: Ontario’s Long-Term Report on the Economy
Chapter 4: Modernizing Ontario’s Tax System for Jobs and Growth

Introduction

Rapid changes in the global economy, together with growing pressures on public services from an aging population, present challenges and opportunities in positioning Ontario’s economy for growth and prosperity.

As technology advances and new economies emerge to compete with established ones, the global economy has become highly integrated. This has led to intense competition for the internationally mobile investment required to support economic growth and job creation.

Furthermore, the recession has changed the economic landscape, posing additional challenges to Ontario’s traditional sources of prosperity.

A comprehensive tax package

To better position Ontario for economic growth as the economy emerges from the recession, the 2009 Budget presented a plan to modernize Ontario's tax system. This comprehensive tax package, which was passed by the legislature in December 2009 under the Ontario Tax Plan for More Jobs and Growth Act, 2009, will significantly improve Ontario's competitiveness for new business investment and cut income taxes for people. It will lead to more jobs and higher incomes, and help sustain key priorities such as health care and education.

The comprehensive tax package builds on a wide range of measures the Ontario government has implemented over the past six years to improve Ontario’s competitiveness. These include:

  • strategic tax cuts, such as the legislated elimination of the Capital Tax and reductions in Business Education Tax rates;
  • streamlining the cost of doing business in Ontario through initiatives such as the implementation of a single corporate tax administration; and
  • investments in infrastructure, education and innovation.

The Comprehensive Tax Package Improves Ontario’s Tax Competitiveness, Leading to New Investment, More Jobs and Higher Incomes

A recent report by accounting firm KPMG shows that the tax measures in the 2009 Budget significantly improve Ontario’s competitiveness.

KPMG, "Competitive Alternatives: Focus on Tax, 2009 Update for Ontario Ministry of Finance," November 2009.

"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:

  • increased capital investment of $47 billion;
  • increased annual incomes of up to 8.8%, or $29.4 billion; and
  • an estimated 591,000 net new jobs."

Jack M. Mintz, "Ontario's Bold Move to Create Jobs and Growth," School of Public Policy, University of Calgary, November 2009

Tax Plan for Jobs and Growth1

Tax relief for people and business

The comprehensive tax package delivers significant permanent and temporary tax relief of $15 billion to people and business over three years by:

  • replacing the Retail Sales Tax (RST) with a more modern, value-added tax (VAT) that will be combined with the federal Goods and Services Tax (GST) to create a Harmonized Sales Tax (HST);
  • cutting personal income tax (PIT) for 93 per cent of income tax payers;
  • enhancing property tax credits and sales tax credits for low- to middle-income individuals and families;
  • providing temporary support to people and businesses to assist in the transition to the HST;
  • reducing Corporate Income Tax (CIT) rates for large and small businesses; and
  • eliminating the small business deduction surtax.

Promoting Jobs and Growth Through Sales Tax Harmonization and Tax Cuts for Business

Sales Tax Harmonization for Jobs and Growth

Harmonized Sales Tax for economic growth and jobs

Effective July 1, 2010, the RST will be replaced with a 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, improve productivity, create new jobs and raise incomes.

Harmonization Will Lead to Stronger Productivity Growth and Greater Prosperity for Ontario

"Last year, we said that Ontario needed to pursue tax reform as a high priority. Our key recommendations were to harmonize the provincial sales tax (PST) with the federal goods and services tax (GST) and to bring down corporate income tax rates that penalized new productivity-enhancing investments by business. We are pleased that these recommendations were adopted in the March 2009 provincial budget. The tax changes announced in this budget will help all Ontarians."

“Navigating through the Recovery,” Task Force on Competitiveness, Productivity and Economic Progress, Eighth Annual Report, November 2009.

The RST is charged on many purchases made by businesses in manufacturing goods and providing services. The tax becomes embedded in the cost of goods and services and gets passed through to the next stage of the production, distribution and retail processes. The result is a compounding of tax upon tax that raises the cost of running a business in Ontario. By applying to many capital purchases, the RST also increases the tax burden on new capital investment. For example, assuming that materials account for about half the cost of constructing new buildings used by business, the RST charged on construction materials adds approximately four per cent to the cost of constructing a new building.2

RST harms Ontario’s competitiveness

This places Ontario at a competitive disadvantage with 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 relies on exports. It also makes it more difficult for Ontario businesses to compete against imports.

Removing the hidden sales tax

The HST removes this hidden tax by refunding sales taxes paid on most business inputs.3 This 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.

By no longer taxing most business inputs under the HST, Ontario will improve its tax competitiveness internationally. Ontario will join four other provinces4 and more than 140 countries that have already adopted a VAT. These include all the countries in the Organisation for Economic Co-operation and Development (OECD), with the exception of the United States.

