Cutting Personal and Corporate Taxes
and Harmonizing Sales Taxes
The Honourable Dwight Duncan
Minister of Finance
Over the past six years, the McGuinty government has implemented a wide range of measures to improve Ontario’s competitiveness in attracting business investment and creating jobs. These measures include significant investments in health care, education, infrastructure and innovation, along with strategic tax cuts, such as the legislated elimination of the Capital Tax.
During this global recession, intense competition for investment and jobs poses an increasing challenge to Ontario’s traditional sources of prosperity. Ontario must find innovative ways to attract the business investment needed to ensure sustained economic growth. This growth will further enhance the province’s standard of living and the public services Ontario families rely on.
Ontario’s population is growing and getting older. These factors will increase the pressure on Ontario’s health care system, which already consumes more than 40 per cent of the Province’s annual budget.
That is why the McGuinty government set out a plan in the 2009 Budget to create jobs and economic growth and to sustain key priorities such as health care and education.
The plan contains a fair and balanced package of tax cuts for both people and businesses. It will increase business investment, create new jobs, raise incomes and allow for price reductions on many consumer purchases. For families, the proposed personal income tax cuts will benefit 93 per cent of taxpayers. For businesses, the Corporate Income Tax cuts will enhance the benefits of the proposed Harmonized Sales Tax (HST) by attracting additional business investment to Ontario and creating even more jobs.
The government is introducing legislation — the Ontario Tax Plan for More Jobs and Growth Act, 2009 — that will follow through on the 2009 Budget proposals to implement the HST and cut personal and corporate income taxes.
While short-term stimulus measures are important during this global recession, this legislative package is part of the overall commitment by the McGuinty government to encourage job creation and economic growth.
“The 2009 Ontario Budget measures, together with other recent tax changes, will have a profound impact on Ontario’s competitiveness by lowering the tax burden on new business investment.
Within ten years, Ontario will benefit from:
Jack M. Mintz, Palmer Chair of Public Policy, School of Public Policy, University of Calgary, November 2009
Now is precisely the right time to modernize the tax system so that when the effects of this global recession end — and they will — Ontario’s economy will be even more competitive and better able to create jobs.
Working together, Ontarians will confront the challenges and emerge with more jobs and a stronger and more prosperous economy.
Dear Ms. Deller:
The proposed Ontario Tax Plan for More Jobs and Growth Act, 2009 will implement a series of tax cuts for people, families and businesses as well as measures relating to the Harmonized Sales Tax (HST). The tax measures proposed in the bill as a whole will deliver significant permanent tax cuts and temporary tax relief for people and businesses that will create jobs and economic growth.
Ontario individuals and families will receive $10.6 billion in tax relief over three years. This will be achieved through a personal income tax (PIT) cut, almost doubling property tax and sales tax credits and providing direct payments to ensure a smooth transition to the HST.
Effective January 1, 2010, the tax rate on the first tax bracket will be cut from 6.05 per cent to 5.05 per cent, providing more than $1.1 billion to Ontarians in PIT cuts. Ontarians will have the lowest provincial tax rate on the first $37,106 of taxable income. As a result, 93 per cent of taxpayers will see a PIT cut and approximately 90,000 lower-income tax filers will no longer pay PIT.
Significant Corporate Income Tax (CIT) cuts are also proposed for small and large businesses across the province to foster jobs and growth. The proposed CIT cuts will deliver $4.5 billion in business tax relief over three years. This is in addition to the permanent tax cut for business provided by the elimination of the Capital Tax.
A recent study estimated that the proposed tax package, combined with other recent tax measures will, within 10 years, lead to $47 billion in new investment and 591,000 net new jobs and will raise annual incomes by up to 8.8 per cent.
The proposed Ontario Tax Plan for More Jobs and Growth Act, 2009, which includes some new or modified tax measures, will result in significant tax cuts for people and business. In addition to the PIT and CIT rate cuts and the enhancements to tax credits contained in the proposed act are the replacement of manufacturers’ fees on beer and wine with taxes on the sale of beer and wine, a change to the retail sales tax on used vehicles to ensure a level playing field, and a legislative mechanism to allow for a dedicated, regionally based levy on transient accommodation to promote destination marketing.
Pursuant to subsection 5 (2) of the Taxpayer Protection Act, 1999, this statement will confirm that, in my opinion, the specified circumstance in paragraph 1 of subsection 5 (1) exists. The total tax relief package, including the proposed measures announced today, will reduce Ontario revenue by $3.4 billion over the first four years, net of federal assistance of $4.3 billion.
“ DWIGHT DUNCAN ”
The Honourable Dwight Duncan
Minister of Finance
The 2009 Ontario Budget proposed a comprehensive tax package that will modernize Ontario’s tax system in order to improve the province’s competitiveness and create jobs.
The proposed comprehensive tax package will:
The proposed Ontario Tax Plan for More Jobs and Growth Act, 2009, will result in significant tax cuts for people and business and, as a result, fully complies with Ontario’s Taxpayer Protection Act, 1999.
The comprehensive tax package proposed in the 2009 Budget delivers significant permanent and temporary tax relief of $10.6 billion to people and $4.5 billion to business over three years. The Budget also proposed a number of targeted tax relief measures that will support key sectors in the economy, innovation and skills training.
Enhanced tax support for the film and television sector announced in June 2009 and the proposed HST measures described in this paper will provide further tax relief to support jobs and growth.
Chart 1 presents the net reduction in Ontario revenue over the first four years from the total tax relief package for people and business.
To support the transition to the HST, the federal government agreed to provide Ontario with transfer payments totalling $4.3 billion. After deducting the federal payments, the net reduction in Ontario revenue from the total tax relief package will be $3.4 billion over the first four years.
The total tax relief package, including the proposed measures presented in this paper, will reduce Ontario revenue by $3.4 billion over the first four years, net of federal assistance of $4.3 billion
Effective July 1, 2010, the RST will be replaced with a value-added tax (VAT) and combined with the federal GST to create a federally administered HST. The provincial portion of the HST will be eight per cent — the same as the general RST rate — and the federal portion will be five per cent, for a combined HST rate of 13 per cent.
