Ontario Budget 2009: Chapter III: Reforming Ontario’s Tax and Pension Systems

Introduction

The McGuinty government is proposing a comprehensive package of changes to Ontario’s tax and pension systems. These proposed changes, if approved by the legislature, would strengthen the foundation for job creation and economic growth and improve fairness and transparency.

The Budget proposes to:

• fundamentally reform Ontario’s tax system to help position Ontario for the next generation of economic growth and prosperity by:
  • implementing a single sales tax on July 1, 2010 to further strengthen Ontario’s economic growth and tax competitiveness;
  • providing $10.6 billion in tax relief to people over three years to help consumers through the transition to a single sales tax and to provide ongoing tax reductions through the Personal Income Tax (PIT) system; and
  • providing $4.5 billion in business tax relief over three years that includes reducing the Corporate Income Tax (CIT) rate to 10 per cent over three years, cutting the small business CIT rate and exempting more small and medium-sized businesses from the Corporate Minimum Tax (CMT);
• provide targeted tax incentives to support innovation, the entertainment and creative cluster and skills training;
• move forward on reforming Ontario’s pension system by:
  • implementing measures to provide temporary solvency funding relief for defined benefit pension plans while helping to ensure greater transparency and security of pension benefits; and
  • laying out a framework for strengthening Ontario’s pension system, including measures to modernize pension regulations.

TAX REFORM MEASURES

Sales Tax Reform

Structure and Tax Rate

It is proposed that, starting July 1, 2010, Ontario’s Retail Sales Tax (RST) would be converted to a value-added tax structure and combined with the federal Goods and Services Tax (GST) to create a federally administered single sales tax. The single sales tax would have a combined tax 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.

Value-Added Tax Structure

The current RST applies to many purchases made by businesses in the course of providing goods and services for sale. As a result, the tax can become embedded in the price of the finished goods and services throughout the supply chain. This hidden RST is passed on to consumers. The new single sales tax would use a value-added tax structure, meaning that most businesses would be reimbursed for the tax they pay on most of their inputs.

Studies show that most of the cost savings to business from removing embedded sales taxes are passed on to consumers through lower prices. A recent C.D. Howe report that examined the effects of GST harmonization in the Atlantic provinces found that the benefit to consumers can occur quickly, with the majority of the savings passed through to consumers in the first year.¹

Exported goods would also be generally free of embedded sales tax, making Ontario exports more competitive.

Input Tax Credits

Businesses selling taxable or zero-rated goods and services would be able to claim input tax credits on their purchases, as under the federal GST, with limited exceptions. These credits would reimburse businesses for the tax they pay in the course of commercial activities. This approach would reduce business costs, most noticeably in areas that are taxable under the current RST system, and would support business investment in Ontario.

In general, businesses selling tax-exempt goods or services would be unable to claim input tax credits, as under the federal GST rules. For example, most financial services are GST exempt and therefore input tax credits could not be claimed in respect of those services.

Tax Base and Administration

To simplify administration, the single sales tax would generally use the same rules and tax base as the federal GST. This would significantly reduce the administrative burden on businesses that currently must comply with two separate and sometimes conflicting sets of tax rules. Ontario businesses would save more than $500 million a year in compliance costs. The unified tax base would also facilitate the administration of the single sales tax by the Canada Revenue Agency, improving cost efficiencies in government.

Under the RST system, Ontario compensates vendors for collecting and remitting the tax. With the elimination of the RST, vendor compensation would end as part of the transition to the single sales tax. Vendor compensation would continue to apply for RST returns filed up to and including those filed for the period ending March 31, 2010 under the existing RST system.

Small Business Transition Support

Although most RST vendors are also registrants under the federal GST, businesses would have to make some changes to their point-of-sale and accounting systems in order to collect the single sales tax. Ontario would provide up to a total of $400 million in one-time transition support to small business in the form of a small business transition credit.

Most businesses, other than financial institutions, with less than $2 million in annual revenue from taxable sales, would be eligible for a transition credit of up to $1,000.

Small Supplier Threshold

Under the single sales tax, Ontario would parallel the GST small supplier threshold where businesses with sales under the threshold would not be required to register and collect the single sales tax. This would reduce administrative burden and complexity for small businesses. Similar to the GST, small suppliers (with total taxable revenues of $30,000 or less in the prior year or $50,000 or less in the case of a public service body) that choose not to register would not be required to file a single sales tax return and would not be eligible to claim input tax credits. If a small supplier chooses to register, it would be eligible to claim input tax credits related to its taxable supplies when it files its single sales tax return.

Point-of-Sale Exemptions

To provide targeted relief while maintaining the single administration of sales taxes in Ontario, point-of-sale rebates would be introduced for the provincial portion of the tax for the following items: books, children's clothing and footwear, children's car seats and car booster seats, diapers, and feminine hygiene products. This treatment would also preserve retailers' ability to claim input tax credits.

New Housing Rebate

Currently, the RST applies to building supplies used in the construction of new homes. The single sales tax would remove this embedded tax. Based on a recent Canada Mortgage and Housing Corporation study, this embedded sales tax ranges from about two per cent to three per cent, on average, on the final sale of a new house in Ontario.

To ensure that, on average, new homes under $400,000 would not be subject to an additional tax burden, the government is proposing a new housing rebate. Homebuyers would be able to claim a rebate of part of the provincial portion of the tax for new homes priced up to $500,000. The rebate for new primary residences under $400,000 would be 75 per cent of the provincial portion of the tax (or six per cent of the purchase price), with the rebate amount reduced for homes priced between $400,000 and $500,000.

Resale homes would not be subject to the single sales tax.

Keeping Public Service Bodies Fiscally Neutral

Ontario’s public service bodies (i.e., municipalities, hospitals, universities, colleges, school boards, charities and qualifying non-profit organizations) would be able to claim rebates for the provincial portion of the single sales tax so that the net effect of the tax on each sector would be fiscally neutral relative to the amount of RST currently paid by these sectors. As with the GST, the rebates would be a percentage of tax paid.

