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March 25, 2008

Highlights

• Second Consecutive Surplus Projected for 2007-08
• Tax Exemption for New Corporations That Commercialize Research
• Capital Tax Elimination for Manufacturing and Resource Activities Now Effective January 1, 2007
• Homeowners' Property Tax Grant Announced For Seniors

Overview

“Growing a Stronger Ontario"

On March 25, 2008, the Honourable Dwight Duncan presented his first budget since taking over as Minister of Finance from Greg Sorbara on a permanent basis. Despite the recent urging of the federal government on the need to reduce business taxes in Ontario to encourage investment, the budget contained no significant tax relief.

The expected surplus for the 2007-08 fiscal year, originally projected to be a deficit of $400 million after providing for a $750 million reserve, is now forecast to be a surplus of $600 million, the province's second consecutive surplus. For the 2008-09 fiscal year, a balanced budget has been forecast after providing for an $800 million reserve.

The centerpiece of the budget is the investment of $1.5 billion over three years in the government's Skills to Jobs Action Plan, designed to train unemployed workers for new careers, expand apprenticeships, build more spaces in colleges and universities, and help students with education costs. This program will be very important for workers who are losing jobs in the manufacturing sector. Also, as announced by Premier McGuinty last week, the province is investing $1 billion on infrastructure programs.

There were very few tax changes in the budget. New corporations that commercialize research from Canadian universities, colleges or research institutes will benefit from an exemption from corporate income and minimum tax for 10 years. Low and moderate income seniors who own their homes will benefit from a new property tax grant starting in 2009.

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 2007/08	Revised Forecast 2007/08	Projected 2008/09
Revenue	91.5	96.6	96.9
Program Expense	(82.0)	(87.0)	(87.3)
Interest on Debt	(9.1)	(9.0)	(8.9)
Reserve	(0.8)	-	(0.8)
Surplus (Deficit)	(0.4)	0.6	-

Personal Tax Changes

New Senior Homeowners' Property Tax Grant Introduced

In addition to the current property tax credit, a new property tax grant will be provided to seniors who own their homes. The maximum grant in 2009 will be $250 and will increase to $500 in 2010. Eligible single seniors who pay at least $500 in property tax having income of $35,000 or less would receive the maximum grant (a proportionately smaller grant will be available to single seniors with income between $35,000 and $50,000). Eligible senior couples who pay at least $500 of property tax having combined income not exceeding $45,000 will receive the maximum grant (a proportionately smaller grant will be available for senior couples with income between $45,000 and $60,000).

Senior homeowners will apply for the grant as part of their 2008 tax returns.

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 $23,820 for 2007. Because of increases to the Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) in 2008, the 2008 threshold when the credit starts to be reduced will be increased, once the federal government finalizes OAS and GIS amounts for 2008.

Business Tax Changes

Ontario Tax Exemption for Commercialization

To support innovation in the Ontario economy, the government proposed a new 10-year tax exemption for new corporations that commercialize intellectual property developed by qualifying Canadian universities, colleges or research institutes. A qualifying corporation established after March 24, 2008 and before March 25, 2012, would be exempt from Ontario Corporate Income tax and Corporate Minimum Tax for its first 10 taxation years. The exemption would generally apply to corporations that commercialize intellectual property in priority areas such as, but not limited to, bio-economy/clean technologies, advanced health technologies, and telecommunications, computer and digital technologies. Eligible activities would include the development of prototypes and the marketing and manufacturing of products related to the intellectual property. A qualifying corporation would be incorporated in Canada and derives all or substantially all of its income from eligible commercialization activities carried on in Ontario.

Corporate Tax Instalments for Small Business

In the 2008 federal budget, certain smaller Canadian-controlled private corporations will be allowed to pay federal corporate tax instalments on a quarterly basis. In addition, corporations will not be required to pay federal instalments at all if the balance of federal tax owing in the current or previous year does not exceed $3,000. Ontario will parallel these changes for taxation years ending after 2008.

