Ontario - 2009 Budget

By Alan Rowell , DFA, Tax Specialist and President, The Accounting Place

On March 26th 2009 the Ontario government announced that it would become the 5^th province to join in a single sales tax system and move to a Value-Added Tax Structure. Provincial estimates put the savings on the "cost of compliance" for Ontario business to be $500 million per year, marking a most significant move for businesses and consumers alike. In addition the government moved to reduce personal income taxes for low income earners as well as corporate taxes, in its response to stimulate the economy. Details follow:

THE SINGLE SALES TAX (SST)

Effective July 1, 2010, Ontario will move to a Single Sales Tax of 13%, comprised of 5% Federal and 8% Ontario components. This change will allow Ontario businesses to claim Input Tax Credits on purchases made in the course of doing business, resulting in lower costs and lower pricing as the cost savings are passed to the consumer.

Further, the budget states that, in order to simplify administration, the single sales tax will generally use the same rules and tax base as the federal GST. This means that businesses selling taxable or zero-rated goods and services would deduct the input credits from collected sales tax and remit the difference to Canada Revenue Agency who will administer the Single Sales Tax (SST) on behalf of Canada and Ontario.

Additionally, the "cost of enforcement" currently incurred by the Ontario government will become the responsibility of Canada Revenue Agency, resulting in costs savings at the provincial level. Further, the Federal Government will provide Ontario with $4.3 billion in cash transfers to promote economic growth and support the implementation of the new value-added tax system.

Additional provisions resulting from this announcement include the following:

Ontario Sales Tax Transition Benefit will be provided to families and individuals in Ontario. A family with income less than $160,000 will receive a total of $1,000 from June 2010 to June 2011. The credit begins to phase out at $161,001 and is eliminated at $166,600. Individuals 18 and over will receive a credit of $300 with incomes below $80,000 and will be fully phased out at $82,000.

Small Business Transition. Ontario businesses currently collecting RST on behalf of the province receive compensation of up to $1,500 per year. Under the new system this compensation is removed. In order to assist with costs associated with the transition, Ontario business with less than two million in annual sales will receive a Small Business Transition Credit based on their taxable sales for their first full fiscal quarter commencing after June 30, 2010.

Small Supplier Threshold. The SST will mirror the current GST requirements where, if sales are less than $30,000 in the prior year, registration is not required. The business would neither collect sales tax nor claim input tax credits unless they choose to register. Exemptions. Ontario will offer targeted point-of-sale exemptions for the provincial portion of the SST on the following items:

• Books
• Children's clothing and footwear
• Children's car seats and car booster seats
• Diapers
• Feminine hygiene products

New home buyers will also receive a rebate of 75% of the provincial portion of the SST (6% of the purchase price) on new homes up to $400,000 and a pro-rated rebate on a purchase price from $400,001 to $500,000. New homes exceeding $500,000 will not qualify for the rebate. Resale homes would not be subject to the single sales tax.

Ontario's Public Service Bodies and Qualifying Charities and Non-Profit Organizations will also receive rebates of the SST based on the provincial portion of the SST.

Temporary ITC's Restrictions for Large Businesses:

• Energy, except where purchased by farms or used to produce goods for sale
• Telecommunication services other than internet access or toll-free numbers
• Road vehicles weighing less that 3,000 kilograms (including parts and certain services) and fuel to power those vehicles
• Food, beverages and entertainment

Private Transfers of Used Vehicles. SST will apply to the private transfers of ownership on used motor vehicles.

PERSONAL TAX CHANGES

Alternative Minimum Tax calculations and thresholds will also be affected.

Ontario Dividend Tax Credit. The budget proposes to reduce the dividend tax credit effective January 1, 2010 to accommodate the reduction in the base tax bracket.

Ontario Senior Homeowners' Property Tax Grant. Ontario Seniors will benefit as the budget doubles the Ontario Senior Homeowners' Property Tax Grant from $250 in 2009 to $500 for 2010.

Ontario Sales Tax Credit. The current Ontario Sales Tax Credit will change and be paid in advance as opposed to the current system. The credit will also increase to $260 from $100 for adults and $50 for children. The credit remains income tested and begins to phase out at $20,000 for a single person and $25,000 for a couple.

Corporate Income Tax Rates. Effective July 1, 2010 the budget proposes reducing corporate tax rates for all sectors:

The elimination of the Small Business Deduction Surtax results in all Canadian Controlled Private Corporations paying only 4.5% Ontario tax on the first $500,000 of taxable income.

The reduction in the Corporate Income Tax rate will also result in a corresponding reduction in the Corporate Minimum Tax. Also proposed is a reduction in the Corporate Minimum Tax rate to 2.7% and a corporation with less than $50 million in assets or $100 million in gross revenues will not pay any Corporate Income Tax in Ontario.

The Ontario budget will mirror changes announced January 27, 2009 as follows:

• Ontario Innovation Tax Credit (Scientific Research and Development) phase-out thresholds increased by $100,000 to $500,000 and fully phased out at $800,000.
• Accelerated CCA for computers and software acquired after January 27, 2009 and before February 2011 at 100% with no half-year rule application.
• Mirroring of the Federal CCA legislation for Manufacturing and Processing Equipment
• Mirroring of the Federal budget announcement increasing the Home Buyers' Plan withdrawal limit to $25,000
• Mirroring the Federal budget announcement to allow losses incurred in RIF and RRSP holdings of a deceased person to be carried back and applied against income inclusion on the deceased annuitant's final return.

Ontario Budget 2009 also proposes to enhance a number of Ontario targeted tax credits.

• Ontario Interactive Digital media Tax Credit
• Ontario Computer Animation and Special Effects Tax Credit
• Ontario Book Publishing Tax Credit
• Co-operative Education Tax Credit
• Apprenticeship Training Tax Credit

The following temporary targeted tax credits will be made permanent.

• Ontario Film and Television Tax Credit
• Ontario Production Services Tax Credit