Temporarily Restricted Input Tax Credits

Similar to the restricted input tax credit (ITC) system in Quebec, large businesses (those with annual taxable sales in excess of $10 million) and financial institutions would be unable to claim input tax credits in certain areas. These restrictions would be temporary, during the initial implementation of the single sales tax, and would apply only to the provincial portion of the tax. After the first five years of single sales tax implementation, full input tax credits on their taxable supplies would be phased in over a three-year period.

Supporting Tourism

The RST rate on transient accommodation, such as hotel rooms, is currently five per cent. Under the single sales tax, the provincial portion would increase to eight per cent.

Approximately $40 million of annual net revenue associated with the difference in rates would be allocated to destination marketing in Ontario tourism regions, once these are established.

Private Transfers of Motor Vehicles

Similar to the tax treatment in other provinces, Ontario would retain a sales tax on private transfers of used motor vehicles. This would help to ensure a level playing field between used vehicles sold through dealerships and private sales.

Maintaining Current Tax Levels on Certain Types of Insurance

Retail Sales Tax currently applies to premiums for some types of insurance such as group insurance. Ontario would retain a tax on insurance at eight per cent after the transition to the single sales tax, on the same types of insurance currently taxed under the RST. Automobile insurance premiums would continue to be exempt from sales tax.

Maintaining Current Levels of Revenue from Alcohol Sales

The RST is currently collected on alcoholic beverages sold through licensed establishments at the rate of 10 per cent and on alcoholic beverages sold through retail stores at the rate of 12 per cent.

Under the single sales tax, the provincial rate on these products would fall to eight per cent.

To maintain social responsibility and existing revenue, while introducing the new single sales tax, the government proposes to make adjustments to current alcohol fees, levies and charges.

The government also proposes to introduce legislation to replace various alcohol and other fees, levies and charges with taxes to enhance their operational structure and legislative clarity.

Additional Information

Additional information on technical design issues and transitional rules will be released in the coming months to help taxpayers and businesses prepare for the proposed changes. The government will also establish an implementation panel to assist with the transition to the single sales tax.

Stronger Economic Foundation

Canada and Ontario have entered into a Memorandum of Agreement for Ontario to join a framework agreement for federal collection and administration of a single value-added sales tax, effective July 1, 2010.  Key provisions of the Memorandum of Agreement include $4.3 billion in cash transfer payments to Ontario and flexibility to provide certain consumer exemptions.

Tax Breaks for People

Ontario Sales Tax Transition Benefit

As part of the sales tax reform proposed in this Budget, $4 billion in relief would be provided to Ontarians to help ensure a smooth transition to the new sales tax system.

Benefits would be delivered to eligible Ontario tax filers aged 18 and over in each of June 2010, December 2010 and June 2011, totalling a maximum of $300 for single people and $1,000 for single parents and couples. Each maximum benefit would be reduced by five per cent of the recipients’ previous year’s adjusted family net income over $80,000 for single individuals and over $160,000 for families. To qualify for the two benefits in 2010, a 2009 tax return would have to be filed, and a 2010 tax return would have to be filed for the June 2011 benefit. About 6.5 million individuals and families in Ontario would receive sales tax transition benefits.

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 maximum benefit would be reduced by five per cent of income over $80,000, so a single person with income of $81,000, for example, would receive three benefits of $50 each. Single people with income over $82,000 would not receive a benefit.

A family with income of up to $160,000 would receive three benefits: $330 in June 2010, $335 in December 2010 and $335 in June 2011. The maximum benefits would be reduced by five per cent of family income over $160,000, so a family with income of $163,000, for example, would receive one benefit payment of $180 and two benefit payments of $185 each. Families with income over $166,700 ($166,600 for the June 2010 benefit) would not receive a benefit.

Sales Tax and Property Tax Relief

The government is proposing to increase the amount of ongoing sales tax and property tax relief for individuals and families with low to middle incomes by more than $1 billion a year. To better target this tax relief, the current combined sales and property tax credits would be replaced with two new tax credits: the Ontario Sales Tax Credit and the Ontario Property Tax Credit. These changes would improve transparency, fairness and timeliness.

Ontario Sales Tax Credit

This Budget proposes a new ongoing sales tax credit to help low- to middle-income individuals and families with the sales taxes they pay.

Under the current tax system, Ontario families have to wait until their income tax returns are processed to receive sales tax relief for sales tax paid in the previous year. To provide more timely assistance, the new sales tax credit would replace the current sales tax relief, provided through the Ontario Property and Sales Tax Credits, with advance payments. The sales tax credit would be refundable and paid quarterly starting in July 2010, when the new sales tax would come into effect.

The new sales tax credit would provide annual relief of up to $260 for each adult and each child. It would be reduced by four per cent of adjusted family net income over $20,000 for single people and over $25,000 for families.

For example, for the period from July 2010 to June 2011, a single individual with income of $20,000 or less would receive $260; a single parent with one child or a couple with $25,000 or less of income would receive $520; and a couple with two children and family income of $25,000 or less would receive $1,040.

Unlike the current sales and property tax credits, the maximum benefit and thresholds would be indexed for inflation to protect the value of this assistance for people with low to middle incomes.

About 2.9 million families and individuals would benefit from this measure.

Ontario Property Tax Credit

Property tax relief, currently provided through the Ontario Property and Sales Tax Credits, would be replaced by a new refundable Ontario Property Tax Credit for low- to middle-income homeowners and tenants that would provide an additional $270 million in property tax relief on an annual basis. The new credit would maintain existing benefit amounts while extending property tax relief to more Ontarians.

The credit would be based on occupancy cost — that is, property tax paid or 20 per cent of rent paid. A credit would be provided for occupancy cost of up to $250 for non-seniors or $625 for seniors, 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 in excess of $20,000 for single individuals and $25,000 for families.

