2009 Ontario Economic Outlook and Fiscal Review

Chapter 5: Creating a More Competitive and Modern Tax System

TAX CUTS FOR A STRONGER ONTARIO

In the 2009 Budget, the McGuinty government proposed a comprehensive tax package to position Ontario’s economy for long-term competitiveness in a global marketplace, so that families and businesses can take advantage of the next generation of jobs and economic growth.

This paper provides additional details on the proposed changes to create a more competitive and modern tax system. A strong, competitive Ontario that thrives in the new economy will better support high-quality public services and greater prosperity.

HARMONIZED SALES TAX

To further strengthen Ontario’s economic growth and tax competitiveness, the 2009 Budget proposed that, effective July 1, 2010, the Retail Sales Tax (RST) would be replaced with a value-added tax and combined with the federal Goods and Services Tax (GST) to create a federally administered Harmonized Sales Tax (HST). The HST would have a combined rate of 13 per cent. The provincial portion would be eight per cent — the same as the general RST rate — and the federal portion would be five per cent.

Ontario’s announcement was followed by British Columbia, which would join three of the Atlantic provinces (New Brunswick, Nova Scotia and Newfoundland and Labrador) and Quebec, all of which have had value-added taxes since the 1990s.

More than 130 countries have already adopted a value-added tax, which is generally viewed as being more efficient than an RST.

The RST is charged on many of the purchases made by businesses in the course of producing goods and services. As illustrated in Chart 1, this tax works its way into each stage of the production, distribution and retail process as it is passed on from suppliers to business customers and eventually to consumers. The result is a tax that becomes embedded and hidden in the price of purchases made, raising the cost of operating a business in Ontario. This cascading pattern leads to higher prices for Ontario consumers and makes Ontario exports less competitive, which discourages investment in the province. The proposed HST would remove this hidden tax by refunding sales taxes paid on most business inputs, resulting in a cost saving for business.

A study that examined the impact of sales tax harmonization in the Atlantic provinces found that cost savings to business were passed through to consumers¹. A recent TD Bank report predicts that, in Ontario, competitive pressures would lead businesses to pass through 80 per cent of their savings to consumers in the first year and 95 per cent by the third year². The report notes that “(i)n order for businesses to generate an increase in demand for their products they will have to pass those savings onto consumers.”³

TAX CUTS FOR PEOPLE

Personal Income Tax Cuts

The 2009 Budget proposed $10.6 billion in tax relief to Ontarians over three years to provide personal income tax (PIT) cuts, enhance the sales tax and property tax credits and help consumers adjust to the HST.

The government is proposing to cut the tax rate on the first $36,848 of taxable income (adjusted for inflation) by one percentage point, from 6.05 per cent to 5.05 per cent, effective for the 2010 taxation year. In addition, the Ontario dividend tax credit rates would be adjusted to reflect the proposed Corporate Income Tax (CIT) rate reductions. The proposed PIT changes would benefit about 4.3 million individuals and families in Ontario, providing more than $1.1 billion annually in broadly based PIT cuts. About 93 per cent of Ontario taxpayers would pay less income tax, and approximately 90,000 lower-income taxpayers would no longer pay Ontario PIT.

Sales Tax and Property Tax Credits

The government is proposing to introduce two new, separate and enhanced tax credits — the Ontario Sales Tax Credit and the Ontario Property Tax Credit — to replace the existing combined property and sales tax credits. The new credits would continue to be refundable but would better target sales and property tax relief to low- to middle-income tax filers. An additional $1 billion in property and sales tax relief would be provided to Ontarians through the new credits.

Ontario Sales Tax Credit

Currently, Ontarians have to wait until they file a tax return to receive sales tax relief for the previous year. To provide more timely assistance, the new Ontario Sales Tax Credit would be paid quarterly, starting in August 2010, to individuals who are 19 years of age or over or who have a spouse or a common-law partner or live with their child.

The credit would provide about 2.9 million low- to middle-income families and individuals with annual assistance of up to $260 for each adult and each child. It would be reduced by four per cent of the previous year’s adjusted family net income over $20,000 for single people and over $25,000 for families, including single parents.

