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Ontario Budget 2009 Overview

The Ontario budget was delivered on March 26, 2009 with a projected deficit of $3.9 billion in 2008- 2009 increasing to $14.1 billion in 2009-2010. This budget proposes to harmonize Ontario’s 8% retail sales tax and the federal 5% GST to create a single 13% value added sales tax. The changes are effective July 1, 2010.

The budget proposes minor tax changes for individuals while increasing the tax rate on both eligible and non-eligible dividends. There are minor tax rate adjustments for the general, manufacturing and processing and the small business tax rates. The small business deduction surtax will be eliminated. The single rate harmonized sales tax will be consistent with the GST. The single rate will tax a wide range of goods and services but will not be charged on basic groceries, prescription drugs and medical devices. Businesses that are zero rated will be able to claim input tax credits on their purchases. Ontario will receive $4.3 billion in cash transfer payments from the federal government to promote economic growth and support the transition to the single rate harmonized sales tax.

Transition Benefits for Individuals

Ontario will assist individuals during the transition to harmonized sales tax.  There will be benefits payable to eligible Ontario income tax filers that are over the  age of  18.  A person that is single with no children whose income is less than $80,000 will receive $300 in 3 instalments payable in June 2010, December 2010 and June 2011.  Couples or single parents with combined income of $160,000 or less will receive $1,000 in 3 instalments payable June 2010, December 2010 and June 2011.

PST/GST Harmonization

Ontario is now gearing up for the July 1, 2010 conversion to the harmonized sales tax systems with the federal governments GST.  Ontario’s share of the sales tax will be collected by the Canada Revenue Agency.  The combined sales tax will be 13% (8% Ontario plus 5% federal).  The combined sales tax will follow the sale rules as the federal GST although there are some exceptions.   Expenses for business must be segregated between pre and post July 1, 2010 so that input tax credits can be measured accurately. Businesses selling taxable or zero rated goods and services will be able to claim input tax credits on their purchases, and under the GST.  Businesses selling tax-exempt goods or services will  not be able to claim the input tax credits as under the federal GST rules.   Businesses should review their planned expenditures which are near the conversion date to determine whether the expenditures should be incurred prior to or after July 1, 2010.  If the expenditures are incurred after June 2010 the provincial component of the tax paid will qualify for a fully recoverable input tax credit.  Individual consumers should also review planned expenditures prior to and after the conversion date.  The small supplier threshold will remain at $30,000 and will parallel the federal GST.

Alcohol Sales

Ontario retail sales tax is currently charged on alcoholic beverages sold through licensed establishments at the rate of 10 percent and at retail stores at a rate of 12%.  Under the single sales tax, the provincial rates on these products would fall to eight percent.  Therefore, the total tax on alcoholic beverages will be at 13%.

Ontario Exemptions

The federal government reached an agreement with the Ontario government which will allow exemptions on children’s clothing and shoes, children’s car seats, diapers, feminine hygiene products and books.

Input tax credit phase in for larger businesses

The major component of the new system is that input tax credits can be claimed at 13% in Ontario. The input tax credits will be restricted during the first five years of the new systems for financial institutions and businesses with taxable sales which are in excess of $10 million annually. After three years, the input tax credits will be implemented over a three year period. These restrictions will apply to input tax credits related to energy (except for energy used for farming or the production of goods for sale), telecommunication costs, other than internet access or toll free numbers, road vehicles weighing less than 3,000 kilograms and related fuel and beverages, food and entertainment.

Housing Rebate

To ensure that new homes priced under $400,000 do not attract additional sales tax, the rebate will be available equal to 75% of the provincial component of the single sales tax (6%). The rebate will be reduced for homes priced between $400,000 to $500,000. There will be no rebate for home priced in excess of $500,000. There will be no rebate for resale homes.

Insurance Premiums

Retail sales tax currently applies to premiums for some types of insurance such as group insurance. Ontario would retain a tax on insurance at 8% after the transition to the single sales tax, on the same types of insurance currently taxes under the RST system. Automobile insurance premiums would continue to be exempt from sales tax.

Transition Credit for Small Business

In order to help alleviate the cost of conversion to the new HST system, there will be a credit of between $300 and $1,000 for the first reporting period after harmonization. The credit will only be applicable for small businesses that have sales less than $2 million. The credit will be based on taxable sales in the first full quarter commencing after June 30, 2010. Businesses with taxable revenues of $15,000 or less will receive a $300.00 credit. Businesses with taxable revenues between $15,000 and $50,000 will receive a credit of 2% of taxable revenue. Businesses with taxable revenues between $50,000 and $500,000 will receive a credit of $1,000.