For example, for the 2010 taxation year, a single individual with income of $20,000 or less and $500 in monthly rent would receive $370 in Ontario Property Tax Credit; a couple with $1,500 in property tax and $25,000 or less of family income would receive $400; and a senior couple with $4,000 in property tax and $25,000 or less in family income would receive $1,025.

The amounts and thresholds would be indexed for inflation to protect the value of this assistance for people with low to middle incomes.

About 2.3 million families and individuals would benefit from this measure.

Eligible senior homeowners will continue to receive additional assistance with their property taxes through the Ontario Senior Homeowners’ Property Tax Grant.

Personal Income Tax Relief

The government is proposing to provide more than $1.1 billion annually in broadly based PIT relief by cutting the first tax rate by one percentage point, from 6.05 per cent to 5.05 per cent, effective January 1, 2010. As a result, Ontarians would benefit from the lowest provincial tax rate in Canada on the first $36,848 of taxable income, based on legislation currently in place in other provinces.

Ontario Tax Reduction

The Ontario Tax Reduction (OTR) reduces or eliminates PIT by up to $205 per tax filer and $379 per child or disabled or infirm dependant. By leaving these parameters in place while reducing the first tax rate, approximately 90,000 lower-income tax filers would no longer pay Ontario PIT, and approximately 725,000 additional taxpayers with lower incomes would have their Ontario PIT further reduced by the OTR.

Other Changes

Various tax credits and provisions of the PIT system are based on the tax rate structure. As a consequence, these credits and provisions would be adjusted to reflect the proposed tax rate cut.

Ontario’s two-tiered surtax adds to the progressivity of the PIT system. Currently, Ontario levies a 20 per cent surtax on basic Ontario tax over $4,257, and a 36 per cent surtax on basic Ontario tax over $5,370. This Budget proposes to adjust both surtax thresholds to maintain the progressivity of the income tax system by providing a more proportionate distribution of benefits to taxpayers as a result of the rate reduction.

Most of Ontario’s non-refundable tax credits are calculated by multiplying a credit amount (for example, the Basic Personal Amount) by 6.05 per cent, the first tax rate. With the proposed reduction in the first tax rate, the calculation of these non-refundable credits would be adjusted so that the credit amounts would be multiplied by 5.05 per cent. The tax credit rate on the first $200 of qualifying charitable donations would also be adjusted from 6.05 per cent to 5.05 per cent. Consequential adjustments would also be made to the calculation of Ontario minimum tax.

Ontario Dividend Tax Credit

The dividend tax credit provides PIT relief to Ontario investors and small business owners in recognition that dividends from Canadian corporations are distributed from earnings that have already been taxed at the corporate level. As a result of the proposed reductions in CIT rates, Ontario would adjust the tax credit rates for dividends from taxable Canadian corporations. The changes to the dividend tax credit rates would maintain the integration of Ontario’s CIT and PIT systems by reflecting the reduction in CIT rates.

Competitive Business Taxes

The Budget is proposing business tax relief that would lower business costs, enhance Ontario’s competitiveness and support growing small businesses. These measures would support the government’s five-point economic plan and build on the tax relief already in place, such as the elimination of Capital Tax in 2010.

Cutting CIT Rates

Ontario’s current general CIT rate is 14 per cent of taxable income and the rate for manufacturing and processing (M&P), mining, logging, farming and fishing is 12 per cent. The small business CIT rate currently is 5.5 per cent.

The government is proposing to cut CIT rates, 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 M&P and resource sectors 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.

The following table sets out the proposed CIT rate cut plan:

Table 6
Ontario’s Proposed Corporate Income Tax Rate Cut Plan

	Rates (Per Cent)
Date	General	M&P1	Small Business2	Small Business Deduction Surtax3
Current	14	12	5.5	4.25
July 1, 2010	12	10	4.5	0
July 1, 2011	11.5	10	4.5	0
July 1, 2012	11	10	4.5	0
July 1, 2013	10	10	4.5	0

• ¹ Income from manufacturing and processing, mining, logging, farming or fishing.
• ² Applies to Canadian-controlled private corporations (CCPCs) on the first $500,000 of active business income.
• ³ Applies to CCPCs on taxable income between $500,000 and $1.5 million.
• Note: The proposed tax rate reductions would be pro-rated for taxation years straddling the effective dates.

Lowering the CIT rate to 10 per cent would enhance Ontario’s competitiveness and create a more efficient tax system that would encourage investment and increase productivity.

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 Organisation for Economic Co-operation and Development (OECD) corporate tax rate of 26.7 per cent. Compared to the U.S. Great Lakes states — Ontario’s key competitors for jobs and investment — Ontario’s combined rate would be 15 percentage points lower than the average combined federal–state general CIT rate and more than 11 percentage points lower than the average combined manufacturing rate.

The proposed Ontario CIT rate reductions, together with the conversion of the RST into the single sales tax, would also cut Ontario’s marginal effective tax rate (METR) on new capital investment in half, when those measures are fully phased in. This would make Ontario one of the most competitive jurisdictions in the industrialized world in terms of the taxation of new capital investment by corporations.

The Ontario METR, which includes federal taxes, currently stands at 32.8 per cent. The sales tax and CIT measures proposed in this Budget, together with previously announced Ontario and federal tax cuts, would bring Ontario’s marginal effective tax rate in 2010 down to 18.6 per cent — below the OECD average of 21.8 per cent. Following the completion of the proposed CIT rate cuts in 2013, the Ontario rate would fall further to 17.3 per cent. When the restrictions on input tax credits under the single sales tax are phased out in 2018, the rate would decline to 16.2 per cent.

This would promote increased foreign and domestic investment and productivity in Ontario.

Eliminating the Small Business Deduction Surtax

The small business deduction provides a lower CIT rate of 5.5 per cent to Canadian-controlled private corporations (CCPCs) on the first $500,000 of active business income. Currently, the benefit of the small business deduction is gradually phased out on taxable income between $500,000 and $1.5 million. In 2008, the small business deduction provided over $1.1 billion of tax relief to CCPCs in Ontario.

