TAX NEWS - march 2010
Canada Tax: Ontario budget 2010
Titled "Open Ontario," the budget confirms an estimated $21.3-billion deficit for fiscal 2009-10. In fiscal 2010-2011, the projected deficit will drop to $19.7 billion, and then to $17.3 billion in 2012-2013. The minister stated that the budget sets out a realistic and responsible plan to cut the current deficit in half in five years and eliminate it in eight years.
The minister reaffirmed the province's commitment to the introduction of the harmonized sales tax (HST) on 1 July 2021 and to the previously enacted personal and corporate income tax cuts.
Following is a brief summary of the key tax measures.
Business tax measures
Corporate tax rates
The minister confirmed that the reductions in corporate income tax rates enacted on 15 December 2021 will proceed as planned. Once the rate reductions are fully phased in, the combined federal-provincial corporate tax rates will be 25% on general income and 15.5% on eligible small-business income. In addition, he reaffirmed the elimination of the small-business deduction surtax effective 1 July 2010. This means all Canadian-controlled private corporations (CCPCs) will benefit from the small-business deduction on the first $500,000 of active business income (shared between associated corporations), irrespective of the corporation's taxable income. The corporate income tax rate reduction plan is summarized in table below. Changes are pro-rated for taxation years straddling the effective dates.
Corporate income tax rate reduction plan
Date Proposed tax rates (%)
General income M&P and resource income Small-business income Small-business deduction surtax
Current 14 12 5.5 4.25
1 July 2010 12 10 4.5 0
1 July 2011 11.5 10 4.5 0
1 July 2012 11 10 4.5 0
1 July 2013 10 10 4.5 0
No changes are proposed to the capital tax rates. As scheduled, the capital tax will be eliminated effective 1 July 2010.
Other business tax measures
The minister also confirmed the following business tax measures announced in the 2010 federal budget:
- Taxation of corporate groups - loss consolidation: Ontario will work collaboratively with the federal government on new rules for the taxation of corporate groups, such as a formal system of loss transfers or consolidated reporting. However, the minister calls on the federal government to ensure tax losses are utilized by a corporation in the province where the loss takes place, and indicates Ontario will take action, where appropriate and within its administrative authority, to ensure the principles of interprovincial income allocation are upheld.
- Employee stock options: Automatic adoption of proposals related to the tax treatment of employee stock options, including the deductibility of employee stock options in situations where employees "cash out" their stock option rights for a cash payment from the employer.
- Capital cost allowance: Automatic adoption of the accelerated capital cost allowance measures for heat recovery and energy distribution equipment announced in the 2010 federal budget, subject to federal implementation.
Personal income tax rates
No changes to personal income tax rates were announced. However, there are modest "inflation" revisions to the tax brackets.
As set out in the 2009 budget, the lowest marginal personal tax rate was reduced to 5.05% from 6.05%, effective 1 January 2010. Companion adjustments were made to most non-refundable tax credits (5.05% rate), and the threshold applicable for the application of the Ontario surtax.
Personal tax credits
The budget proposes the following changes to personal tax credits:
- Ontario energy and property tax credit: The budget proposes to convert the Ontario property tax credit to the Ontario energy and property tax credit, effective for 2010 and later years. Payments of this refundable credit will be made quarterly (like the Ontario sales tax credit), beginning in 2011 after individuals file their 2010 personal tax returns. No further details were provided in the budget.
- Northern Ontario energy tax credit: The budget proposes a new northern Ontario energy refundable tax credit for low- to middle-income families and individuals living in northern Ontario, effective for 2010 and later years. The maximum annual credit for a single person is $130, and for a family (including single parents), $200. These credits are reduced when a single person's income exceeds $35,000 and a family's income exceeds $45,000, and are completely eliminated when a single person's income exceeds $48,000 and a family's income exceeds $65,000.