Ontario Property Tax Credit

Starting in 2010, the proposed enhanced Ontario Property Tax Credit would be paid annually to low- to middle-income Ontario homeowners and renters who are 18 years of age or over or who have a spouse or a common-law partner or live with their child. Like the existing property tax relief, it would be based on occupancy cost — that is, property tax paid or 20 per cent of rent paid. Non-seniors would be able to claim up to $250 plus 10 per cent of occupancy cost and seniors would be able to claim up to $625 plus 10 per cent of occupancy cost. The credit would not exceed occupancy cost and would be subject to a maximum of $900 for non-seniors and $1,025 for seniors. It would then be reduced by two per cent of adjusted family net income over $20,000 for single individuals and over $25,000 for families, including single parents. This credit would benefit about 2.3 million families and individuals.

Table 1
Program Parameters for the Proposed Ontario Sales Tax Credit and Ontario Property Tax Credit

	Maximum Amount1		Phase-out Rate	Phase-out Range — Adjusted Family Net Income1
				Singles		Families
				Begins	Ends	Begins	Ends
Ontario Sales Tax Credit (OSTC)	$260 per adult and child in a family		4%	$20,000	$26,500	$25,000	Family Size	Income2
							2	$38,000
							3	$44,500
							4	$51,000
							5	$57,500
Ontario Property Tax Credit (OPTC)	Non-seniors:	$900	2%	$20,000	$65,0003	$25,000	$70,0003
	Seniors:	$1,025			$71,2503		$76,2503

• Notes:
• ¹ The amounts and income thresholds for the OSTC and OPTC would be indexed annually for inflation.
• ² Maximum income for the OSTC varies with the number of people in the family; it rises to $64,000 for a family of six, and by $6,500 for each additional family member.
• ³ The maximum income for the OPTC depends on the property tax or rent paid. These upper limits represent the maximum possible income at which someone could stop receiving the OPTC. For many people, especially tenants, the maxima would be much lower. For example, a non-senior family would have to pay over $2,700 a month in rent to receive the OPTC with income at or near $70,000.

Sales Tax Transition Benefit

Table 2
Ontario Sales Tax Transition Benefit

Payment Month	Single Individuals		Single Parents and Couples
	Maximum Benefit	Phase-out Range	Maximum Benefit	Phase-out Range
Jun-10	$100	$80,000–$82,000	$330	$160,000–$166,600
Dec-10	$100	$80,000–$82,000	$335	$160,000–$166,700
Jun-11	$100	$80,000–$82,000	$335	$160,000–$166,700
Total	$300		$1,000

Up to three non-taxable payments would be made to eligible Ontario residents aged 18 and over in June 2010, December 2010 and June 2011. Individuals under 18 years of age would also be eligible if they have a spouse or common-law partner or live with their child. Eligible families (including single parents) with adjusted family net incomes of $160,000 or less would receive three payments totalling $1,000. Eligible single individuals with adjusted net incomes of $80,000 or less would receive three payments totalling $300. The maximum benefit would be reduced by five per cent of income over these income thresholds. This proposed measure would provide about $4 billion to 6.5 million eligible individuals and families to help smooth the transition to the proposed new sales tax system.

How the Tax Changes Would Benefit People

Ontarians would benefit from the greater prosperity that comes from a stronger, more competitive economy that creates more jobs, provides higher incomes and better supports public services that Ontarians depend on.

People would also benefit from the permanent income tax cuts, enriched tax credits and the transition payments.

The following examples illustrate the impact of the proposed tax changes. The impacts are shown for:

• the first full year of the HST, when individuals and families would receive two of the transition benefit payments;
• the third year, when the transition benefit would no longer be provided; and
• at maturity, when the HST credits for businesses would be fully phased in.

These examples show that the transition benefit, combined with the permanent PIT cuts and enriched tax credits, would more than offset the HST impacts for many families, especially those with lower incomes and those with children.⁴

COMPETITIVE BUSINESS TAXES

The 2009 Budget proposed $4.5 billion in business tax relief over three years that would lower business costs, enhance Ontario’s competitiveness and support growing small businesses. These measures would build on the tax relief already in place, such as the elimination of the Capital Tax for manufacturers retroactive to 2007 and complete Capital Tax elimination on July 1, 2010.