The benefit of the small business deduction is phased out by a 4.25 per cent surtax that is applied in addition to the regular CIT rates.

As part of the government’s plan to enhance the competitiveness of Ontario’s corporate tax system, the government proposes to eliminate this barrier to growth for small businesses effective July 1, 2010. This would extend the benefit of the small business deduction to all CCPCs. If passed by the legislature, CCPCs would be taxed at the proposed new small business rate of 4.5 per cent, effective July 1, 2010, on the first $500,000 of active business income, regardless of income level. The proposed elimination of the small business deduction surtax and the general CIT rate cut to 10 per cent, in 2013, would provide all CCPCs with an average CIT rate on active business income of below 10 per cent.

Based on legislation currently in place in other provinces, eliminating the surtax would make Ontario the only province not to claw back the benefit of the small business deduction.

This measure would be pro-rated for taxation years straddling the effective date.

Reducing the Corporate Minimum Tax

The CMT is calculated as the amount by which four per cent of adjusted net income for accounting purposes exceeds CIT payable. The CMT generally acts as a prepayment of CIT by providing for a carry-forward credit equal to the amount of CMT paid. The credit can be carried forward up to 20 years and may be applied to reduce CIT in years where CIT exceeds CMT. A corporation or an associated group of corporations with total assets under $5 million and annual gross revenues under $10 million does not pay CMT.

As a result of the CIT reform proposals in this Budget, a corresponding reduction in the CMT rate is necessary to ensure that corporations subject to the CMT are able to fully benefit from the proposed CIT rate reductions. In addition, the government is proposing to exempt more small and medium-sized businesses from calculating and paying the CMT.

It is proposed that effective for taxation years ending after June 30, 2010:

• the CMT rate be reduced to 2.7 per cent; and
• a corporation or an associated group with under $50 million in total assets or under $100 million in annual gross revenues would not pay CMT.

The 20-year CMT credit carry-forward mechanism would continue to apply.

The proposed rate reduction would be pro-rated for taxation years straddling the effective date.

Ontario’s Legislated Plan to Eliminate Capital Tax

Capital Tax, which taxes business investment, is widely recognized as a barrier to attracting new investment. In 2004, the government set out a plan to eliminate Ontario’s Capital Tax by 2012.

Since then, the government has accelerated the elimination plan and further relieved the Capital Tax burden on business. On January 1, 2007, Capital Tax rates were cut by an additional 21 per cent, and Capital Tax was eliminated for Ontario companies primarily engaged in M&P and resource activities.

On January 1, 2010, Capital Tax rates will be cut by one-third and the tax will be fully eliminated on July 1, 2010. The accelerated Capital Tax elimination plan has been fully legislated.

Table 7
Ontario’s Accelerated Capital Tax Elimination Plan

Date	Deduction ($ M)	Rates (Per Cent)
		Non-Financial Institutions		Financial Institutions
				1st $400 Million of Taxable Capital	Taxable Capital Over $400 Million
		M&P and Resources1	Other Corporations		Non-Deposit Taking	Deposit Taking
2004	5	0.3	0.3	0.6	0.72	0.9
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, 2010	15		0.15	0.3	0.36	0.45
July 1, 2010	Legislated Accelerated Elimination Date

• Measures are pro-rated for taxation years straddling the effective date.
• ¹ Primarily engaged in manufacturing and processing, mining, logging, farming or fishing activities in Ontario.

TARGETED TAX MEASURES

This Budget proposes a number of targeted tax measures to build on the government’s five-point economic plan to create jobs, strengthen the economy and enhance the quality of life in the province. These targeted tax relief measures would support key sectors in the economy, innovation and skills training, and would provide additional benefits of more than $940 million over four years to Ontario families, businesses and communities.

Encouraging Innovation

Ontario Innovation Tax Credit

The Ontario Innovation Tax Credit (OITC) is a 10 per cent refundable tax credit for small and medium-sized corporations performing eligible Scientific Research and Experimental Development (SR&ED) in Ontario.

This Budget proposes to extend the OITC to more small and medium-sized corporations by extending the taxable income phase-out range of between $400,000 and $700,000 to a new phase-out range of between $500,000 and $800,000.

This measure would parallel the enhancement of the federal Investment Tax Credit for SR&ED proposed in the 2009 federal budget.

The required amendments would be introduced once the implementing federal legislation is enacted. The effective date of the amendments and phase-in rules would parallel the federal amendments.

Accelerated Capital Cost Allowance for Computers

Currently, computers are eligible for a 55 per cent Capital Cost Allowance (CCA) rate on a declining-balance basis.

Ontario will parallel the 2009 federal budget proposal to provide a temporary 100 per cent accelerated CCA rate for eligible computers and software acquired after January 27, 2009 and before February 2011, subject to federal implementation. As announced federally, the temporary accelerated CCA rate for computers will not be subject to the half-year rule and, accordingly, the full cost of eligible computers and software can be deducted in the first taxation year that the assets are available for use.

Supporting Key Sectors

Accelerated Capital Cost Allowance for Manufacturing and Processing Machinery and Equipment

Ontario and the federal government currently provide a temporary tax incentive in the form of an accelerated CCA rate for M&P machinery and equipment acquired after March 18, 2007 and before 2012. Eligible assets acquired before 2010 qualify for a 50 per cent straight-line accelerated CCA rate and those acquired in 2010 and 2011 are eligible for accelerated CCA rates on a declining-balance basis.

Ontario will parallel the 2009 federal budget proposal to extend the 50 per cent straight-line accelerated CCA rate for eligible assets acquired in 2010 and 2011, subject to federal implementation.

Ontario continues to call on the federal government to extend the 50 per cent straight-line CCA rate to all M&P machinery and equipment acquired before 2014 to benefit businesses making longer-term investments.

Making the Enhanced Ontario Film and Television Tax Credit Rate Permanent

The Ontario Film and Television Tax Credit (OFTTC) is a refundable tax credit available to qualifying corporations for labour expenditures related to certified domestic film and television productions in Ontario.