Capital Tax Elimination

The timing of the elimination of the corporate capital tax has been accelerated yet again, when compared with the 2007 budget and last fall's economic statement. Last fall, the government announced that the capital tax for corporations primarily engaged in manufacturing and resource activities in Ontario would be eliminated on January 1, 2008. In today's budget, the Finance Minister announced that the elimination of the capital tax for these corporations will now be moved back to January 1, 2007. Given many corporations have already paid capital tax at full rates, tax relief will be provided by issuing a refund or allowing corporations to offset other taxes payable.

The capital tax reduction for manufacturing and resource activities will apply to corporations whose salaries and wages relating to manufacturing and processing, mining, logging, farming or fishing activities in Ontario represent 50% or more of their total salaries and wages in Ontario. For corporations whose salaries and wages in Ontario for these activities comprise less than 50%, but more than 20% of their total salaries and wages in Ontario, the capital tax will be reduced proportionately on a straight-line basis. For example, a corporation whose Ontario salaries and wages for these activities comprise 35% of total Ontario salaries and wages will have one-half of its capital tax eliminated.

The chart below sets out the revised capital tax elimination schedule.

Ontario Capital Tax Elimination Plan
	Deduction ($ mil.)	Rates (%)
		Regular Corporations		Financial Institutions
		M&P and Resources	Other Corporations	First $400 mil. of Taxable Capital	Taxable Capital Over $400 million
					Non-Deposit Taking	Deposit Taking
Jan. 1, 2007	12.5	Eliminated	0.225	0.45	0.54	0.675
Jan. 1, 2008	15		0.225	0.45	0.54	0.675
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	Legislated accelerated elimination date
-   Rates and deductions are prorated for taxation years straddling the effective dates.  -   M&P and resource corporations include corporations primarily engaged in manufacturing and processing, mining, logging, farming or fishing activities in Ontario .

Capital Cost Allowance Changes

The Ontario government will parallel the capital cost allowance (CCA) changes announced in the 2008 federal budget, including:

• The extension of accelerated CCA rules for manufacturing and processing equipment, being a 50% straight-line deduction for assets purchased in 2009 and a declining balance deduction for those assets purchased in 2010 and 2011.
• The expansion of eligibility for Class 43.2 treatment to include a number of clean energy generation assets.
• Increasing the CCA rate for carbon dioxide pipelines and setting the CCA rate for pumping and compression equipment for these pipelines so that it is consistent with the rates that apply to equipment used in the oil and gas sector.
• Increasing the CCA rate for railway locomotives.

Ontario Innovation Tax Credit (OITC) Enhanced

The OITC is a 10% refundable tax credit available to small and medium-sized corporations that carry on scientific research and experimental development (SR&ED) in Ontario. The budget proposes to parallel enhancements made to the federal SR&ED tax credit in the recent federal budget by enhancing the OITC. The expenditure limit on SR&ED expenditures which qualify for the OITC annually will be increased to $3 million from $2 million. In addition, the annual expenditure limit is currently phased-out by $10 for each dollar of a corporation's taxable income that exceeds $400,000, becoming fully phased-out when taxable income hits $600,000. This upper limit will be increased to $700,000 to be consistent with the increase of the annual limit to $3 million. The effective date of these changes will parallel the federal amendments.

Ontario Interactive Digital Media Tax Credit (OIDMTC)

The OIDMTC is a refundable tax credit available to Ontario corporations for the creation, marketing and distribution of interactive digital media products. The budget proposes to increase the 20% tax credit rate for corporations with gross revenues over $20 million and total assets over $10 million and for fee-for service work to 25% for qualifying expenditures incurred after March 25, 2008 and before January 1, 2012. The enhanced 30% tax credit rate for small corporations (gross revenues and total assets of not more than $20 million and $10 million respectively) will also be extended to qualifying expenditures incurred before January 1, 2012. In addition, the eligibility period for eligible labour expenses for qualifying digital media products for the OIDMTC will be extended from two to three years.