The HST will make Ontario businesses more competitive, increase business investment, create new jobs, raise incomes and allow for price reductions on many consumer expenditures.
The RST is charged on many purchases made by businesses in manufacturing goods and providing services. As illustrated in Chart 2, this tax becomes embedded in the cost of goods at each stage of the production, distribution and retail processes. The result is a compounding of tax upon tax that is ultimately paid by consumers through higher prices for goods and services. The proposed HST will remove this hidden tax by refunding sales taxes paid on most business inputs. These refunds will mean lower business costs and prices for many consumer purchases.
By taxing business purchases, including many capital items, the RST places Ontario at a competitive disadvantage compared to many jurisdictions when it comes to attracting investment and creating jobs. Ontario businesses have more difficulty competing in the export market, which is especially damaging since Ontario’s economy is reliant on exports. It also makes it more difficult for Ontario businesses to compete against imports.
Replacing the RST with the HST will reduce the cost of capital purchases and operating costs, making Ontario more attractive for new business investment, and will allow existing Ontario businesses to improve their competitiveness by lowering their prices. Increased business investment means more jobs and higher incomes.
A study that examined the impact of sales tax harmonization in the Atlantic provinces found that cost savings to business were rapidly passed through to consumers.1 A recent TD Bank report predicts that, in Ontario, competitive pressures will lead businesses to pass through 80 per cent of their savings to consumers in the first year and 95 per cent by the third year (see Chart 3).2
The studies by the TD Bank and Professors Michael Smart and Richard Bird of the University of Toronto indicate that ultimately cost savings are fully passed through to consumers.
The TD Bank 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
For example, after the implementation of the proposed tax measures and the removal of embedded RST, a manufacturer with annual revenue of $5 million could see its Ontario CIT and sales tax burden reduced by nearly 90 per cent.4 This saving presents an opportunity for the manufacturer to cut the price charged to its customers. Other tax reductions, such as the legislated elimination of the Capital Tax, and the reduction in compliance costs from a single HST administration will provide a further opportunity for businesses to cut prices.
More than 140 countries and four other provinces5 have adopted a VAT. Following Ontario’s 2009 Budget proposal to harmonize with the GST, British Columbia announced in July 2009 that it would also harmonize with the GST in order to generate economic growth and create jobs.
“This is the single biggest thing we can do to improve BC’s economy. This is an essential step to make our businesses more competitive, encourage billions of dollars in new investment, lower costs on productivity and reduce administrative costs to BC taxpayers and businesses. Most importantly, this will create jobs and generate long-term economic growth that will in turn generate more revenue to sustain and improve crucial public services.”
The Honourable Gordon Campbell, Premier, British Columbia, July 23, 2009
“We had to move fast if we were not to be left at a competitive disadvantage to Ontario.”
The Honourable Colin Hansen, Minister of Finance, British Columbia, August 20, 2009
All the advanced countries in the Organisation for Economic Co-operation and Development (OECD), with the exception of the United States, have adopted a VAT. In adopting the GST in 1991, Canada was a relative latecomer to the move to value-added taxes. Among the OECD countries, only Finland, Switzerland and Australia adopted a VAT after Canada did.
Since 1990, the OECD has consistently recommended that provinces in Canada harmonize their sales tax with the GST to increase economic efficiency and promote economic growth. For example, in 2004, the OECD commented that “[a] single rate, harmonised broad-based value-added sales tax system would be simpler, fairer, and more economically efficient. Importantly, a broad-base value-added tax would reduce capital and operating costs of business compared with retail sales taxes that currently apply in some of the provinces. This would promote investment, productivity and the competitiveness of Canadian-based firms both domestically and in foreign markets.”6
The increases in investment, jobs and incomes from moving to the HST will be further enhanced by the proposed CIT rate cuts and the legislated elimination of the Capital Tax.
The 2009 Budget proposed $10.6 billion in tax relief to people over three years by cutting PIT, enhancing ongoing sales tax and property tax relief, and providing direct payments to ensure a smooth transition to the HST.
Effective January 1, 2010, the tax rate on the first tax bracket will be cut by one percentage point, from 6.05 per cent to 5.05 per cent, providing more than $1.1 billion to Ontarians in broadly based PIT cuts in 2010–11. Ontarians will have the lowest provincial tax rate on the first $37,106 of taxable income (for 2010). As a result, 93 per cent of taxpayers will see a PIT cut, and approximately 90,000 lower-income tax filers will no longer pay Ontario PIT at all.
Two new tax credits — the Ontario Sales Tax Credit and the Ontario Property Tax Credit — will replace the existing combined property and sales tax credits starting with the 2010 tax year. The new credits will be refundable and are designed to provide sales and property tax relief to low- to middle-income tax filers. In 2011–12, more than $1.1 billion in additional sales and property tax relief will be provided to Ontarians through the new credits, compared to those currently in place.
The new sales tax credit will provide timely assistance through quarterly payments starting in August 2010, one month after the federal GST credit to provide a smoother cash flow to help lower-income families. Ontario residents who are aged 19 or over or who have a spouse or common-law partner or live with their child will be eligible to claim the credit. It will provide annual relief of up to $260 for each adult and each child, benefiting about 2.9 million families and individuals. The credit will provide about $1 billion in total sales tax relief in 2011–12.
|Helping Low- to Middle-Income Ontarians
Through Enhanced Tax Credits
|Maximum||Phase-out Rate||Phase-out Range —|
|Amount1||Adjusted Family Net Income1|
|Ontario Sales Tax Credit (OSTC)||$260 per adult and child in a family||4%||Single||$20,000 to $26,5002|
|Family of 2||$25,000 to $38,0002|
|Family of 3||$25,000 to $44,5002|
|Family of 4||$25,000 to $51,0002|
|Family of 5||$25,000 to $57,5002|
|Ontario Property Tax Credit (OPTC)||Non-seniors||$900||2%||Non-senior Single||$20,000 to $65,0003|
|Non-senior Family||$25,000 to $70,0003|
|Seniors||$1,025||Senior Single||$20,000 to $71,2503|
|Senior Family||$25,000 to $76,2503|
|1 The amounts and income thresholds for the OSTC and OPTC will 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.|
The new property tax credit will maintain existing benefit amounts while extending property tax relief to more low- to middle-income Ontario homeowners and tenants, providing an additional $270 million in property tax relief on an annual basis to about 2.3 million individuals and families. Individuals who are aged 18 or over or who have a spouse or common-law partner or live with their child will be eligible to claim the credit. The credit will provide about $1 billion in total property tax credits in 2010–11. Together with the new Ontario Senior Homeowners’ Property Tax Grant, the government’s proposals will almost double property tax relief since 2003.
