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March 25, 2010

Highlights

• Deficit of $21.3 Billion Projected for 2009-10
• Deficit of $19.7 Billion Forecast for 2010-11
• Books to be Balanced by 2017-18
• Corporate Tax Cuts to Proceed on Schedule

Overview

"Open Ontario: Ontario's Plan for Jobs and Growth"

On March 25, 2010, the Honourable Dwight Duncan presented his third budget since becoming Finance Minister on a full-time basis. Following the same trend that has developed in the federal and provincial budgets presented so far this year, the economic downturn has had a more severe impact on Ontario's finances than first predicted in last year's budget. The deficit of $14.1 billion predicted for the 2009-2010 fiscal year in last year's budget is now expected to be a deficit of $21.3 billion. A deficit of $19.7 billion is forecast for the 2010-2011 fiscal year.

It will be some time before the province's books are back in the black as a balanced budget is not predicted until the 2017-2018 fiscal year. Until then, the government has said that budget deficits will be gradually reduced each year.

Recognizing that economic growth will be key in terms of balancing the province's books, much of the discussion in the budget presented today focused on education and job creation. Citing positive feedback from major corporations that plan to expand in Ontario, the Finance Minister has again emphasized that the implementation of the HST on July 1, 2010 and the accompanying corporate tax cuts made possible by the additional HST revenue will be a driving force for job creation into the future.

The Finance Minister highlighted that Ontario has made many changes in recent years to modernize the rules governing pension plans. He also stated that Ontario will play a leading role in a national effort to review the state of the current retirement income system. This important issue will be discussed at a meeting of federal and provincial finance ministers in May.

On education, the budget papers address new education initiatives including confirmation of a plan to implement a full-day learning program for 4 and 5 year-olds in Ontario. This plan will begin in September for up to 35,000 children in 600 schools. The Second Career program will be expanded which will see participation grow from 27,000 workers to nearly 60,000.

The following is a summary of the more important items of interest to our clients.

Ontario Budget Projections (in billions $)
	Original Forecast 2009/10	Revised Forecast 2009/10	Projected 2010/11
Revenue	96.0	96.4	106.9
Program Expense	(99.6)	(108.8)	(115.9)
Interest on Debt	(9.3)	(8.9)	(10.0)
Reserve	(1.2)	-	(0.7)
Deficit	(14.1)	(21.3)	(19.7)

PERSONAL TAX CHANGES

Ontario Energy and Property Tax Credit Changes

In the 2009 budget, the combined property and sales tax credits were replaced by two new credits - the Ontario Sales Tax Credit and the Ontario Property Tax Credit and tax relief was enhanced for 2010. The current Ontario Property Tax Credit provides tax relief to low and middle-income families. Effective for the 2010 tax year, the government proposes to convert this credit into the new Ontario Energy and Property Tax Credit. For the 2010 tax year, the credit will be provided to individuals once they file their personal tax returns in 2011. Going forward for 2011 and subsequent tax years, the credit will be paid on a quarterly basis, similar to the new Ontario Sales Tax Credit. The timing of the payments will be determined after consultations with social policy groups.

New Northern Ontario Energy Tax Credit

Due to higher energy costs incurred by people living in the North, the government is proposing a new Northern Ontario Energy Tax Credit, beginning for 2010 and subsequent years. This credit will be a permanent annual refundable credit to help low to middle-income families and single people living in northern Ontario. The credit will be available to northern residents who pay rent or property tax for their principal residence and will be income-tested. The maximum annual credit for a single person with adjusted net income of up to $35,000 will be $130. The credit will be reduced where adjusted net income is over $35,000 and will not be available at all where adjusted net income exceeds $48,000.

For families (including single parents), the maximum annual credit will be $200. The credit will be reduced for families with adjusted net income over $45,000 and will not be available at all where adjusted net income exceeds $65,000.

For 2010, residents will need to apply to the Ontario Ministry of Revenue for the credit which will be received in two payments - in the fall of 2010 and early in 2011. For 2011 and subsequent years, it is proposed that the credit will be paid quarterly with the new Ontario Energy and Property Tax Credit.

BUSINESS CHANGES

Corporate Tax Cuts to Proceed on Schedule

The corporate reductions announced in last year's budget will proceed on schedule. In addition to corporate income tax rate reductions and the elimination of the Small Business Deduction clawback (as shown in the chart below), the other corporate tax measures coming into force this year include:

• Fewer Corporations Subject to Corporate Minimum Tax (CMT) - Corporations (or an associated group) with total assets of less than $50 million or total revenue of less than $100 million will no longer be subject to the CMT. In addition, for those corporations that are still subject to the CMT, the CMT rate will be reduced from 4% to 2.7%. Both changes will be effective for taxation years ending after June 30, 2010.
• Elimination of the General Corporate Capital Tax - The corporate capital tax will be eliminated effective July 1, 2010.