In the 2007 Ontario Economic Outlook and Fiscal Review, the government announced an increase to the OFTTC rate to 35 per cent from 30 per cent, effective January 1, 2008 to December 31, 2009.

As announced on February 20, 2009, the government proposes to make the enhanced 35 per cent OFTTC rate permanent.

Making the Enhanced Ontario Production Services Tax Credit Rate Permanent

The Ontario Production Services Tax Credit (OPSTC) is a refundable tax credit available to qualifying corporations for labour expenditures related to qualifying foreign film and television production services and non-certified domestic film and television productions in Ontario.

In the 2007 Ontario Economic Outlook and Fiscal Review, the government announced an increase to the OPSTC rate to 25 per cent from 18 per cent effective January 1, 2008 to December 31, 2009.

As announced on February 20, 2009, the government proposes to make the enhanced 25 per cent OPSTC rate permanent.

Enhancing the Ontario Interactive Digital Media Tax Credit

The Ontario Interactive Digital Media Tax Credit (OIDMTC) is a refundable tax credit available to qualifying corporations for expenditures related to the creation, marketing and distribution of eligible interactive digital media products. Currently, a 30 per cent refundable tax credit is available to small corporations that develop their own eligible products and a 25 per cent refundable tax credit is available to large corporations that develop their own eligible products or to corporations that develop eligible products under a fee-for-service arrangement.

This Budget proposes permanent enhancements to the OIDMTC to:

• enhance the tax credit rates;
• expand eligible labour expenditures; and
• extend the tax credit to more fee-for-service arrangements.

Enhancing the OIDMTC Rate

This Budget proposes, effective for qualifying expenditures incurred after March 26, 2009, to enhance the OIDMTC rates to:

• 40 per cent for qualifying corporations, regardless of size, that develop and market their own eligible products; and
• 35 per cent credit for qualifying corporations that develop eligible products under a fee-for-service arrangement.

Expanding Eligible Labour Expenditures under the OIDMTC

This Budget proposes to expand the OIDMTC, effective for qualifying expenditures incurred after March 26, 2009, to allow corporations to claim 100 per cent of the amount paid to eligible arm’s-length contractors that is attributable to the salaries and wages of the contractor’s employees. Currently, qualifying corporations that develop and market their own products are able to claim 50 per cent of such labour expenditures while corporations developing eligible products under a fee-for-service arrangement are unable to claim these expenditures.

Extending the OIDMTC to More Fee-for-Service Arrangements

This Budget also proposes, effective for qualifying expenditures incurred after March 26, 2009, to extend the OIDMTC to digital media game developers that incur a minimum $1 million of eligible labour expenditures over a 36-month period for fee-for-service work done in Ontario in respect of an eligible product. Corporations that meet the minimum expenditure test would not be required to be at arm’s length with the purchaser corporation, or to develop all, or substantially all, of the eligible product.

Expanding the Ontario Computer Animation and Special Effects Tax Credit

The Ontario Computer Animation and Special Effects (OCASE) tax credit is a 20 per cent refundable tax credit available to qualifying corporations for eligible labour expenditures related to digital animation and special effects in qualifying film and television productions.

This Budget proposes, effective for qualifying expenditures incurred after March 26, 2009, enhancements to the OCASE tax credit that would:

• increase eligible labour expenditures to 100 per cent from 50 per cent of amounts paid to arm’s-length unincorporated individuals and partnerships providing freelance services;
• expand eligible labour expenditures to include 100 per cent of amounts paid to arm’s-length incorporated individuals providing freelance services while ensuring that incorporated individuals cannot claim the credit directly; and
• streamline administration by relaxing the requirement that an eligible animation or visual effect be created primarily with digital technologies.

Expanding the Ontario Book Publishing Tax Credit

The Ontario Book Publishing Tax Credit is a 30 per cent refundable tax credit available to Ontario book publishing corporations for qualifying expenditures related to publishing and promoting the first three books by a Canadian author in an eligible category of writing. Eligible categories of writing are adult or children’s fiction, non-fiction, poetry or biography.

This Budget proposes to expand eligibility to qualifying expenditures incurred after March 26, 2009 for:

• any number of books by a Canadian author in an eligible category of writing; and
• direct expenses that reasonably relate to publishing an electronic version of an eligible book.

Supporting Skills and Knowledge

Enhancing the Co-operative Education Tax Credit

The Co-operative Education Tax Credit (CETC) is a refundable tax credit available to businesses that employ postsecondary students enrolled in qualifying co-operative education programs at eligible educational institutions. Currently, the CETC is a 10 per cent refundable tax credit (15 per cent for small businesses) on salaries and wages paid, to a maximum credit of $1,000 per work placement.

This Budget proposes enhancements to the CETC, effective for eligible expenditures incurred after March 26, 2009, that would:

• increase the 10 per cent CETC rate to 25 per cent and the enhanced 15 per cent rate for small businesses to 30 per cent; and
• increase the maximum tax credit available from $1,000 to $3,000 per work placement.

Enhancing the Apprenticeship Training Tax Credit

The Apprenticeship Training Tax Credit (ATTC) is a refundable tax credit available to businesses on the salaries and wages paid to eligible apprentices in designated construction, industrial, motive power and service trades. Currently, the ATTC provides a 25 per cent refundable tax credit (30 per cent for small businesses) on the salaries and wages paid during the first 36 months of an apprenticeship program, to a maximum annual credit of $5,000. The ATTC is available for apprentices that begin their apprenticeship program before January 1, 2012 and salaries and wages paid before January 1, 2015.

This Budget proposes enhancements to the ATTC that would make it the most generous tax credit of its kind currently legislated in Canada. These proposed enhancements, effective for expenditures incurred after March 26, 2009, would:

• increase the 25 per cent ATTC rate to 35 per cent and the enhanced 30 per cent rate for small businesses to 45 per cent;
• increase the $5,000 annual maximum tax credit to $10,000;
• extend the ATTC to salaries and wages paid during the first 48 months of an apprenticeship program; and
• make the ATTC a permanent tax incentive.