To help smooth the transition to the HST, eligible Ontario residents 18 years of age or over or who have a spouse or common-law partner or live with their child will receive transition benefit payments in June 2010, December 2010 and June 2011. Eligible families (including single parents) with adjusted family net incomes of $160,000 or less will get three payments totalling $1,000. Eligible single individuals with net incomes of $80,000 or less will get three payments totalling $300. These payments will not be taxable or affect eligibility for social assistance or income-tested benefits delivered through the tax system. This measure will provide an estimated $4 billion in relief to 6.5 million eligible individuals and families.
The comprehensive tax package proposed in the 2009 Budget will permanently reduce taxes for large and small businesses across the province. The CIT rates will be cut, beginning July 1, 2010, as follows:
To ensure that businesses subject to the Corporate Minimum Tax (CMT) fully benefit from the proposed CIT rate reductions, the 2009 Budget proposed a corresponding reduction in the CMT rate from four per cent to 2.7 per cent. The 2009 Budget also proposed to exempt more small and medium-sized businesses from calculating and paying the CMT; a corporation or associated group with under $50 million in assets or under $100 million in annual gross revenues will not pay CMT. These proposed changes will take effect for taxation years ending after June 30, 2010. The proposed CMT rate reduction will be pro-rated for taxation years straddling the effective date.
As announced in the 2009 Budget, the proposed permanent CIT cuts, together with the small business transition support, will deliver $4.5 billion in tax relief to business over three years. This is in addition to the permanent tax cut for business provided by the legislated elimination of the Capital Tax (see Chart 6).
Table 2 shows that almost all sectors of Ontario’s economy will see substantial tax savings from the HST combined with the permanent tax cuts. When fully implemented, businesses will save almost $4.5 billion a year from replacing the RST with the HST, $2.4 billion annually from the CIT cuts and nearly $1.6 billion a year from eliminating the Capital Tax.
|Total Business Tax Relief by Sector — Annual Savings1,2
|Corporate Income Tax||Capital Tax3||Total|
|Forestry, Fishing and Hunting||
|Mining, Utilities, Oil and Gas||
|Transportation and Warehousing||
|Information and Cultural Industries||
|Financial Services (except Insurance)||
|Renting and Leasing||
|Professional, Scientific and Technical Services||
|Other Services (except Public Administration)||
|1 Represents the annual savings following the full phase-in of the tax measures. Savings do not include more than $700 million annually in Business Education Tax reductions, targeted tax incentives proposed in the 2009 Budget and the enhancement to the Ontario Production Services Tax Credit announced on June 29, 2009, over $500 million in annual compliance cost savings from a single HST administration and up to $100 million in annual compliance cost savings from a single corporate tax administration.
2 Annual savings of less than $5 million are denoted by the letter “s” (small).
3 Capital Tax savings compared to the Capital Tax structure before the 2004 Budget measures.
The following examples illustrate the potential annual savings for several small to large businesses from the proposed tax cuts and the removal of the RST that is embedded in the price of business inputs.7 Charts 7 to 10 present these savings for a manufacturer, restaurant, retailer and software publisher. Further examples are summarized in Table 3. The examples show that these costs will be reduced by about 60 per cent to over 90 per cent.
|Annual Tax Savings to Business — Illustrative Examples||Table 3|
|Industry/Business||Revenue||Full Implementation2||% Reduction in Tax Payable|
|1 Tax payable includes sales tax, CIT, embedded sales tax and Capital Tax (where applicable).|
|2 Full implementation occurs July 1, 2010 for the coffee shop, dry cleaner, landscaper and movie theatre; July 1, 2013 for the hotel, when the CIT rate cuts are fully phased in; and July 1, 2018 for the telecommunications provider and the forestry company, when input tax credits are fully phased in.|
The tax reductions for business will cut Ontario’s marginal effective tax rates (METRs)8 on new business investment in half. This reduction in the tax rates on income earned from new investment will make Ontario a highly attractive location for businesses to invest and create jobs.
Ontario’s METR for medium-sized and large businesses will fall from 32.8 per cent in 2009 to 16.2 per cent in 2018, when the input tax credits are fully phased in (see Chart 11). The largest proportion of the reduction will occur in 2010, when the METR falls to 18.6 per cent. The reduction in Ontario’s METR relative to the U.S. and OECD averages will significantly improve Ontario’s tax competitiveness in attracting new jobs and investment.
The METR for small businesses will also fall dramatically. A study has estimated that the small business METR will fall from 28.6 per cent in 2009 to 13.3 per cent in 2010.9 With small businesses accounting for over 90 per cent of all Ontario businesses, this reduction in the METR will support a sector that is key to creating jobs and economic growth.
It is estimated that, within 10 years, the improvement in Ontario’s tax competitiveness will lead to $47 billion in new investment and 591,000 net new jobs and will raise annual incomes by up to 8.8 per cent.10
Moving to the HST will cause some purchases to cost more because some goods and services that were not subject to the RST will become subject to the provincial portion of the HST for the first time. However, Ontarians will not see a change in taxable status for 83 per cent of total consumer expenditures (see Chart 12).