The comprehensive tax package proposed in the 2009 Budget would permanently and significantly reduce taxes for large and small businesses across the province. For example, CIT rates would be cut, beginning July 1, 2010, as follows:

• the general CIT rate would be cut from 14 per cent to 12 per cent and further reduced to 10 per cent over three years;
• the CIT rate on manufacturing and processing, mining, logging, farming and fishing income would be cut from 12 per cent to 10 per cent;
• the small business CIT rate would be cut from 5.5 per cent to 4.5 per cent; and
• the small business deduction surtax of 4.25 per cent would be eliminated.

How the Tax Changes Would Benefit Business

When the proposed Ontario CIT rate cuts are fully implemented, Ontario’s combined federal–provincial CIT rate of 25 per cent would be lower than the current average corporate tax rate among developed countries and about 15 percentage points below the average combined federal–state general CIT rate in the U.S. Great Lakes States — Ontario’s key competitors for jobs and investment.

The HST would also provide substantial tax savings for businesses. When fully implemented, businesses would save $4.5 billion a year through input tax credits on business purchases.

In addition, businesses would save over $500 million a year in compliance costs from the move to a single HST administration.

These tax and cost savings could be used to reduce prices or invest in new machinery and equipment, allowing Ontario businesses, large and small, to better compete in the export market or domestically against imports, and to create new jobs.

Ontario’s marginal effective tax rate ⁵ (METR) on new business investment would be cut in half, making Ontario one of the most competitive jurisdictions in the industrialized world for new investment. Ontario’s position as one of the best places in the world to invest would be further strengthened by other actions the government has taken to improve competitiveness, such as investments in infrastructure, skills training and innovation.

SUPPORTING INNOVATION AND KEY SECTORS

The McGuinty government continues to partner with key sectors to help Ontario businesses be well positioned to succeed in an increasingly competitive global economy.

The entertainment and creative industries are an important component of the new knowledge economy. These industries enhance creativity and innovation in the province, and in turn boost economic growth by attracting businesses, skilled workers and highly mobile professionals and investors. Ontario provides significant support to strengthen its entertainment and creative cluster.

STREAMLINING THE DIGITAL MEDIA TAX CREDIT FOR LARGE GAME DEVELOPERS

The 2009 Budget proposed to enhance the Ontario Interactive Digital Media Tax Credit rates from 25 per cent (30 per cent for small corporations) to 40 per cent for qualifying corporations, regardless of size, that develop their own eligible products and to 35 per cent for corporations that develop eligible products under a fee-for-service arrangement.

To streamline the tax credit for large game developers and strengthen Ontario’s competitiveness for investment in this sector, the government is proposing additional changes to better support large, specialized game developers that develop eligible interactive digital media games in Ontario.

It is proposed that, effective after March 26, 2009, a 35 per cent refundable tax credit on Ontario salaries and wages would be available annually to certified game developers that incur at least $1 million of Ontario labour expenditures per year in the development of eligible interactive digital media games. A certified game developer generally would have at least 80 per cent of Ontario payroll or 90 per cent of annual revenues attributable to interactive digital media game development.

ENHANCING THE PRODUCTION SERVICES TAX CREDIT

To support the film and television sector, Ontario announced an enhancement to the Ontario Production Services Tax Credit (OPSTC) on June 29, 2009. The OPSTC is a 25 per cent refundable tax credit for labour expenditures available to corporations for qualifying foreign film and television production services and non-certified domestic film and television productions in Ontario. Effective for expenditures incurred after June 30, 2009, the OPSTC would be expanded to additional production expenditures incurred in Ontario, including eligible service contracts as well as the purchase or rental of qualifying tangible properties, such as equipment and studio rentals.

• ¹ Michael Smart, “Lessons in Harmony: What Experience in the Atlantic Provinces Shows About the Benefits of a Harmonized Sales Tax,” C.D. Howe Institute Commentary, July 2007.
• ² “The Impact of Sales Tax Harmonization in Ontario and B.C. on Canadian Inflation,” TD Economics Special Report, September 18, 2009.
• ³ Ibid.
• ⁴ The specific impacts on individual households may vary according to their actual consumption patterns, sources and divisions of income, tax credits and deductions, and level of savings. The examples do not include the benefits to households from higher Gross Domestic Product and personal disposable incomes as the result of the tax changes.
• ⁵ The METR is a comprehensive measure of the tax that applies to an incremental dollar of income from new capital investment. It reflects the combined effect of federal and provincial corporate income taxes, rules related to depreciation, investment tax credits, capital and sales taxes.