Helping Seniors and Families

Ontario Senior Homeowners’ Property Tax Grant

Introduced in the 2008 Budget, the Ontario Senior Homeowners’ Property Tax Grant is providing a grant of up to $250 to help low- to middle-income senior homeowners pay their 2009 property taxes.

Starting in 2010, the maximum grant amount will be doubled from $250 to $500. Senior homeowners can apply for the grant when filing their income tax returns. In 2010, over 575,000 seniors will be able to benefit from this grant.

Eligible single seniors with $500 or more in property taxes and income of up to $35,000 a year will receive the maximum $500 grant in 2010. Eligible single seniors with income between $35,000 and $50,000 will receive a proportionately smaller grant. Eligible senior couples with $500 or more in property taxes and income of up to $45,000 a year will receive the maximum grant. Eligible senior couples with income between $45,000 and $60,000 will receive a proportionately smaller grant.

Ontario Property and Sales Tax Credits for Seniors

The Ontario Property and Sales Tax Credits for seniors were established in 1992 to assist seniors with modest incomes. In 2004, the government enhanced these refundable credits by increasing the underlying property tax credit amount by 25 per cent, from $500 to $625. In each of the last four budgets, the government also increased the income threshold at which senior couples’ benefits begin to be reduced.

The 2009 minimum level of income guaranteed by the Ontario and federal governments for eligible senior couples is rising because of increases to Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). As a result of these increased amounts, the minimum level of income guaranteed by governments, including Ontario’s Guaranteed Annual Income System (GAINS), for qualifying Ontario senior couples is rising above $24,300 in 2009.

The Province wants seniors who receive the guaranteed minimum level of income to get the full benefit of the Ontario Property and Sales Tax Credits. To achieve this goal, this Budget proposes to increase the income threshold for senior couples in 2009. The new level would be determined when the federal government finalizes OAS and GIS amounts for 2009. About 695,000 senior recipients would benefit this year from an estimated $95 million in enhancements to these credits since 2003, including this proposal.

Starting in 2010, the Ontario Property and Sales Tax Credits would be replaced with a new Ontario Sales Tax Credit and a new Ontario Property Tax Credit.

Increasing Access to Locked-In Accounts

This Budget proposes to amend the Pension Benefits Act Regulation and the Schedule of Required Fees to:

• enhance access to locked-in funds by increasing, from 25 per cent to 50 per cent, unlocking permitted on purchase from new Life Income Funds (LIFs), effective January 1, 2010. Current new LIF owners would have an opportunity to unlock an additional 25 per cent of amounts previously transferred into their existing fund. Remaining old LIFs and Locked-in Retirement Income Funds (LRIFs) would be harmonized with the updated new LIF rules; and
• temporarily waive financial-hardship application withdrawal fees for Ontario locked-in accounts. This two-year fee waiver would take effect for applications approved on or after April 1, 2009.

Concordance with the Income Tax Act (Canada)

The following proposals announced by the federal government in its 2009 budget to help families would be adopted automatically once federal legislative and regulatory changes have been approved.

• Effective for withdrawals from Registered Retirement Savings Plans (RRSPs) made after January 27, 2009, the Home Buyers’ Plan withdrawal limit would be increased from $20,000 to $25,000. As a result, first-time homebuyers would have greater access to funds to purchase or build a home. The increase to the withdrawal limit would also be available to those who purchase or build a more accessible home for the benefit of a related person with a disability, and to persons with disabilities who purchase or build a more accessible home.
• Where the final distribution of property from the RRSP or Registered Retirement Income Fund (RRIF) of a deceased annuitant occurs after 2008, the amount of post-death decreases in the value of the plan would be allowed to be carried back and deducted against the year-of-death RRSP/RRIF income inclusion.

Tax-Free Savings Accounts and the Succession Law Reform Act

The government proposes to change the Succession Law Reform Act (SLRA) to allow for beneficiary designation of Tax-Free Savings Accounts (TFSAs). Designated beneficiaries would be able to receive TFSAs outside of a will in the same way that beneficiaries can receive proceeds of RRSPs. The TFSA could also pass to the designated beneficiary without being subject to Estate Administration Tax, simplifying estate matters and reducing costs.

Other Measures

New Measures to Encourage Tobacco Tax Compliance

Ontario continues to review opportunities in its Tobacco Tax Act to enhance its enforcement measures to encourage compliance. The following proposals build on measures enacted over the past five years to strengthen enforcement against the illegal manufacture and distribution of tobacco products. These proposed measures would add the following:

• enforcement provisions aimed at individuals suspected of contravening the act;
• the authority for the court to suspend the driver’s licence of a person convicted of an offence under the act involving the use of a vehicle;
• provisions that prohibit the possession of any quantity of unmarked cigarettes, unless otherwise permitted under the act; and
• requirements to mark fine-cut tobacco similar to cigarettes. Revenue officials will consult with manufacturers on how to best implement this measure.

The federal government has requested that the Ontario Flue-Cured Tobacco Growers’ Marketing Board revise its licensing system for tobacco leaf production. Government enforcement agencies will have access to the Board’s licensing records in their ongoing efforts to address the distribution of raw leaf tobacco that may be used in contraband tobacco products.

Ontario will continue to work with key stakeholders and its federal and provincial counterparts to explore new and innovative measures to address contraband tobacco.

Ontario Political Contributions

As announced on December 30, 2008, the government proposes to introduce legislation this spring to convert the tax deduction that was available for corporations making eligible Ontario political contributions under the Corporations Tax Act into a non-refundable tax credit, based on the general CIT rate, under the Taxation Act, 2007. The proposed tax credit, effective for taxation years ending after December 31, 2008, would maintain a similar level of support as that provided under the former tax deduction.

Eligible Ontario political contributions would be contributions made under the Election Finances Act to Ontario parties and constituency associations or to candidates in an Ontario election. Unused contributions, including those from pre-2009 taxation years, would be available to be carried forward and claimed for up to 20 years. Similar to the deduction, the annual contribution limit would be indexed according to the manner and schedule set out in the Election Finances Act.