To mitigate the effect on consumers, the 2009 Budget proposed $10.6 billion over three years in permanent and temporary tax relief for consumers. The tax package will further support Ontario consumers through a more competitive economy, an estimated 591,000 net new jobs and higher annual incomes of up to 8.8 per cent.11
|Taxable Status of Goods and Services for Consumers Under HST||Table 4|
|No Change in Taxable/Exempt Status for Consumers — Examples|
|Municipal Water||Admissions to Sporting Events|
|Certain Medical Devices||Movie Tickets|
|Most Health Care Services||Restaurant Meals|
|Most Educational Services||Cleaning Products (e.g., Soaps, Detergents)|
|Municipal Public Transportation||Cell Phone Charges|
|Luggage, Briefcases, Bags, etc.||Home Phone Services|
|Child Care Services||Cable TV Service|
|Children’s Clothing||Home Insurance|
|Children’s Footwear||Residential Rent|
|Clothing||Prepared Foods Sold for $4 or Less|
|Child Car Seats and Car Booster Seats||Newspapers|
|Vehicles and Parts||Radios, Stereos, CD Equipment and Accessories|
|Vehicle Repairs (Parts and Labour)||TVs, DVDs and Accessories|
|Over-the-Counter Medication||Music Lessons|
|Crafting Supplies (Scissors, Yarn)||Pharmacist Dispensing Fees|
|Home Maintenance Equipment (Lawnmowers, Snow Blowers, Sprinklers)||Auto Rentals|
|Mortgage Interest Costs||Adult Incontinence Products|
|Refrigerators and Freezers||Feminine Hygiene Products|
|Prepackaged Computer Software||Diapers|
|Change in Taxable Status for Consumers — Examples|
|Electricity||Personal Services (e.g., Hairstyling)|
|Professional Services (e.g., Legal, Accounting and Real Estate Fees and Commissions)||
Internet Access Fees
The impact on individual households will vary depending on a number of factors, such as spending patterns, level of savings, and tax credits and deductions claimed. The following examples illustrate the impact of the proposed tax changes on several households. These impacts include the new tax relief measures proposed in the Ontario Tax Plan for More Jobs and Growth Act, 2009, but do not reflect the increased personal incomes that are expected due to stronger economic growth resulting from the full tax plan. Three time periods are presented for each example:
As proposed in the 2009 Budget, the RST will be replaced with a VAT and combined with the GST to create the HST effective July 1, 2010.
The McGuinty government continues to work with businesses, stakeholder organizations and other interested parties to ensure a smooth transition to the HST.
The government has published several information notices to help address taxpayer questions. To help consumers and businesses prepare for the proposed tax changes, the government released transitional rules for housing on June 18, 2009 and general transitional rules on October 14, 2009. Additional details on point-of-sale rebates were released on November 12, 2009. These information updates are available at www.ontario.ca/taxchange.
Additional information is included in this paper to further help consumers and businesses prepare for the HST.
On November 9, 2009, Canada and Ontario entered into a Comprehensive Integrated Tax Coordination Agreement (CITCA), facilitating a modern sales tax system with a single administration that will save businesses more than $500 million per year in compliance costs alone. This historic agreement is based on the Memorandum of Agreement signed by Canada and Ontario in March 2009 and provides the policy framework for the HST.
The CITCA confirms $4.3 billion in federal transitional assistance, enables areas of provincial tax policy flexibility and provides for the best possible arrangements for Ontario Public Service employees affected by the changes. Additional information on the CITCA is included in the Technical Appendix and a copy of the Agreement is available at www.ontario.ca/taxchange.
As part of the move to the HST, Ontario will wind down broad-based tax provisions of the current Retail Sales Tax Act, with the exception of certain provincially levied taxes, such as the sales tax on specified insurance premiums and private transfers of used vehicles.
The existing RST and related exemptions, special rates, credits and rebates under the Retail Sales Tax Act will generally end for transactions on or after July 1, 2010.
As announced in the 2009 Budget, under the HST, Ontario’s Public Service Bodies (PSBs) will be able to claim proportional rebates of the provincial portion of the HST they pay for inputs used to provide exempt supplies.
|Public Service Body Rebate Rates
Rebate for Ontario’s
|Charities and Qualifying Non-Profit Organizations||
|Universities and Colleges||
The proposed PSB rebates are intended to keep each PSB sector fiscally neutral relative to the RST it currently pays. As a result, the aggregate tax burden for each sector will remain unchanged after the transition to the HST.
Public service bodies providing taxable supplies will be eligible for input tax credits. The Technical Appendix provides further information regarding PSB rebates as well as the Special Quick Method of Accounting for PSBs.
The 2009 Budget proposed temporary restrictions on input tax credits (ITCs) that will apply to certain inputs used by large businesses (generally those with annual taxable sales in excess of $10 million) and certain financial institutions. These restrictions will be temporary and will apply only to the provincial portion of the HST. After the first five years of implementation, full ITCs will be phased in over a three-year period. Similar to the restricted ITC system in Quebec, the restrictions will apply only to certain inputs: energy, except where used to produce goods for sale; certain telecommunication services; certain road vehicles and fuel used to power those vehicles; and food, beverages and entertainment.
To support Ontario farmers, these temporary restrictions will not apply to farming businesses.
To support PSBs, these temporary restrictions will not apply to PSBs (i.e., school authorities, hospital authorities, public colleges, universities, municipalities, charities and non-profit organizations).
The Technical Appendix provides further information regarding the application of restricted ITCs as well as the exemption from these temporary restrictions for farms and PSBs.
The 2009 Budget proposed to provide targeted relief for consumers from the eight per cent provincial component of the HST on many items important to Ontario families through point-of-sale rebates for books, children’s clothing and footwear, children’s car seats and car booster seats, diapers and feminine hygiene products.
In addition, point-of-sale rebates of the eight per cent provincial component of the HST are proposed for print newspapers and qualifying prepared food and beverages sold for a total of $4.00 or less.
See the Technical Appendix for further details.
The McGuinty government has proposed several measures that will help Ontarians buying new homes, support a strong housing industry and encourage economic growth and job creation in this important sector.
As announced on June 18, 2009, new homes purchased as primary residences across all price ranges will qualify for a rebate of up to $24,000. This rebate will ensure that, on average, new homes priced up to $400,000 will not be subject to additional tax compared to the RST currently embedded in the prices of new homes.
According to a recent TD Bank report, harmonization “may result in the drop of the purchase price of a new home valued under $500,000.”12 The TD Bank’s analysis of the impact of harmonization on the price of a new home in Ontario is illustrated in Chart 17. It shows a net tax reduction for lower-priced homes as a result of Ontario’s new housing rebate overcompensating for the RST currently embedded in the prices of these homes.
