Tax Highlights of the Ontario Budget March 27, 2003

As widely reported in the media, the Premier has postponed the spring session of the Ontario legislature and the Finance Minister chose to present the recent budget away from Queens Park. It appears that the budget measures will have to be reintroduced in the legislature at a later time for them to have any legal impact. To add to the uncertainty, an election could be called before the legislature reconvenes. Therefore, it is not clear at this point that the measures discussed below will be introduced as a formal budget. The following is a summary of tax measures proposed in the budget.

Business Tax Measures

Income Tax Rates:

The reduction in the general and M&P corporate tax rates will continue on schedule as announced in previous budgets. As a result, the combined federal and Ontario corporate tax rates will be as follows:

Elimination of Ontario Capital Tax:

Unlike income taxes, capital taxes must be paid even when a corporation is not profitable. In the 2003 federal budget, the federal government proposed to eliminate its capital tax by 2008. The Ontario government announced that it intends to eliminate capital tax for all corporations by the same date of 2008. As a step towards eliminating the capital tax, the government proposes to reduce the capital tax rates for all corporations by 10% effective January 1, 2004.

Apprenticeship Tax Credit:

The government has proposed the introduction of an Apprenticeship Tax Credit for corporations and unincorporated business in Ontario. The tax credit would be a 10% refundable credit for eligible expenditures in respect of apprentices in a qualifying skilled trade. For businesses with total payroll costs of not more than $400,000, the credit would be 15%. An employer would be eligible for a tax credit of up to $250 per month per apprentice to a maximum of $6,000 over a 24-month employment period. Eligible expenditures would be salaries and wages paid after March 27, 2003 to an apprentice in a qualifying skilled trade.

Collection Measures:

The Ministry of Finance will move forward with aggressive measures to ensure that all corporations file their tax returns or Exempt from Filing Declarations. The government will send notices to all corporations in default of filing, requiring immediate filing of appropriate documents, by April 30, 2003. Failure to respond to this notice could ultimately result in the corporations dissolution, as well as prosecution of the directors of the corporation. Where tax is owing, late filing penalties of up to 17% of the tax owing will apply. The rate will increase to 50% for repeat late filers.

Other:

• Ontario will parallel the 2003 federal budget announcement regarding small business rollovers. The taxation of capital gains on investments in eligible small businesses can be deferred if the proceeds of disposition are reinvested in other eligible small business shares.
• Several enhancements are proposed to two programs Labour-Sponsored Investment Funds and Community Small Business Investment Funds . These enhancements are aimed at improving access to capital for small and medium sized businesses.
• Under the Credit Union and Caisses Populaires Act , the government proposes to give credit union members more flexibility in determining the best way for their credit union to provide services to its members. Transfers of credit unions between different federal and provincial jurisdictions to the Ontario jurisdiction, would be facilitated.
• Under the Ontario Book Publishing Tax Credit , the budget proposes to deem the books published and the qualifying expenditures incurred by a predecessor corporation to be those of its successor corporation, effective for corporate reorganizations after December 31, 2001.
• The Ontario Business Research Institute Tax Credit is a 20% refundable tax credit on qualified research and development expenditures incurred by an Eligible Research Institute (ERI) under a research contract funded by the corporation claiming the credit. The rules will be amended to relax the rules that deny a tax credit where the corporation and the ERI are connected. In addition, the ERIs will be given more flexibility in sub-contracting R&D work.

Personal Measures

Income Tax Rates:

The reduction in the lower and middle income tax brackets will continue as announced in the 2002 budget. For 2004, the three tax rates will be as follows (with estimated indexation):

These rates do not include the Ontario surtax. The top marginal rate will remain unchanged for 2003. The combined federal and Ontario personal tax rates are 31.34% for dividends, 23.21% for capital gains and 46.41% for all other income.

The Ontario surtax will be eliminated for individuals with taxable income less than $75,000 per year by January 1, 2005.

In addition, effective January 1, 2004, the Ontario Tax Reduction program which reduces or eliminates income tax for Ontarians with lower incomes, will be enhanced by increasing the basic personal claim to $197 plus an increase for inflation.