PENSION REFORM MEASURES

Solvency Funding Relief Measures

In December 2008, the government announced that it would seek the approval of the legislature to provide temporary solvency funding relief to pension plans affected by the financial-market turmoil and take steps to ensure greater transparency while helping to protect the security of pension benefits.

Amendments to the Pension Benefits Act (PBA) will be introduced that would, if passed, provide for temporary solvency funding relief through regulations that would have retroactive effect to September 30, 2008.

Under proposed solvency relief rules, when filing the first scheduled valuation report dated on or after September 30, 2008, a plan administrator would be able to elect to:

• consolidate existing solvency payment schedules into a new five-year payment schedule;
• defer for one year from the valuation date, the start of new going-concern and solvency special payments identified in the valuation report; and
• subject to consent, extend the solvency payment schedule to a maximum of 10 years for a new solvency deficiency determined in the report.

To further enhance solvency relief and to maximize its effectiveness, up to 10 years of going-concern special payments could be taken into account to determine the net solvency deficiency where the special payment schedule is extended to a maximum of 10 years.

If an election is made, a solvency excess identified in subsequent valuation reports could be used to reduce or eliminate solvency special payments identified in the initial report. To promote transparency, enhanced notice regarding the funded status of the plan and the effect of the election would be provided to active, deferred and retired members.

If solvency payment schedules are consolidated or extended, future benefit enhancements would be funded over a maximum of five years on both a solvency and going-concern basis. This provision would remain in effect for up to five years following the start of special payments identified in the initial valuation report.

To protect benefit security in light of adverse economic conditions, contribution holidays would not be permitted in fiscal years ending in 2010 to 2012 unless:

• an actuarial cost certificate, based on an approximation from the last filed report, is filed annually with the Financial Services Commission of Ontario (FSCO) and the cost certificate confirms the plan was in a surplus position at the start of the fiscal year; or
• the plan is a designated plan under the Income Tax Act (Canada).

The Canadian Institute of Actuaries’ revised Standard of Practice for Pension Commuted Values, scheduled to take effect April 1, 2009, could be used for the purpose of solvency valuations as of December 12, 2008, if the legislature approves the necessary regulation-making authority.

Strengthening Ontario’s Pension System

In November 2006, the Ontario government established the Expert Commission on Pensions. The Commission held extensive consultations with Ontarians and issued its final report, A Fine Balance: Safe Pensions, Affordable Plans, Fair Rules, in November 2008.

The government is reviewing the many comments received from stakeholders about the Commission’s report and will continue to be informed by ongoing stakeholder engagement.

Moving Forward with Pension Modernization

The government is moving forward on a number of initiatives to modernize Ontario’s pension system, including legislative or regulatory amendments to the PBA to assist plan sponsors, plan members, retired members and their families.

Pension Division on Marriage Breakdown

The current rules that apply to pension division on marriage breakdown have resulted in unnecessary delays, costs and disputes for spouses, plans and the pensions regulator. Following consultations, the government is moving forward with important changes, introduced in Bill 133 on November 24, 2008. These changes would simplify and clarify pension rules faced by members, pensioners and spouses in the difficult process of marriage breakdown. If legislation is approved by the legislature, the government will consult with stakeholders on regulatory details.

Phased Retirement

Complementary to recent federal tax changes, amendments would be introduced to permit pension plans to offer phased retirement programs to workers. These changes would permit plans to allow members at retirement age to continue working while receiving a pension and continuing to accrue pension benefits. These reforms would enhance labour market flexibility by helping employers retain valuable employees while providing workers with additional employment opportunities.

Enhancing the Powers of the Superintendent of Financial Services

Complementary to recent amendments to the federal Companies’ Creditors Arrangement Act, amendments would be introduced to allow the Superintendent to review certain pension arrangements in restructuring proceedings.

Modernizing Multi-jurisdictional Regulation

To improve the regulation and administration of multi-jurisdictional pension plans, the government will finalize a new agreement governing the regulation of these plans. The proposed new agreement is being developed in partnership with other governments under the auspices of the Canadian Association of Pension Supervisory Authorities.

Improving Pension Regulation

The government has taken steps to strengthen the regulation of pensions:

• In response to concerns raised by the Expert Commission on Pensions’ report, between March 31, 2008 and January 31, 2009, FSCO reduced outstanding pension applications relating to asset transfers, plan mergers and surplus distributions by 60 per cent and reduced the average processing time for all defined benefit pension plan applications by 25 per cent.
• To further improve service and enhance the effectiveness of pension plan regulation, FSCO will assign 25 additional full-time positions to support better regulatory efficiency and oversight. These resources are being phased in over a three-year period.

Laying the Groundwork for Further Reform

The government is committed to introducing a package of pension reforms in the legislature in the fall of 2009 to further modernize Ontario’s pension system. Additional stakeholder input, building on responses to the Commission’s report, will be sought. As part of the government’s plan to transform Ontario’s pension system, the Province is:

• establishing a Pension Reform Advisory Council, representing a broad spectrum of interests and perspectives, to provide practical and focused feedback on specific pension reform proposals;
• formally consulting with the Canadian Institute of Actuaries and FSCO representatives to review actuarial standards and practices to improve pension plan funding;
• initiating the first actuarial projection study of the stability and financial status of the Pension Benefits Guarantee Fund, including revenues and claims, to inform the development of long-term policy;
• improving data collection and developing greater analytical and research capacity to improve pension policy and regulation; and
• working with the federal government and other provinces to explore possible strategies to increase pension coverage for working Ontarians and their families.

These are critical first steps to a legislative framework that better supports today’s workforce, as well as current and future pensioners in Ontario.

Ontario Teachers’ Pension Plan

Expanded Mandate

The government is introducing legislation that, if passed, would expand the mandate of the Ontario Teachers’ Pension Plan (OTPP) Board if the government and the Ontario Teachers’ Federation (as Partners of the Plan) agree. The amendment would permit the OTPP Board to provide pension administration and investment services to other pension plans and institutional investors in the public sector.