As announced in the 2009 Budget, Ontario will provide up to $400 million in one-time transitional assistance for small businesses to assist with point-of-sale and accounting systems changes required to collect the HST.
Small business transitional assistance of up to $1,000 will be available for GST/HST registrants, other than financial institutions, in business in Ontario on July 1, 2010, who make taxable supplies and have less than $2 million in annual revenue from taxable sales.
Reducing Compliance Costs
To simplify administration, the HST will generally use the same rules and tax base as the GST. This will significantly reduce the administrative burden on businesses that currently comply with two separate and sometimes conflicting sets of tax rules. The HST will be administered by the Canada Revenue Agency (CRA). Ontario businesses will benefit from one set of forms, one payment system and one point of contact for audits, appeals and taxpayer services. This will save Ontario businesses, both large and small, more than $500 million a year in compliance costs and will help to promote job creation and growth.
Under the RST system, Ontario compensates vendors for collecting and remitting the tax. Vendor compensation will end as part of the transition to the HST. Vendor compensation will 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.
Promoting Newer, More Fuel-Efficient Vehicles
Ontario currently applies a Tax for Fuel Conservation (TFFC) and provides a Tax Credit for Fuel Conservation (TCFFC) for new passenger and sport utility vehicles based on highway fuel-consumption ratings. Both the TFFC and TCFFC are legislated under the Retail Sales Tax Act. As part of the transition to the HST and wind-down of the RST, the TFFC and TCFFC will no longer apply to new vehicle purchases on or after July 1, 2010. This will save businesses and consumers approximately $35 million per year.
The McGuinty government’s goal is that, by 2020, one in every 20 passenger vehicles on the province’s roads will be an electric vehicle. This will not only help the environment, but it could also strengthen Ontario’s economy by driving innovation, revitalizing the global auto sector and creating jobs. To support this ambitious plan, various incentives were recently announced, including a purchase rebate for consumers to help reduce the higher cost of electric vehicles. The rebate will be available for plug-in hybrid and battery electric vehicles purchased after July 1, 2010. The introduction of the new electric vehicle rebate coincides with the sunset date for the existing RST rebate for alternative fuel vehicles, which will no longer be available for purchases as of July 1, 2010.
Eliminating the Multi-Jurisdictional Vehicle Tax
Ontario currently applies an annual pro-rated sales tax on multi-jurisdictional vehicles — the multi-jurisdictional vehicle tax (MJVT) — under the Retail Sales Tax Act. The MJVT applies to new registrations and registration renewals for trucks and buses that are registered to travel into and out of Ontario under the International Registration Plan (IRP). The RST does not apply to the purchase of these vehicles and any related repairs that are subject to the MJVT.
As part of the transition to the HST and wind-down of the RST, the MJVT will no longer apply to renewals or new registrations of these multi-jurisdictional vehicles under the IRP on or after July 1, 2010. In addition, the vehicles will no longer be subject to RST (exit tax) when they cease to be registered under the IRP on or after July 1, 2010.
Eliminating the MJVT will be consistent with the treatment in other Canadian provinces that have adopted a VAT and will help maintain a level playing field between multi-jurisdictional and domestic vehicles.
Simplifying Sales to Government
Like every business in Ontario, the Ontario government and its Crown agencies must be ready to comply with the HST, effective July 1, 2010.
Currently, the government pays RST on its purchases, but claims a GST exemption. Claiming this exemption requires businesses to separate government purchases from other purchases, increasing business compliance costs.
As part of moving to the HST, the government is simplifying how it does business by reducing the administrative burden on businesses. Under the HST, the Ontario government will pay the HST upfront on all its purchases and claim a rebate from the CRA for eligible HST amounts. Businesses will no longer have to separate government purchases, decreasing their compliance costs.
This is called the pay-and-rebate model. It is used by all of the provinces that have a harmonized sales tax.
The 2009 Budget proposed to make adjustments to current alcohol fees, levies and charges and retain a sales tax on private transfers of used vehicles.
The proposed Ontario Tax Plan for More Jobs and Growth Act, 2009 will replace certain alcohol charges with taxes to enhance their operational structure and legislative clarity; these measures will take effect on July 1, 2010.
The proposed rates shown in Table 6 will be set to achieve the following policy objectives:
|Proposed Alcohol Rates||Table 6|
|Non-Draft Beer Basic Tax||69.75¢/litre|
|Draft Beer Basic Tax||54.75¢/litre|
|Non-Draft Beer Basic Tax (Manufactured by a Microbrewer1)||19.76¢/litre|
|Draft Beer Basic Tax (Manufactured by a Microbrewer1)||18.26¢/litre|
|Beer Volume Tax||17.6¢/litre|
|Beer and Wine Environmental Tax||8.93¢ per non-refillable container|
|Basic Tax on Beer Made at a Brew Pub||20.90¢/litre|
|Ontario Wine and Wine Cooler Basic Tax||6.1%|
|Wine Volume Tax||29¢/litre|
|Wine Cooler Volume Tax||28¢/litre|
|1 A microbrewer will be defined as a manufacturer of beer whose annual worldwide production of beer is 50,000 hectolitres or less.|
The proposed changes will ensure a level playing field across all distribution channels as follows:
In addition, the new wine rates will apply to the purchase of wine from winery retail stores to offset the proposed reduction in the sales tax rate.
“Two key strategies for controlling alcohol-related health and social problems involve pricing alcohol at levels that discourage heavy (high-risk) consumption, and maintain the real value of prices relative to inflation over time. As such, ”Towards a Culture of Moderation” calls for all provinces in Canada to adopt minimum retail social-reference prices (so-called minimum prices) for alcohol, and index these prices, at least annually, to the Consumer Price Index (CPI).”