Ontario Corporate Income Tax Reductions (Prorations apply for taxation years straddling effective dates)
Effective Date	General Rate	M & P Rate	Small Business Rate	Small Business Deduction Surtax
Current	14%	12%	5.5%	4.25%
July 1, 2010	12%	10%	4.5%	Eliminated
July 1, 2011	11.5%	10%	4.5%	Eliminated
July 1, 2012	11%	10%	4.5%	Eliminated
July 1, 2013	10%	10%	4.5%	Eliminated

Taxation of Corporate Groups

In this year's federal budget, it was announced that the federal government will explore whether new rules for the taxation of corporate groups such as the introduction of a formal system of loss transfers or consolidated reporting could improve the functioning of the tax system.

In today's budget, while welcoming such a review, Ontario's Finance Minister also made it clear that more work is needed to ensure that losses are not transferred between provinces under the operation of income allocation rules. In particular, where a loss arises in one province, it should be applied in the same province. Ontario will be monitoring this issue closely, both in terms of current tax rules and future changes, and will take action if needed.

SALES TAX CHANGES

Harmonized Sales Tax Transition Assistance

In today's budget, the government is proposing to extend compensation to retail sales tax (RST) vendors up to a maximum of $375 for the shortened RST collection period of April 1, 2010 to June 30, 2010.

In the 2009 budget, the government announced a credit for small businesses to help reduce the compliance cost of the move to the new Harmonized Sales Tax (HST) system. A small business will generally be one that has annual taxable revenue of less than $2 million. An additional technical amendment will be made to enable the government to prescribe the 12 month period for calculating the $2 million taxable sales threshold.

Changes to Support the Move to the HST

The following technical changes to the Retail Sales Tax Act have been proposed to support the move to the HST:

• Vendors will be allowed to provide refunds of RST to purchasers after October 31, 2010, other than for returned goods. For goods returned after this date that were purchased before July 1, 2010, purchasers will continue to be able to claim RST refunds directly from the Ontario Ministry of Revenue.
• To relieve double tax where a purchaser pays both the RST and HST on goods and services acquired on or after July 1, 2010, a rebate of RST will be available to the purchaser.
• To fully implement 2009 budget changes, amendments will be made related to multi-jurisdictional vehicles that cease to be registered under the International Registration Plan on or after July 1, 2010 and to the exemption for gifts of used vehicles between siblings that is effective on July 1, 2010.

Changes to Tax on Insurance

For certain types of insurance, sales tax will continue to apply under the Retail Sales Tax Act after June 30, 2010. As a result, it is proposed that vendors of taxable insurance will continue to be eligible for vendor compensation, to an annual maximum amount of $1,500. For the transitional year of April 1, 2010 to March 31, 2011, vendor compensation will be available as follows:

• an amount up to $350, for the period from April 1, 2010 to June 30, 2010, and
• an amount up to $1,125, for the period from July 1, 2010 to March 31, 2011.

An amendment is also proposed for this tax on insurance which will provide an exemption for certain costs and fees, such as administration fees for benefit plans, to ensure that these costs and fees will not be subject to both the HST and RST.

OTHER CHANGES

Exemption for Land Transfer Tax on Charity Reorganizations

To help facilitate reorganizations of charitable organizations, a transfer of land from trustees to a non-share capital corporation, or from one non-share capital corporation to another, will be exempt from Land Transfer Tax. To qualify for the exemption, the following conditions must be met:

• The non-share capital corporation will be continuing the same charitable purpose for the same members; and
• No consideration is paid, other than the assumption of any existing liabilities registered on the land.

This change will apply for land transfers after March 25, 2010.

Tobacco Tax Act Permits

When the HST is implemented on July 1, 2010, tobacco retailers will no longer be able to obtain a vendor's permit under the Retail Sales Tax Act. As a result, a change is proposed to require tobacco retailers who do not hold a vendor's permit on June 30, 2010 to obtain a retail dealer's permit under the Tobacco Tax Act.

Sustainability Funding for Tourism

Amendments have been proposed that will alter the distribution of revenue collected under the regional tourism levy on transient accommodation. Under the proposal, the levy collected in a particular tourism region will be paid to that region's tourism organization.

Other Measures and Technical Changes

Although not disclosed, the government announced that technical changes will be made to several acts, including acts governing income tax, the Employer Health Tax, Land Transfer Tax and sales taxes.

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, 2010.

	Top 2010 Personal Rates %	2010 Corporate Rates
		General %	M&P %	Small Business %	Provincial Retail Sales Tax %
BC	43.70	28.50	28.50	13.50	7.00(6)
Alta.	39.00	28.00	28.00	14.00	-
Sask.	44.00	30.00	28.00	15.50	5.00
Man.	46.40	30.00	30.00	12.00(1)	7.00
Ont.	46.41	32.00(2)	30.00(2)	16.50(2)	8.00(6)
Qué.	48.22	29.90	29.90	19.00	7.50(7)
NB	43.30	30.00(3)	30.00(3)	16.00	8.00(8)
NS	48.25	34.00	34.00	16.00	8.00(8)
PEI	47.37	34.00	34.00	13.10(4)	10.00(7)
Nfld.	44.50	32.00	23.00	16.00	8.00(8)
Yukon	42.40	33.00	20.50	15.00(5)	-
NWT	43.05	29.50	29.50	15.00	-
Nunavut	40.50	30.00	30.00	15.00	-