As discussed in Chapter 1: Demographic Trends and Projections, the supply of workers in Ontario will grow slowly by historical standards. A relatively smaller share of workers in the population will have to produce the income needed to fund the public services required by a growing number of retirees. To maintain a high standard of living, it will be vital to have strong growth in productivity. The increased investment per worker resulting from the HST will help bring about stronger productivity growth.

The increases in investment, productivity, jobs and incomes from moving to the HST are further enhanced by the CIT rate cuts and the legislated elimination of the Capital Tax.

Corporate Tax Cuts for Jobs and Growth

Permanent tax cuts for business

The comprehensive tax package permanently reduces taxes for large and small businesses across the province starting July 1, 2010. The main elements of the tax cuts are as follows:

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

These tax cuts are in addition to the permanent tax cut for business provided by the legislated elimination of the Capital Tax on July 1, 2010.

Big tax savings for business

Table 1 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.

Table 1
Total Business Tax Relief by Sector — Annual Savings1,2
($ Millions)
Sector HST Corporate Income Tax Capital Tax3 Total
Agriculture 30 15 s 45
Forestry, Fishing and Hunting 15 s s 15
Mining, Utilities, Oil and Gas 105 110 100 315
Construction 2,335 120 40 2,495
Manufacturing 510 405 305 1,220
Wholesale Trade 440 245 100 785
Retail Trade 265 100 55 420
Transportation and Warehousing 500 60 35 595
Information and Cultural Industries 565 80 85 730
Financial Services (except Insurance) (900) 535 520 155
Insurance (160) 150 5 (5)
Real Estate (20) 135 75 190
Renting and Leasing 105 25 40 170
Professional, Scientific and Technical Services 395 270 120 785
Other Services (except Public Administration) 280 170 75 525
Total Business 4,465 2,420 1,555 8,440
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 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 tax cuts and the removal of the RST that is embedded in the price of business inputs.5 Charts 1 to 4 present these savings for a manufacturer, restaurant, retailer and software publisher. Further examples are summarized in Table 2. The examples show that these costs will be reduced by about 60 per cent to over 90 per cent.

Chart 1, bar graph: Tax Savings for a Manufacturer Chart 2, bar graph: Tax Savings for a Restaurant Chart 3, bar graph: Tax Savings for a Retailer Chart 4, bar graph: Tax Savings for a Software Publisher
Table 2
Annual Tax Savings to Business — Illustrative Examples
    Tax Payable1  
Industry/Business Revenue 2009 Full Implementation2 % Reduction in Tax Payable
Coffee Shop $1,000,000 $9,300 $2,500 73
Dry Cleaner $200,000 $6,480 $960 85
Forestry $20,000,000 $243,000 $45,000 81
Hotel $9,000,000 $245,500 $74,500 70
Landscaping $3,000,000 $54,600 $8,500 84
Movie Theatre $1,000,000 $15,900 $6,400 60
Telecommunications $250,000,000 $5,125,000 $230,000 96
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 forestry company, when input tax credits are fully phased in.

Cutting the Tax Burden on New Business Investment

Tax reductions to attract investment

The tax reductions for business will dramatically reduce Ontario’s marginal effective tax rates (METRs)6 on new business investment. 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 be cut in half, falling from 32.8 per cent in 2009 to 16.2 per cent in 2018, when the input tax credits are fully phased in (Chart 5). Most of the reduction occurs in 2010, when the METR falls to 18.6 per cent. The reduction in Ontario’s METR relative to the United States and OECD averages significantly improves Ontario’s tax competitiveness in attracting new jobs and investment.

Small business key to job creation and economic growth

The METR for small businesses falls proportionately more. A study has estimated that the small business METR will fall from 28.6 per cent in 2009 to 13.3 per cent in 2010.7 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 the improvement in Ontario’s tax competitiveness will lead to $47 billion in new business investment and 591,000 net new jobs by 2020.8

Chart 5, bar graph: Cutting Ontario’s METR on New Business Investment in Half

Improving Ontario’s Overall Tax Competitiveness

The METR analysis discussed above focuses on the taxes that apply directly to new capital investment. An alternative approach looks at overall taxation as part of the cost of business operations. This broader approach has been used in a highly regarded series of reports by accounting firm KPMG, which look at all taxes paid, including payroll taxes and property taxes. A special update by KPMG examines the impact of the 2009 Budget on Ontario’s tax competitiveness.9

KPMG’s analysis shows a significant improvement in Ontario’s tax competitiveness across all industries as a result of the 2009 Budget measures (Chart 6). The Budget measures widen Ontario’s current tax advantage over the United States and significantly improve Ontario’s competitiveness relative to other jurisdictions in Canada and Mexico, where Ontario was less competitive in the past.

Though all sectors in the study benefit from the tax cuts, the most dramatic improvements in Ontario’s competitiveness are in the services and research and development sectors (Charts 7 and 8).