MADD Canada, Letter to the Editor, The Globe and Mail, December 23, 2008
Complementary changes to maintain social responsibility will also be introduced. Specifically, the spirits, wine and beer floor prices will be indexed annually based on a three-year average of the Ontario Consumer Price Index (CPI). The proposed legislation also includes provisions that will index the beer basic rate.
|Proposed Alcohol/Revenue Changes
|Reduced RST on Alcohol||(220)||(310)|
|Existing Alcohol Fee Revenue1||(345)||(460)|
|Alcohol Legislative Changes||565||770|
|Refundable Corporate Tax Credit for Growing Microbrewers||–||–|
|Net Change in Alcohol Revenue||0||0|
1 Reported as part of liquor licence revenue.
As announced on October 13, 2009, the McGuinty government is proposing a plan to build on the success of the Ontario grape and wine industry. Central to this strategy is the continued growth of Vintners Quality Alliance (VQA) wines made from 100 per cent Ontario grapes. To support VQA, the Province will implement a comprehensive plan that will include a VQA support program, marketing initiatives and transition programs. These programs will be financed by levying an additional 10 percentage points on cellared in Canada (CIC) wines sold in winery retail stores. It is expected that this higher rate will generate approximately $12 million a year in additional revenue that will go to support Ontario’s strategy for VQA wines and grapes in Ontario.
Further details on the funding for these initiatives will be announced by the Minister of Consumer Services.
Currently, Ontario provides a graduated beer fee structure for microbrewers. These lower rates help support the development and growth of microbrewers in the province. As a result of the proposed changes, the existing graduated rate structure will be replaced.
A single reduced basic tax rate will apply to purchases of microbrewery products made by beer manufacturers whose annual worldwide production of beer is 50,000 hectolitres or less. This lower rate will help ensure that existing Ontario microbrewers continue to benefit from the same level of support as they do now.
To support Ontario microbrewers as they grow and create jobs, the government is proposing to introduce legislation next spring that will provide a refundable corporate tax credit for growing microbrewers, effective July 1, 2010.
For purposes of the tax credit, a qualifying microbrewer will be a corporation that is a manufacturer of beer with a permanent establishment in Ontario and whose total annual worldwide production of beer exceeds 50,000 hectolitres but does not exceed 150,000 hectolitres.
A maximum tax credit of up to $2,499,500 on eligible non-draft beer sales or a maximum tax credit of up to $1,824,500 on eligible draft beer sales will be available to qualifying microbrewers on sales over 50,000 hectolitres and up to, and including, 75,000 hectolitres. The tax credit will be proportionately reduced when sales exceed 75,000 hectolitres and fully eliminated when sales exceed 150,000 hectolitres. This proposed tax support will replace current program support for growing microbrewers.
On September 26, 2008, the McGuinty government announced a new four-year Ontario Craft Brewers Opportunity Fund (OCBOF). The OCBOF provides $1.8 million annually to be distributed among eligible Ontario craft beer manufacturers and $200,000 to the Ontario Craft Brewers organization to support the continued growth and development of craft beer manufacturers in Ontario. To date, approximately $4 million has been provided under this program.
The 2009 Budget announced that Ontario will retain a sales tax on private transfers of used vehicles, similar to the tax treatment in other provinces.
To help ensure a level playing field between sales by GST/HST registrants (e.g., car dealerships) and private sales, the tax rate on private transfers of used vehicles will be 13 per cent. Applying the 13 per cent rate to private transfers of used vehicles will raise about $70 million per year in additional revenue.
Effective July 1, 2010, gifts of used vehicles between siblings will no longer be subject to Ontario sales tax.
The 13 per cent tax on private transfers of used vehicles will be administered by Ontario and will generally apply to the same vehicle classes that are currently subject to RST, including boats and aircraft. Exemptions under the current RST on used vehicles will be maintained, and the exemption for gifts by family members will be expanded to include siblings, similar to the treatment in other provinces.
The 2009 Budget proposed a comprehensive package of tax changes to promote Ontario’s economic growth and to better position Ontario’s economy for long-term competitiveness in a global marketplace. In addition to the tax cuts for business proposed in the comprehensive tax package, the proposed Ontario Tax Plan for More Jobs and Growth Act, 2009 will provide targeted tax measures to support education and training, new investments and well-paying jobs in key sectors of the economy.
The economic benefits of a highly educated and skilled workforce are clear. The McGuinty government’s Skills to Jobs Action Plan includes tax measures that will help create jobs and prepare the province’s workforce for the new economy. The 2009 Budget provided an additional $50 million annually to support businesses that hire and train co-op students and apprentices through enhancements to the
Co-operative Education Tax Credit and proposed enhancements to the Apprenticeship Training Tax Credit (ATTC). The proposed ATTC enhancements will make it the most generous tax credit of its kind in Canada.
Apprenticeship Training Tax Credit
Co-operative Education Tax Credit
The McGuinty government continues to partner with key sectors to position Ontario businesses to succeed in an increasingly competitive global economy.
Ontario’s entertainment and creative cluster is a cornerstone of Ontario’s new innovative economy. It is the third largest in North America by employment, after California and New York. The economic health of this cluster enhances creativity and innovation in the province. It also boosts economic growth by attracting businesses, skilled workers and highly mobile professionals and investors to Ontario.
To support job creation and new investment in Ontario, the McGuinty government proposed enhancements in 2009 to a number of the Province’s media tax credits. Ontario’s enhanced media tax credits will provide about $280 million in tax support in 2009 to strengthen the entertainment and creative cluster.
“It [expanding the Film Production Services Tax Credit] will ensure Ontario continues to attract productions that generate billions of dollars in economic activity, protecting our infrastructure and creating jobs throughout the industry.”
Brian Topp, Co-Chair, FilmOntario, June 29, 2009
Tourism plays an important role in Ontario’s economy. According to the February 2009 report prepared by the Ontario Tourism Competitiveness Study, chaired by Greg Sorbara, “[t]he contribution from a stronger, more dynamic sector could make tourism a fundamental building block of the next Ontario economy.”13 For that reason, as part of its tax package, Ontario committed to allocating approximately $40 million to destination marketing in Ontario tourism regions, once these are established, to help support tourism development and job creation.
Building on that commitment, Ontario is proposing to create a legislative mechanism to allow for the establishment of a special dedicated levy on transient accommodation, such as hotel rooms, to promote destination marketing and management programs. The Regional Tourism Levy will implement a key recommendation of the Ontario Tourism Competitiveness Study to standardize and replace destination marketing fees across the province with this new dedicated funding mechanism.
