Ontario's Tax Plan For Jobs and Growth: Cutting Personal and Corporate Taxes and Harmonizing Sales Taxes

Highlights
Published: December 2009
Content last reviewed: August 2012
ISBN: 978-1-4435-1766-9 (Print), 978-1-4435-1768-3 (PDF), 978-1-4435-1767-6 (HTML)

Publication Archived

Notice to the reader: On July 1, 2010 the 13 per cent Harmonized Sales Tax (HST) took effect in Ontario and is administered by the Canada Revenue Agency (CRA). For up-to-date information about the HST, visit the CRA website or call 1 800 959-5525.

This publication was archived and kept for historical purposes. Use caution when you refer to it, since it reflects the law in force at the time it was released and may no longer apply.

Ontario's Tax Plan For Jobs And Growth

Effective July 1, 2010, the Retail Sales Tax (RST) will be replaced with a value-added tax (VAT) and combined with the federal Goods and Services Tax (GST) to create a federally administered harmonized sales tax (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 1, 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 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.

Chart 1: VAT Lowers Costs

Making Ontario Businesses More Competitive

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.

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.

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 2).[2]

Chart 2: Business Cost Savings 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 these tax measures and the removal of embedded RST, a manufacturer with annual revenue of $5 million could see its Ontario Corporate Income Tax (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.

Countries Around the World Have Adopted a Value-Added Tax

More than 140 countries and four other provinces[5] have adopted a VAT. Following Ontario's 2009 Budget proposal to harmonize with the GST, British Columbia announced in July 2009 that it will 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

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

Creating Jobs And Growth: Tax Cuts For People

The 2009 Budget proposed $11.8 billion in tax relief to people over three years by cutting personal income tax (PIT), enhancing ongoing sales tax and property tax relief, and providing direct payments to ensure a smooth transition to the HST.

Chart 3: $10.6 Billion in Tax Relief for People Over Three Years

Personal Income Tax Cuts

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.

Sales Tax and Property Tax Relief

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.

Ontario Sales Tax Credit

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.

Ontario Property Tax Credit

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.

Chart 4: Ontario Property Tax Relief, 2003 vs. 2010

Sales Tax Transition Benefit

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.

Creating Jobs And Growth: Tax Cuts For Business

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:

  • 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 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.

To ensure that businesses subject to the Corporate Minimum Tax (CMT) fully benefit from the CIT rate reductions, the 2009 Budget proposed a corresponding reduction in the CMT rate from four per cent to 2.7 per cent. In addition, more small and medium-sized businesses will be exempt 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 changes will take effect for taxation years ending after June 30, 2010. The CMT rate reduction will be pro-rated for taxation years straddling the effective date.

As proposed in the 2009 Budget, the permanent CIT cuts, together with the small business transition support, will deliver $4.6 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 5).

Chart 5: Corporate Tax Relief for Jobs and Growth

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.

Total Business Tax Relief by Sector — Annual Savings1,2
($ Millions)
Table 1
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 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 tax cuts and the removal of the RST that is embedded in the price of business inputs.[6] Charts 6 to 9 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 6: Tax Savings for a Manufacturer

Chart 7: Tax Savings for a Restaurant

Chart 8: Tax Savings for a Retailer

Chart 9: Tax Savings for a Software Publisher

Annual Tax Savings to Business — Illustrative Examples Table 2
    Tax Payable1  
Industry/Business Revenue   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 the forestry company, when input tax credits are fully phased in.

Making Ontario More Attractive for New Investment and Jobs

The tax reductions for business will cut Ontario's marginal effective tax rates (METRs)[7] 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 10). 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.[8] 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.

Chart 10: Cutting Ontario's METR on New Business Investment in Half

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.[9]

How The Tax Changes Will Affect Consumers

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 11).

To mitigate the effect on consumers, the 2009 Budget proposed $11.8 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.[10]

Chart 11: Taxable Status of Goods and Services for Consumers Under HST

Annual Tax Savings to Business — Illustrative Examples Table 2
    Tax Payable1  
Industry/Business Revenue   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 the forestry company, when input tax credits are fully phased in.
Taxable Status of Goods and Services for Consumers Under HST            Table 3

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

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 tax changes on several households. These impacts include the new tax relief measures 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:

  • the first full year of the HST, when families and individuals will receive two out of the three transition benefit payments designed to assist individuals and families while businesses adjust their prices;
  • the third year, when the transition benefit will no longer be provided; and
  • at maturity in 2018, when the HST credits for businesses will be fully phased in.

Chart 12: Single Parent on Ontario Works, 2 Children (ages 5 & 7)

Chart 13: Single Senior, Pension Income $20,000

Chart 14: Single Individual, $30,000

Chart 15: Couple, $70,000, 2 Children (ages 5 & 10)

General Inquiries

For general inquiries regarding Ontario's Tax Plan for Jobs and Growth: Cutting Personal and Corporate Taxes and Harmonizing Sales Taxes please call:

  • Toll-free: 1 800 337-7222
  • 1 800 263-7776 for teletypewriter (TTY)

Footnotes:

[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.

[3] Ibid.

[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] 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.

[7] 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.

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

[9] Ibid.

[10] Ibid.

 
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