Other personal measures
Various proposals announced in the 2010 federal budget will be adopted immediately once the federal changes have been approved, including proposals related to the following:
- The rollover of certain registered plan proceeds to a registered disability savings plan
- The taxation of the universal child care benefit
- Exclusion of purely cosmetic procedures from the types of expenses eligible for the medical expense tax credit
- Clarification of the type of post-secondary program that is eligible for the education tax credit and the scholarship exemption, as well as the amount eligible for the scholarship exemption
- The tax treatment of employee stock options
- The deduction for US Social Security benefits
Sales tax harmonization
The minister confirmed the harmonized sales tax (HST) will be implemented effective 1 July 2010. The 8% provincial component, together with the 5% federal GST component, results in a combined rate of 13%. This is also the rate currently in effect in New Brunswick, Nova Scotia, and Newfoundland and Labrador. British Columbia, which is also implementing an harmonized sales tax (HST) effective 1 July 2010, will have a combined rate of 12%. The minister announced no new harmonization measures in the 2010 budget. The budget reiterated the previously announced targeted harmonized sales tax (HST) relief to consumers and public service bodies through point-of-sale exemptions and rebates.
Transitional benefit payments
The minister confirmed that the previously announced transition benefit payments will be paid to Ontario residents:
- A single person with no children and income of up to $80,000 would receive a benefit of $100 in each of June 2010, December 2010 and June 2011. The benefit is reduced by 5% of income over $80,000.
- A family with income of up to $160,000 would receive three benefit payments of $330 in June 2010, $335 in December 2010 and $335 in June 2011. The benefit is reduced by 5% of family income over $160,000.
In addition, commencing in August 2010, a new sales tax credit of up to $260 per year will be paid quarterly to low income earners.
Retail sales tax
A number of minor amendments are proposed to the Retail Sales Tax Act in support of the adoption of the HST, building on previously implemented measures.
- Extension of compensation to retail sales tax (RST) vendors to a maximum of $375 for the shortened RST collection period of 1 April 2022 to 30 June 2021
- An amendment to permit vendors to provide retail sales tax refunds to purchasers after 31 October 2010, other than for returned goods
- An amendment to provide for a rebate of retail sales tax (RST) to relieve double taxation where a purchaser has paid both RST and HST on or after 1 July 2021
- An amendment, as previously announced, to provide that multi-jurisdictional vehicles would no longer be subject to retail sales tax (exit tax) when they cease to be registered under the International Registration Plan on or after 1 July 2021
- An amendment, as previously announced, to confirm that the exemption for gifts of used vehicles by family members would be expanded to include siblings as of 1 July 2021
Sales tax on insurance
As certain types of insurance will remain subject to tax under the Retail Sales Tax Act after 30 June 2010, the government is proposing that vendors of taxable insurance remain eligible to receive vendor compensation of up to $1,500 per year.
An exemption from this tax is also proposed to ensure that certain costs and fees, such as administration fees for benefit plans, would not be subject to both harmonized sales tax (HST) and retail sales tax (RST).
As tobacco retailers will not be able to obtain a vendor's permit under the Retail Sales Tax Act as of 1 July 2010, an amendment is proposed to the Tobacco Tax Act to require tobacco retailers who do not hold a vendor's permit to obtain a retail dealer's permit.
Since the announcement of the harmonization proposal in the 2009 budget, Ontario and the federal government have introduced a number of measures that will affect businesses from coast to coast.
Under the place-of-supply rules in the harmonized system, businesses that were not previously required to collect Ontario retail sales tax (RST) or were registered for GST purposes but not making sales in the existing harmonized provinces will now have to track their sales by province to apply the correct rate of tax.
Other tax measures
Land transfer tax and reorganization of charities
Regulatory amendments will be proposed to exempt from land transfer tax certain transfers of land by registered charities where the transfers are made from trustees to a non-share capital corporation, or from one non-share capital corporation to another.
Transfers after 25 March 2022 would be exempt provided:
- The non-share capital corporation continues 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.
Federal changes to disbursement quota for charities
The budget confirms Ontario will automatically adopt changes to the disbursement quota announced in the 2010 federal budget, including repeal of the charitable expenditure rule and modification of the capital accumulation threshold. The federal measures apply to fiscal years of a charity ending on or after 4 March 2010.