Legislative amendments will allow the government to regulate the rate of the Regional Tourism Levy for each tourism region prescribed under the Ministry of Tourism and Recreation Act. The proposed amendments also provide that the rate could not exceed three per cent.
The revenue collected from the levy will be remitted to the Province and, as suggested by the Study, will become a source of funding for qualifying regional Destination Marketing and Management Organizations.
For 2010–11 and 2011–12, during the transition to tourism regions, a further $25 million per year will be provided to support job creation and the tourism industry.
To ensure a smooth transition to the new system, the Province has been working closely with stakeholders to establish tourism regions and intends to work with the industry on details related to the implementation of the levy. The authority for the levy will come into force upon proclamation.
This appendix provides further technical details to help consumers and businesses transition to the HST.
The Comprehensive Integrated Tax Coordination Agreement (CITCA), entered into on November 9, 2009, sets out parameters including federal transitional assistance, provincial tax-policy flexibility and provincial revenue-allocation requirements. The Agreement also includes federal commitments to negotiate the best possible arrangements for employment of Ontario Public Service staff at the Canada Revenue Agency (CRA) and the Canada Border Services Agency in Ontario, and to maximize activities and operations in Ontario.
The CITCA will be supplemented by:
Canada and Ontario have concluded a Comprehensive Integrated Tax Coordination Agreement (CITCA) that, subject to legislative approvals, will:
Canada will provide Ontario with a total of $4.3 billion in transitional payments — $3 billion upon implementation of the HST in Ontario on July 1, 2010 and $1.3 billion on July 1, 2011, to promote economic growth and support the transition to the new value-added tax.
The CITCA will also require the Province to remain a party to the Agreement for a period of at least five years from the implementation date. Ontario will also be required to maintain its existing eight per cent rate for at least two years.
As announced in the 2009 Budget, Ontario proposes to provide targeted relief from the eight per cent Ontario component of the HST on many items important to Ontario families by providing point-of-sale rebates of the Ontario component of the HST for books, children’s clothing, children’s footwear, children’s car seats and children’s car booster seats, diapers and feminine hygiene products.
In addition to the point-of-sale rebates proposed in the 2009 Budget, Ontario proposes to provide further targeted sales tax relief. Additional point-of-sale rebates of the Ontario component of the HST are proposed for print newspapers and qualifying prepared foods and beverages sold for a total of $4.00 or less.
Generally, purchasers will not be required to take any steps in order to take advantage of these point-of-sale rebates. Where a person purchases a designated item at a retail establishment, the retailer will automatically provide the purchaser with the point-of-sale rebate, crediting the Ontario component of the HST and only collecting the five per cent federal component of the HST on that item. Crediting purchasers in this manner will not affect a retailer’s ability to claim ITCs on its business inputs. Also, there will be no requirement for the retailer to indicate the point-of-sale rebate on its invoices or to indicate the point-of-sale rebate amounts credited to the purchaser in its GST/HST return. In the event that a purchaser does pay the Ontario component of the HST on the purchase of a designated item (i.e., the retailer did not credit the Ontario component of the HST to the purchaser), the purchaser will be entitled to apply to the CRA, within four years of the day that the tax became payable, for a rebate of the Ontario component of the HST paid.
The point-of-sale rebate of the Ontario component of the HST will not only be available to purchasers at retail establishments located in Ontario, but will also be available on Internet purchases of designated items. Further, the point-of-sale rebates will be available on supplies of designated items made at any point in the distribution chain, including supplies made by producers, wholesalers and distributors. In other words, the point-of-sale rebate of the Ontario component of the HST will be available on any supply of a designated item where the Ontario component of the HST applies.
In addition, persons importing a designated item into Ontario, or bringing a designated item into Ontario from another province, will not be required to pay the Ontario component of the HST. The current GST treatment will continue to apply for the five per cent federal component of the HST in respect of an importation.
The CRA will administer these point-of-sale rebates on behalf of the Province of Ontario.
The following information provides additional details for consumers and retailers:
Additional point-of-sale rebates from the eight per cent provincial component of the HST are proposed for the following:
This point-of-sale rebate is expected to provide a benefit to consumers of approximately $260 million per year.
The Province is working with the federal government to refine the above estimates based on the most currently available data.
The 2009 Budget announced proposed temporary restrictions on ITCs that will apply to certain items used by large businesses, including certain financial institutions, in the course of their commercial activities (i.e., the making of taxable supplies, including zero-rated supplies). The restrictions will be temporary during the initial implementation of the HST and will only apply to the provincial portion of the tax. The restrictions will be similar to those currently in place in Quebec for large businesses.
After the first five years of HST implementation, ITCs relating to restricted items will be phased in over a three-year period. Accordingly:
The restrictions will generally apply to restricted items acquired or brought into Ontario for consumption or use in Ontario, but not to restricted items acquired or brought in for resale or resupply.
Restricted items acquired outside Ontario for consumption or use inside Ontario will generally be subject to the restrictions. Conversely, restricted items acquired in Ontario for consumption or use outside Ontario will generally not be subject to the restrictions.
The following rules will apply in determining who is a “large business” subject to the ITC restrictions:
To support Ontario farmers, the restrictions will not apply to items acquired for use in farming activities by a person whose chief source of income is “farming,” as that term is defined in the Income Tax Act (Canada) (ITA).
To further support public service bodies (PSBs), these temporary restrictions will not apply to persons that are PSBs for purposes of the ETA (i.e., school authorities, hospital authorities, public colleges, universities, municipalities, charities and non-profit organizations).
Where the ITC restrictions apply to a partnership (because the partnership is a large business), a member of the partnership (other than an individual) that acquires or brings into Ontario restricted items for consumption or use in the activities of the partnership will be considered to be a large business for the purposes of that acquisition or bringing in.
Where a participant in a joint venture is a large business that has made a joint-venture election with the operator of the joint venture, and the operator acquires or brings into Ontario a restricted item on behalf of the participant, the operator will be considered to be a large business for the purposes of that acquisition or bringing in.
