is eliminated in 2010.

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
Jul. 1, 2010	Eliminated
Rates and deductions are prorated for taxation years straddling the effective dates.

Corporate Minimum Tax (CMT) Amendments

The CMT is a minimum tax that applies to larger Ontario corporations. The CMT applies to corporations that (together with associated corporations) have revenue in excess of $10 million or total assets in excess of $5 million. Where the tax applies, income for accounting purposes under generally accepted accounting principles (GAAP), with certain adjustments, is subject to tax at 4%. If this amount exceeds basic corporate tax, the higher amount is payable. The extra tax can be carried forward as a potential credit, and applied to reduce regular corporate tax in a future year when that tax exceeds the CMT.

Three changes were proposed in today's budget with respect to the CMT:

• Carryforward period extended - The carryforward period for CMT losses and credits will be extended from 10 years to 20 years (effective immediately for amounts that had not expired).
• Exemption for unrealized gains and losses - Under recent GAAP changes, some corporations are required to book unrealized gains as accounting income, and the CMT could potentially apply to these amounts. It was announced today that the CMT "would be calculated without reference to unrealized gains and losses that are not required to be included in computing income for income tax purposes". Also, the impact of unrealized gains and losses will be removed from revenue and total assets when determining whether a corporation is subject to CMT. These changes are effective for taxation years ending after March 22, 2007.
• Exemption for certain tax rollovers - Under current rules, accounting income related to a transfer where the gain is deferred for income tax purposes can be deferred and brought into income when the asset is disposed of for CMT purposes. Under proposals announced today, these gains will be exempt for CMT purposes and the accounting/income tax differences do not have to be tracked. This change is effective for dispositions, amalgamations or winding-ups completed after March 21, 2007.

Although we welcome these changes, Ontario is the only jurisdiction in Canada that levies a tax like the CMT and we had hoped a plan would be announced today to eliminate the tax

Ontario R&D Tax Credit

Currently, Ontario provides a deduction for a portion of the federal investment tax credit (ITC) that relates to scientific research and development (SR&ED) in Ontario. This deduction will expire for taxation years ending after 2008 and will be replaced with a 4.5% non-refundable tax credit. Eligible expenditures for the new tax credit will be expenditures that are incurred by a corporation during a taxation year ending after 2008 for SR&ED carried on through an Ontario permanent establishment and are qualified SR&ED expenditures for purposes of the federal ITC. Unused tax credits will have a 20 year carryforward period and a 3 year carryback period; however, no carryback is allowed to taxation years ending before 2009.

Transitional Rules for SR&ED

Unused tax pools for carryover, such as unclaimed deductions for losses and SR&ED expenditures, will often differ for Ontario and federal tax purposes. When the federal and corporate tax systems are harmonized, the Ontario tax pool balance will assume its federal value, resulting in Ontario tax gains or losses for corporations. Bill 174 contained proposals to spread the impact of this change evenly over a 5 year period. Two changes are proposed to provide further transitional support to R&D companies:

• The amount of a corporation's relevant federal ITCs earned in taxation years ending before 2009 will be added to the corporation's total Ontario balance to eliminate the gap between the incentive provided by the new 4.5% tax credit and the existing deduction for a portion of the federal ITC.
• Where a corporation's federal SR&ED pool balance exceeds its Ontario SR&ED pool balance as of the beginning of its first taxation year ending after 2008, the corporation will be allowed to defer a certain amount of its tax debits relating to its federal SR&ED pool balance.

Apprenticeship Training Tax Credit

The Apprenticeship Training Tax Credit (ATTC) provides businesses with a 25% to 30% refundable tax credit on salaries and wages paid to eligible apprentices who commence employment before January 1, 2008. Today, the government extended the program to eligible apprentices who commence employment before 2012. Eligible apprentices must be in their first 36 months of an apprenticeship training program in designated construction, industrial, motive power and service trades. In addition, six trades will be added to the list of skilled trades that qualify for the ATTC: entertainment industry power technicians, process operators - power, tractor-trailer commercial drivers, exterior insulated finish systems mechanics, and information technology call centre inside sales and customer care agents.

Ontario Computer Animation and Special Effects Tax Credit

The budget proposes to amend this 20% refundable credit to allow any wholly owned subsidiary to claim labour expenditures incurred by the parent corporation in respect of the subsidiary's production, effective for productions commencing after March 22, 2007.