Sales Tax Changes

Retails Sales Tax (RST) Changes

A number of RST changes were proposed, as noted below.

Reusable Containers and Other Packaging, Storage and Shipping Items - The Retail Sales Tax Act will be amended, retroactive to May 7, 1997, to deal with the recent court interpretation in the Procter and Gamble case. The amendments will confirm that RST must be paid on purchases of containers and other packaging, storage and shipping items that are intended to be returned for reuse in the packaging, storage or shipping of goods. The amendments will also confirm that RST must be paid on containers and other items that are provided as a promotional distribution.

Newspapers - As announced in December 2007, the definition of newspapers is being expanded to enable publications with smaller circulations or less frequent publishing schedules, such as community and ethnic newspapers, to qualify for the RST exemption for newspapers. This change will be retroactive to January 1, 2000

Destination Marketing Fees - The current RST exemption for destination marketing fees, designed to support Ontario's tourism and hotel industries, will be extended for two more years. Fees billed on or before June 30, 2010 will qualify for the exemption.

Admissions to Live Theatres - The current temporary RST exemption on admissions to live theatres of not more than 3,200 seats will be made permanent, effective April 1, 2008.

Energy Star Household Appliances and Light Bulbs - The current RST exemption for purchases on qualifying new Energy Star household appliances and light bulbs will extended to appliances purchased, rented or leased on or before August 31, 1999 and delivered on or before September 20, 2009, and to qualifying light bulbs purchased on or before August 31, 2009.

Bicycles and Related Safety Equipment - The temporary RST exemption for purchases of bicycles having a price of $1,000 or less and related safety equipment is being extended to include purchases made on or before December 31, 2010.

Nicotine Replacement Therapies - The current RST exemption for qualifying non-prescription nicotine replacement therapies will now become permanent.

Other Changes

Property Tax Changes

In the 2007 Ontario budget, the government announced reductions to the Business Education Tax (BET) so that the rate would be lowered over 7 years to a target maximum rate of 1.6%. In the 2008 budget, it was announced that the reductions in northern Ontario will be accelerated so that they take place over 3 years. To qualify, businesses must be located in the following districts: Algoma, Cochrane, Kenora, Manitoulin, Nipissing, Parry Sound, Rainy River, Sudbury, Thunder Bay and Timiskaming.

It was also announced that mandatory phase-in of assessment increases will be expanded to include all property classes, including commercial, industrial and multi-residential.

Land Transfer Tax - Farmland

The land transfer tax exemption on farmland will be extended to include transfers of farmland from family farm corporations to family members. It should be remembered, however, that the income tax rollover for farmland does not apply to a transfer of farmland by a corporation.

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 25, 2008.

	Top 2008 Personal Rates %	Top Corporate Rates
		General %	M&P %	Small Business %	Retail Sales Tax %
BC	43.70	31.5 (1)	31.5 (1)	15.5 (1)	7.0
Alta.	39.00	29.5	29.5	14.0	-
Sask.	44.00	32.5 (2)	29.5	15.5	5.0
Man.	46.40	33.5 (3)	33.5	13.0	7.0
Ont.	46.41	33.5	31.5	16.5	8.0
Qué.	48.22	30.9	30.9	19.0	7.5 (6)
NB	46.95	32.5	32.5	16.0	8.0 (7)
NS	48.25	35.5	35.5	16.0	8.0 (7)
PEI	47.37	35.5	35.5	15.3 (4)	10.0 (6)
Nfld.	45.50	33.5	24.5	16.0	8.0 (7)
Yukon	42.40	34.5	22.0	15.0 (5)	-
NWT	43.05	31.0	31.0	15.0	-
Nunavut	40.50	31.5	31.5	15.0	-

Ontario Budget Report 2008 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.