The restrictions will generally apply to the following property and services:
Additional details regarding restricted ITCs will be released in an upcoming information notice.
As announced in the 2009 Budget, under the HST, Ontario’s PSBs (i.e., municipalities, hospital authorities, universities, public colleges, school authorities, charities and qualifying non-profit organizations) will be able to claim rebates for a percentage of the provincial portion of the HST they pay for their inputs used in their exempt activities. Ontario’s PSB rebates were calculated to ensure that, as a whole, each sector will remain fiscally neutral relative to the amount of RST it currently pays.
Table 5 sets out the proposed PSB rebate rates.
A PSB that is a GST registrant could recover the HST paid or payable on purchases made and expenses incurred to make taxable supplies by claiming ITCs. The PSB rebate will be available to partially recover the HST paid or payable by a PSB on eligible purchases that were not recoverable through an ITC. A PSB does not have to be a registrant to be eligible for the rebate. As previously stated, PSBs will not be subject to temporarily restricted ITCs.
Similar to under the GST, Ontario’s PSBs will generally be eligible to take advantage of the following simplified rules to further ease their compliance requirements.
Under the GST, registrants must generally track the tax they pay on inputs for taxable and exempt supplies separately. However, to reduce the compliance requirements, the Special Quick Method (SQM) of accounting is available to most PSBs other than charities, and will be available under the proposed HST.
Public service bodies that qualify and elect to use the SQM do not separately track the tax paid on most inputs for taxable or exempt supplies. Instead, the specified PSB remittance rate will apply to these inputs. The SQM acts as a proxy for the value of ITCs and allows the PSB to retain a portion of HST collected on taxable sales in lieu of claiming ITCs.
When a PSB uses the SQM, the PSB will still collect the 13 per cent HST on its taxable supplies of goods or services. However, to calculate the amount of the HST to remit, the PSB will multiply the amount of HST-included supplies for the reporting period by the remittance rate(s) that apply (see Table 8).
The SQM remittance rates are less than the 13 per cent rate of tax that a PSB collects. This means that the PSB will remit only a part of the tax it collects. The part of the tax that the PSB keeps accounts for the approximate value of the ITCs it normally will have claimed since it cannot claim ITCs on most of its purchases when using this method. The following sets out the proposed Ontario SQM rates:
|Special Quick Method Remittance Rates
|Supply Made in a Non-HST Province||Supply Made in an HST Province (with an 8% provincial HST rate)|
|PSB location||Ontario (proposed)||Ontario (proposed)|
|Specified Facility Operator, Qualifying NPO, Designated Charity1||3.0||9.9|
|Universities and Public Colleges2||3.3||10.2|
|Universities and Public Colleges3||3.9||10.7|
|Hospital Authority, External Supplier, or Facility Operator||4.2||11.0|
|1 "Designated charity" refers to a charity that provides employment assistance to individuals with disabilities, supplies services that are performed by such individuals to clients, and has been approved by the Minister of National Revenue to make its supplies of these services taxable when provided to a GST/HST registrant.|
|2 These rates must be used if vending-machine sales (and certain other retail sales) are at least 25 per cent of an amount determined by a formula set out in the regulations.|
|3 These rates must be used if vending-machine sales (and certain other retail sales) are less than 25 per cent of an amount determined by a formula set out in the regulations.|
The GST framework provides a separate Special Net Tax Calculation for charities. This method will also be used by charities under the proposed HST. Charities are generally required to use this method, but they may elect not to use it if they make supplies outside Canada or zero-rated supplies in the ordinary course of their business, or if 90 per cent or more of their supplies are taxable.
Under the charity-specific net tax calculation, charities are not required to track the GST paid on inputs to most taxable supplies. The general rule is that charities remit 60 per cent of the tax collected on their taxable supplies and keep the remaining 40 per cent in lieu of claiming ITCs (there are certain exceptions, such as for real property and capital property, where ITCs may be claimed). The GST paid is eligible for the charity-specific PSB rebate (the Ontario proposed charity rate is 82 per cent).
Ontario will adopt the 60 per cent Special Net Tax Calculation rate for use by certain charities.
Ontario will parallel the GST treatment of charities and qualifying non-profit organizations that provide eligible services traditionally performed in hospitals by allowing them to claim a rebate of the provincial part of HST on inputs to these services at the proposed 87 per cent hospital rate, using the same rules and definitions that apply for the GST.
Additional technical details regarding the HST can be found at www.ontario.ca/taxchange. The HST will use the same tax base and structure as the federal GST, with limited exceptions. Further information regarding the application of the GST is available at www.cra-arc.gc.ca.
1 Michael Smart and Richard M. Bird, “The Economic Incidence of Replacing a Retail Sales Tax with a Value-Added Tax: Evidence from Canadian Experience,” Canadian Public Policy, Volume XXXV, No. 1, 2009.
2 “The Impact of Sales Tax Harmonization in Ontario and B.C. on Canadian Inflation,” TD Economics Special Report, September 18, 2009.
4 See the section titled Creating Jobs and Growth: Tax Cuts for Business for a more detailed presentation of this example and for other illustrative examples of the potential savings to businesses.
5 These provinces are Quebec, Newfoundland and Labrador, Nova Scotia and New Brunswick.
6 OECD, Economic Survey of Canada, 2004, p. 114.
7 While each example does not represent an actual company, the financial profile and corporate tax payable are based on actual corporate tax administration data for corporations in the industry. Sales tax and embedded sales tax estimates are based on effective tax rates paid by each industry, as determined using Statistics Canada survey data.
8 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 and capital and sales taxes.
9 Jack M. Mintz, “Ontario’s Bold Move to Create Jobs and Growth,” School of Public Policy, University of Calgary, November 2009.
12 “The Impact of Sales Tax Harmonization in Ontario and B.C. on Canadian Inflation,” TD Economics Special Report, September 18, 2009.
13 “Discovering Ontario: A Report on the Future of Tourism,” Ontario Tourism Competitiveness Study, February 2009, p. 6.
14 Other snack foods will be items excluded from basic groceries under paragraphs (e) to (j) and (l) in Part III of Schedule VI to the federal Excise Tax Act.