Ontario Production Services Tax Credit

The budget proposes to extend this 18% credit for one year, until March 31, 2008

Electricity Act Changes

Under provincial rules, municipal electricity utilities (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. Three changes were proposed with respect to this tax:

• Rollover administrative policies to be enacted - Rules will be introduced to specifically allow tax rollovers of assets to corporations under section 85 of the federal Income Tax Act and rollovers to partnerships under section 97. However, the corporations in question must be subject to the PIL regime and in the case of partnerships, all partners must be subject to PILs. In addition, for taxation years ending after March 22, 2007, a partnership will be deemed to dispose of its assets at fair market value where one partner ceases to be subject to PILs or a non-PILs partner is admitted to the partnership.
• Interest deductions restricted - Where a MEU pays interest to a municipality, the interest will be capped to be consistent with the proposed Ontario Energy Board cost of capital rules. In addition, a debt to equity ratio will be imposed. These changes apply to taxation years ending after March 22, 2007.
• Losses from other businesses - Where an MEU carries on a business other than electricity distribution, changes were proposed that will restrict losses from these businesses. Effective for taxation years ending after March 22, 2007, these losses can only be applied to reduce income from the particular loss business.

Other Measures

Property Tax System Changes

Business Education Property Taxes (BET) - The budget proposes to significantly reduce the wide variation in BET rates. A $540 million cut to high BET rates will be implemented over the next seven years.

Current Value Assessment (CVA) - The budget proposes to introduce three changes to the CVA system. These include a four-year reassessment cycle (under the original CVA system, annual reassessments of property values were planned), a mandatory phase-in of assessment increases over four years (rather than the current system where the reassessed value is adjusted immediately), and enhancements to the fairness and effectiveness of the assessment appeal system.

Previously Announced Changes

The following initiatives were announced previously, and their application was confirmed:

• Dividend tax credit for individuals - Legislation will be introduced to enact the revised dividend tax credit rates on eligible dividends announced last year.
• Pension income splitting - Although Ontario is bound to the federal definition of taxable income for individuals, the province confirmed that the federal announcement on October 31, 2006 on pension income splitting will apply in Ontario.

Locked-In Accounts

Under current rules, amounts transferred into a life income fund (LIF) are subject to locking-in rules. Changes were announced today that would allow seniors greater access to their LIFs. In particular, seniors would be allowed, on a one-time basis, to unlock up to 25% of a LIF no earlier than the early retirement date under the pension plan from which the LIF funds originated (which is generally age 55). These changes should be in place by early 2008.

Special Additional Tax on Life Insurers

The special additional tax (SAT) is paid by life insurance companies. The budget proposes to introduce a SAT carryforward credit equal to the amount of SAT paid for a taxation year. This credit can be applied in a future year to reduce Ontario income tax payable in excess of CMT and SAT and would have a carryforward period of 20 years. This credit would apply for taxation years ending after 2008.

Destination Marketing Fees

The budget proposes to extend the retail sales tax exemption on these fees for one year. Any fees billed on or before June 30, 2008 would qualify for exemption from the 5% tax on accommodations.

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 22, 2007.

	Top 2007	Top Corporate Rates
	Personal Rates %	General %	M&P %	Small Business %	Retail Sales Tax %
BC	43.70	34.12	34.12	17.62	7.00
Alta.	39.00	32.12	32.12	16.12	-
Sask.	44.00	36.12 (1)	32.12	17.62	5.00
Man.	46.40	36.12	36.12	16.12	7.00
Ont.	46.41	36.12	34.12	18.62	8.00
Qué.	48.22	32.02	32.02	21.12	7.50 (2)
NB	46.95	35.12	35.12	18.12	8.00 (3)
NS	48.25	38.12	38.12	18.12	8.00 (3)
PEI .	47.37	38.12	38.12	18.52 (4)	10.00 (2)
Nfld.	48.64	36.12	27.12	18.12	8.00 (3)
Yukon	42.40	37.12	24.62	17.12 (5)	-
NWT.	43.05	33.62	33.62	17.12	-
Nunavut	40.50	34.12	34.12	17.12	-

Ontario Budget Report 2007 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.