Tax Measures for Seniors:

The proposed Ontario Home Property Tax Relief for Seniors program will reimburse seniors who own or rent a home in Ontario for the residential education taxes they pay, in respect of property taxes after July 1, 2003. It is projected that this measure will provide the average senior household with an additional $475.

The new program will require seniors to complete an application. To ensure that amounts are not double counted, the Ontario Tax Credit for Seniors program will be adjusted to reflect this new measure.

Tax Measures for Caregivers and People with Disabilities:

Effective January 1, 2003, it is proposed that the amounts on which the following non-refundable tax credits are based, will increase as follows:

In addition, the budget proposes to expand the eligibility for the caregiver and infirm dependant credits to include more caregivers (such as spouses) and to increase the threshold for the dependants income on which the credits are based. This means that more caregivers will be eligible to claim these credits.

Refundable Education Credit:

Under this credit, parents can claim a refundable credit on qualifying tuition payments made to private, elementary and high schools. The government has announced that it will introduce legislation to phase in the Equity in Education Tax credit according to the its original schedule i.e. 20% in 2003; 30% in 2004; 40% in 2005 and 50% in 2006 and subsequent years. When fully phased in, the tax credit will be 50% of eligible tuition fees to a maximum of $1,750 or $3,500 per child (depending on age).

Child Care Supplement Income Threshold Increased:

The Ontario Child Care Supplement is paid to Ontario families as part of the National Child Benefit. Currently, the supplement is reduced where a familys net income exceeds $20,000. Effective for July 1, 2003, this threshold will be increased to $20,750.

Retail Sales Tax Measures:

• For purchases after March 27, 2003 and before November 26, 2007, the retail sales tax rebate for solar energy systems will be expanded to include wind energy systems, micro-hydro electric systems and geothermal heating/cooling systems for residential premises.
• Buyers who take delivery of qualifying alternative fuel vehicles after March 27, 2003 will be eligible for an increased retail sales tax rebate to a maximum of $2,000. The maximum rebate for propane vehicles will remain at $750.
• Religious and charitable organizations can currently apply for a rebate of retail sales tax that they pay for materials incorporated into buildings that they own or lease under a long-term lease. This rebate will be modernized to reflect modern financial arrangements. For contracts entered into after March 27, 2003, the rules will be amended to expand the eligibility for this rebate to qualifying organizations that enter into an agreement to construct a facility that they will lease on a long-term basis (at least 20 years) immediately upon completion. The charity must have the right to acquire the building for nil or nominal consideration at the end of the lease. There are transitional rules for such contracts entered into on or before March 27, 2003 based on payments made after that date.
• The Purchase Exemption Certificate (PEC) system will be amended to reduce red tape and compliance costs for vendors and taxpayers. PECs will no longer require a signature or list of exempt items and will have no expiry date. Also, to simplify the purchase of eligible farm-related supplies, equipment and building materials, qualifying farmers will be allowed to use a farmer identification card in lieu of a PEC. The changes will be implemented through amendments to the Regulations.
  
  

Land Transfer Tax:

• Life leases are a form of housing for seniors, whereby the owner of a life lease has the right to occupy a residential dwelling for life. Life leases of a registered charity or specified non-profit organizations will be exempt from Land Transfer Tax. The proposed exemption will be retroactive to the application of land transfer tax to unregistered dispositions of land.
• Currently, transfers of farmland into a family farm corporation are exempt from land transfer tax. To provide additional relief, the exemption will be expanded to include transfers of farmland between family members on qualifying transfers after March 27, 2003.

Property Tax:

• Resulting from the governments review, proposed changes will be made to the managed forest property, farm property and rooming houses in the residential property class.
• Proposed measures will be introduced to address policies, procedures and standards for the provision of assessment services by the Municipal Property Assessment Corporation.
• The government will also continue its review of the above and initiate a review of the assessment averaging mechanism introduced with the current value assessment. Pending the outcome of this review, the government proposes to defer the introduction of assessment averaging beyond 2005 and allow for a notice period of 18 months to allow municipalities sufficient time to implement changes.

The following chart compares top personal and corporate tax rates and sales taxes for all provinces and territories, as announced to March 27, 2003