Chart 6, bar graph: Impact of 2009 Budget on Ontario’s Tax Competitiveness, All Industries Chart 7, bar graph: Impact of 2009 Budget on Ontario’s Tax Competitiveness, Services Chart 8, bar graph: Impact of 2009 Budget on Ontario’s Tax Competitiveness, Research and Development

How the Tax Changes Benefit People

Tax Cuts for People

Tax relief for people

The 2009 Budget provides $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 help ensure a smooth transition to the HST.

  • Effective January 1, 2010, the tax rate on the first tax bracket was cut by one percentage point, from 6.05 per cent to 5.05 per cent. As a result, 93 per cent of income tax payers will see a PIT cut, and approximately 90,000 lower-income tax filers will no longer pay Ontario PIT.
  • Two new tax credits — the Ontario Sales Tax Credit and Ontario Property Tax Credit — replace the existing combined property and sales tax credits starting with the 2010 tax year. The new credits are refundable and provide sales and property tax relief to low- to middle-income families and single people.
  • To support the transition to the HST, eligible Ontario residents aged 18 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.

Impact of Sales Tax Harmonization and Tax Cuts on People

No change in tax status for 83 per cent of consumer purchases

Moving to the HST will cause some consumer 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. Table 3 shows the taxable status of certain goods and services under the HST.

Table 3
Taxable Status of Goods and Services for Consumers Under HST
No Change in Taxable/Exempt Status for Consumers — Examples
Basic Groceries Furniture
Prescription Drugs Toys
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
Books Auto Insurance
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
Tailoring  
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
Tobacco
Heating Fuels Gasoline

Many prices expected to fall

Price increases will be moderated by the pass-through of business savings and, in many cases, prices are expected to fall. A study that examined the experience in the Atlantic provinces following GST harmonization in 1997 found that savings were fully and quickly passed on to consumers.10 Similarly, the TD Bank predicts that 80 per cent of business savings will be passed along to consumers in the first year, rising to 95 per cent by the third year and eventually 100 per cent of business savings will be passed through. The TD Bank notes that “for businesses to generate an increase in demand for their products they will have to pass those savings onto consumers.”11

The impact on people will be further mitigated on an ongoing basis through the PIT cuts and enhanced tax credits and, during the initial years of the HST, through transitional relief.

Tax measures for quality of life

Within 10 years, the HST and tax cuts for business will provide significant benefits for Ontarians through an estimated 591,000 net new jobs, higher annual incomes of up to 8.8 per cent,12 and a stronger, more competitive economy that can better support the quality of life and public services that Ontarians rely on.

The following examples illustrate the impact of the tax changes on several types of households.13 These impacts do not reflect the benefit from the increases in personal incomes that are expected due to stronger economic growth. Three time periods are presented for each example:

  • the first full year of the HST, when families and individuals receive two of the three transition benefit payments designed to assist them while businesses adjust their prices;
  • the third year, when the transition benefits are no longer provided; and
  • at maturity, when the HST credits for businesses are fully phased in.

Chart 9, bar graph: Single Parent on Ontario Works, 2 Children (ages 5 & 7) Chart 10, bar graph: Single Senior, Pension Income $20,000 Chart 11, bar graph: Single Individual, $30,000 Chart 12, bar graph: Couple, $70,000, 2 Children (ages 5 & 10)

1 For further details, see “Ontario’s Tax Plan for Jobs and Growth: Cutting Personal and Corporate Taxes and Harmonizing Sales Taxes,” November 2009, available on the Ontario Ministry of Finance website (ontario.ca/finance).

2 KPMG, “Competitive Alternatives: Focus on Tax, 2009 Update for Ontario Ministry of Finance,” November 2009, p. 9.

3 The HST will be refunded to businesses through input tax credits (ITCs). For large businesses and certain financial institutions, the ITCs for some inputs are being phased in over eight years.

4 These provinces are Quebec, Newfoundland and Labrador, Nova Scotia and New Brunswick. In July 2009, British Columbia also announced that it will harmonize with the GST in order to create jobs and generate long-term economic growth.

5 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.

6 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.

7 Jack M. Mintz, “Ontario’s Bold Move to Create Jobs and Growth,” School of Public Policy, University of Calgary, November 2009.

8 Ibid.

9 KPMG, “Competitive Alternatives: Focus on Tax, 2009 Update for Ontario Ministry of Finance,” November 2009. The full report is available on the Ontario Ministry of Finance website at ontario.ca/finance.

10 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.

11 “The Impact of Sales Tax Harmonization in Ontario and B.C. on Canadian Inflation,” TD Economics Special Report, September 18, 2009.

12 Mintz, ibid.

13 These examples are for illustrative purposes only. The impact on individual households may vary depending on a number of factors, such as spending patterns, level of savings, and tax credits and deductions claimed.

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