• Benefits would include higher revenues for the OTPP Board, lower administrative costs and enhanced investment opportunities for future OTPP clients.
• This change is consistent with recommendations of the Expert Commission on Pensions that large pension plans be permitted to offer their services to smaller pension plans to improve investment returns for Ontario pension plans and others.

Government Contributions

In September 2008, the Province came to an agreement with the Ontario Teachers’ Federation and the OTPP Board to reduce guaranteed inflation protection from 100 per cent to 50 per cent of annual consumer price index (CPI) changes for pension benefits earned after December 31, 2009. The intention is to provide inflation adjustments at 100 per cent of the annual change in the CPI. However, adjustments in excess of 50 per cent will depend on the financial health of the plan in the future.

As part of the agreement, the government proposes to amend the Teachers’ Pension Act to allow it and other employers that contribute to the Plan to make specified contributions to the pension plan whenever inflation protection adjustments paid to retired teachers and others are less than 100 per cent of the annual CPI change.

Financial Information

Currently, every government ministry and Crown agency must provide the Minister of Finance with financial information when required for budgetary and Public Accounts purposes. In recent years, additional entities such as hospitals and colleges have been consolidated in the Province’s financial statements.

A technical amendment to the Ministry of Treasury and Economics Act is proposed that, if passed, would extend the same information and reporting requirements to public-sector pension plans that are either sponsored or co-sponsored by the Province, or by an organization consolidated on the Province’s financial statements.

In addition, a technical amendment is also being proposed to the Financial Administration Act to clarify that pension expense adjustments arising from actuarial valuations are non-cash statutory accounting adjustments. Cash pension contributions will continue to be treated as pension expenses requiring voted appropriations.

TECHNICAL AMENDMENTS

Legislation will be proposed to improve administrative effectiveness and enforcement, and maintain the integrity and equity of Ontario’s tax and revenue collection system, as well as enhance legislative clarity and regulatory flexibility to preserve policy intent, including amendments to the following statutes:

• Assessment Act
• Capital Investment Plan Act, 1993
• City of Toronto Act, 2006
• Commodity Futures Act
• Community Small Business Investment Funds Act
• Corporations Act
• Corporations Tax Act
• Education Act
• Electricity Act, 1998
• Employer Health Tax Act
• Financial Administration Act
• Fuel Tax Act
• Gasoline Tax Act
• Government Advertising Act, 2004
• Income Tax Act
• Land Transfer Tax Act
• Local Roads Boards Act
• Mining Tax Act
• Ministry of Revenue Act
• Ministry of Treasury and Economics Act
• Municipal Act, 2001
• Northern Services Boards Act
• Ontario Home Ownership Savings Plan Act
• Pension Benefits Act
• Provincial Land Tax Act, 2006
• Public Service Pension Act
• Retail Sales Tax Act
• Securities Act
• Statute Labour Act
• Taxation Act, 2007
• Teachers’ Pension Act
• Tobacco Tax Act
• Treasury Board Act, 1991

Table 8
2009 Budget Impact Summary
($ Millions)

	2008–09	2009–10	2010–11	2011–12	2012–13
Tax Reform Measures
Conversion of RST Base to New Sales Tax Base	–	–	1,670	2,175	2,315
Tax Measures for People
Personal Income Tax Cut	–	(275)	(1,115)	(1,175)	(1,240)
New Sales Tax and Property Tax Credits	–	40	(770)	(1,125)	(1,185)
Ontario Sales Tax Transition Benefit1	–	–	(2,700)	(1,300)	–
	–	(235)	(4,585)	(3,600)	(2,425)
Tax Measures for Business
CIT and CMT Cuts	–	–	(530)	(1,330)	(1,665)
Small Business CIT Rate Cut	–	–	(35)	(150)	(150)
Small Business Surtax Elimination	–	–	(65)	(70)	(70)
Small Business Transition Credit1	–	–	(400)	–	–
	–	–	(1,030)	(1,550)	(1,885)
Temporary ITC Restrictions for Business	–	–	905	1,260	1,315
Total Tax Reform Measures	–	(235)	(3,040)	(1,715)	(680)
Targeted Tax Measures
Encouraging Innovation
Ontario Innovation Tax Credit (OITC)	–	(2)	(2)	(2)	(2)
Accelerated Capital Cost Allowance for Computers	(4)	(110)	(53)	59	48
Supporting Key Sectors
Accelerated Capital Cost Allowance for Manufacturing and Processing Machinery and Equipment	–	–	–	(110)	(180)
Ontario Film and Television Tax Credit (OFTTC)	–	(15)	(58)	(58)	(58)
Ontario Production Services Tax Credit (OPSTC)	–	(5)	(19)	(19)	(19)
Ontario Interactive Digital Media Tax Credit (OIDMTC)	–	(7)	(10)	(15)	(17)
Ontario Computer Animation and Special Effects Tax Credit (OCASE)	–	(9)	(9)	(9)	(9)
Ontario Book Publishing Tax Credit (OBPTC)	–	(3)	(3)	(3)	(3)
Supporting Skills and Knowledge
Co-operative Education Tax Credit (CETC)	–	(10)	(10)	(10)	(10)
Apprenticeship Training Tax Credit (ATTC)	–	(40)	(40)	(40)	(40)
Helping Seniors and Families
Ontario Property and Sales Tax Credits for Seniors	(1)	(5)	–	–	–
Concordance with the Income Tax Act (Canada)	(9)	(9)	(3)	(4)	(5)
Tax-Free Savings Accounts (TFSAs)	–	(2)	(3)	(5)	(6)
Total Targeted Tax Measures	(14)	(217)	(210)	(216)	(301)
Total Tax Changes	(14)	(452)	(3,250)	(1,931)	(981)

• ¹ Transitional support reported as a program expense.

• ¹Michael 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.