Personal Tax Reductions

The lowest personal tax rate will be reduced from 6.05% to 5.05%. This will be effective on January 1, 2010. As a result of the proposed tax rate reduction, the non refundable tax credits will be adjusted so that the credit amounts will be multiplied by 5.05%. There will also be adjustments to the Ontario minimum tax. The threshold for the 20% surtax will be reduced from $4,247 in 2009 to $3,978 for 2010. The tax threshold at which the 36% surtax applies will be reduced from $5,370 to $5,091 for 2010.

Dividend Tax Credits

In order to achieve integration with the dividend tax credit system in Ontario, the tax credit on eligible dividends as a percentage of taxable dividends is currently at 7.4% for 2009 and 7.7% for 2010. Effective January 1, 2010, the rate will be reduced to 6.4%. The dividend tax credit rate for ineligible dividends is currently at 5.13% for 2009 and 2010. Commencing January 1, 2010, the rate will be reduced to 4.5%.

Property and Sales Tax Credits

Currently, individuals in the low to middle income receive sales tax relief for both property taxes and Ontario sales taxes. Under the current system, individuals receive tax relief based on the prior years income. The budget proposed to provide greater assistance in introducing a system whereby the credit are paid in advance. Under the proposed new system, the refundable credits will be paid quarterly in advance commencing July 2010. The new refundable Ontario sales tax credit will provide up to $260 for each adult and child. The credit will be reduced by 4% of adjusted family net income over $20,000 for single people and over $25,000 for families. The maximum amounts and threshold will be indexed for inflation. The new refundable Ontario property tax credit for low and middle income homeowners and tenants will maintain existing benefits but will extend property tax relief to more individuals. The credit will continue as before to be based on occupancy costs. Occupancy costs up to $250 for non-seniors and $625 for seniors, plus 10% of occupancy costs up to a maximum of $900 for non-seniors and $1,025 for seniors. The credit will be reduced by 2% of adjusted family net income in excess of $20,000 for single individuals and $25,000 for families. These amounts and thresholds will be indexed for inflation. Those seniors that are eligible will continue to receive assistance through the Ontario Senior Homeowners’ Property Tax Grant.

Tax-Free Savings Accounts

The government has proposed changed for the tax free savings account outside of a Will similar to RRSP’s Beneficiary designation of the tax free savings account outside of a Will be similar to RRSP’s. This will allow the tax free savings account to pass to designated beneficiaries without being subject to probate tax.

Corporate Income Tax

Beginning July 1, 2010, corporate income tax will be reduced. The small business surtax will be eliminated as of July 1, 2010. This will allow for businesses to reinvest corporate profits in excess of the $500,000 small business limit without losing the benefit of the small business deduction. Under the current system, the tax is charged on taxable income in excess of $500,000 at 4.25% until the benefit of the small business deduction has been eliminated. The benefit of the elimination in the surtax will be prorated for year ends that straddle July 1, 2010. The corporate income rate for small business will be reduced from 5.5% to 4.5%.

Ontario Corporate Income Tax Reductions

Effective

Date

General

Rate

M & P

Rate

Small Business Rate

Small Business Deduction Surtax

Current

14%

12%

5.5%

4.25%

July 1, 2010

12%

10%

4.5%

Eliminated

July 1, 2011

11.5%

10%

4.5%

Eliminated

July 1, 2012

11%

10%

4.5%

Eliminated

July 1, 2013

10%

10%

4.5%

Eliminated

Corporate Minimum Tax

Corporations with total assets of less than $50 million or total revenues of less than $100 million will no longer be subject to the corporate minimum tax. Corporations that are subject to the minimum tax will have a CMT rate reduced to 2.7% from 4%. These changes will be effective July 1, 2010 and will be prorated for taxation years straddling this date.

Ontario Innovation Tax Credit

This credit is in respect to small and medium sized corporations performing eligible scientific research and experimental development in Ontario. Ontario proposed to parallel the enhancements to the federal investment tax credit announced in the 2009 federal budget. The current taxable income phase out takes place between $400,000 to $700,000 will be changed to a phase out between $500,000 to $800,000. The effective dates of this will parallel the federal budget of 2009.

Co-operative Education Tax Credit

This credit is refundable to businesses that employ post-secondary students enrolled in qualifying co-opeative education programs at eligible educational institutions. Effective, March 26, 2009. the CETC rate will be increased from 10% to 25% and the enhanced 15% rate for small businesses will be increased to 30%. The maximum credit will be increased from $1,000 to $3,000 per work placement.