FBC – Canada's Small Business Tax Specialist

Ontario’s Government handed down a budget that forecasts a deficit of $21.3 billion for 2009-10 and $19.7 billion for 2010-11. The budget also sets out an eight-year plan to cut the deficit in half in five years, and eliminate it in eight years by 2017-18.
The following is a summary of the tax-related measures contained in the budget.

Personal Tax Changes

Northern Ontario Energy Tax Credit Introduced – Effective for 2010, the budget introduced a new Northern Ontario Energy Credit to assist low- to middle-income individuals resident in Northern Ontario in recognition of their higher energy costs. This program would provide an annual tax credit of up to $130 for single individuals and up to $200 for families (including single parent families). These credits are reduced by 1% of income that exceeds $35,000 for single individuals and $45,000 for families. This means the credits are eliminated when income exceeds $48,000 for singles and $65,000 for families. Eligible individuals will include those who pay rent or property tax for a principal residence in the district of Algoma, Cochrane, Kenora, Manitoulin, Nipissing, Parry Sound, Rainy River, Sudbury, Thunder Bay or Timinskaming.

For 2010, eligible northern residents who apply to the Ontario Ministry of Revenue for the credit will receive payment in two installments, to be issued in the fall of 2010 and early 2011. For subsequent years, the permanent credit will be paid quarterly, along with the new Ontario Energy and Property Tax Credit (see below).

Ontario Energy and Property Tax Credit Introduced – The Ontario Property Tax Credit will be converted to a new Ontario Energy and Property Tax credit. Starting in 2011, the credit would be paid quarterly to eligible individuals, based on income tax returns filed for 2010, as is the case of the Ontario Sales Tax Credit. Since few details of the new credit were contained in the budget, it is expected that further details of the new credit application, including enhancements from current credit amounts, will be released at a later date.

Business Tax Changes

Extension of Retail Sales Tax (RST) Vendor Compensation – The budget is extending vendor compensation entitlements under the RST to the final RST collection period from April 1, 2010 to June 30, 2010. Compensation for this final shortened RST collection period will be payable up to a maximum of $375. The 2009 Ontario Budget had previously announced that vendor compensation would be eliminated as of March 31, 2010.

Sales Tax on Insurance Premiums – Since sales tax on certain types of insurance will be continued under the RST after June 30, 2010, vendors of taxable insurance will continue to be eligible for vendor compensation up to a maximum of $1,500 annually. For this transitional year, vendors will be eligible to receive up to $375 for the period April 1, 2010 to June 30, 2010, and up to $1,125 for the period July 1, 2010 to March 31, 2011.

Measures related to the Transition to the HST

The budget contained the following proposed amendments to the Retail Sales Tax Act, to support the transition to the HST and wind-down of RST:

• the eligibility period for vendor refunds of RST made to purchasers will be extended beyond October 31, 2010, other than for refunds for returned goods [purchasers will be able to claim RST refunds directly from the Ontario Ministry of Revenue for returned goods purchased before July 1, 2010 and returned after October 31, 2010];
• a new rebate will be available to relieve double taxation where a purchaser has paid both the RST and HST on goods and services purchased after June 30, 2010;
• multi-jurisdictional vehicles will no longer be subject to RST (exit tax) when they cease to be registered after June 30, 2010; and
• the exemption for gifts of used vehicles between siblings will be confirmed for gifts after June 30, 2010 (as previously announced).

Tobacco Retailers – Tobacco retailers will no longer be able to obtain a vendor’s permit under the Retail Sales Tax Act. Amendments will be made to the Tobacco Tax Act to require retailers who do not hold a vendor’s permit on June 30, 2010 to obtain a permit under that Act

Ontario – Phased-in Measures

Ontario capital tax (2004 Ontario Budget) – Starting January 1, 2005, the current $5 million deduction from taxable paid-up capital will be increased by $2.5 million each year until the deduction reaches $15 million on January 1, 2008. Under phase 2 starting January 1, 2009, capital tax rates will be reduced each year until the capital tax is fully eliminated on January 1, 2012 for corporations. [Note: See the accelerated capital tax rate cut plan announced in the 2006 Ontario budget below.]

Labour Sponsored Investment Funds (LSIFs) (September 30, 2005) – The Ontario government announced that it plans to eliminate its provincial 15% tax credit for investors in LSIFs by the end of the 2010 taxation year. The credit will remain at 15% until the 2008 taxation year and will be reduced to 10% for the 2009 taxation year and 5% for the 2010 taxation year. The 5% incremental tax credit offered for Research Oriented Investment Funds (ROIF) would be phased out on the same timetable. The federal government continues to offer its own 15% tax credit for labour-sponsored venture capital corporations. [Note: The Ontario government announced a one-year extension of the elimination of the LSIF tax credit to the end of the 2011 tax year – see the “December 13, 2007 Ontario Economic Outlook and Fiscal Review” below.]

Ontario Capital Tax (2006 Ontario Budget) – The 2006 budget accelerated the capital tax rate cut plan originally announced in the 2004 budget (see above). Effective January 1, 2007, every corporation still paying capital tax has its rate reduced by 5%. This is two years earlier than the first currently scheduled rate cut. Also, the government now intends to fully eliminate the tax in 2010 (as confirmed in the 2007 budget).

Retail sales tax rebate for hybrid electric vehicles (2006 Ontario Budget) – The government doubled the maximum retail sales tax rebate paid on eligible hybrid electric vehicles (@ 8% of purchase cost) from $1,000 to $2,000 for vehicles delivered to purchasers after March 23, 2006 and before April 1, 2012.

Ontario Dividend Tax Credit (DTC) (August 3, 2006) – The Ontario government is increasing the provincial DTC from 5.13% to 7.7% for “eligible dividends” to parallel the measures announced by the federal government in its 2006 budget. This enhanced tax credit would be phased in between 2006 and 2010 as shown in the following table.
 

The existing gross-up and tax credit will continue to apply to other dividends paid by Canadian resident corporations. [Note: See the 2009 Ontario budget announcement below reducing the eligible dividend rate to 6.4% effective January 1, 2010.]

Ontario Child Benefit (OCB) (2007 Ontario Budget) – The 2007 budget introduced the new Ontario Child Benefit program that sees low-income families receive up to $250 as a one-time, non-taxable payment for every child under age 18 starting in July 2007. The new benefit is available to all low-income families, regardless of whether they are working or on social assistance such as Ontario Works (OW) or Ontario Disability Support Program (ODSP). When a family leaves social assistance, they do not lose their child benefits.

The maximum OCB is only available to families with an annual net income of $20,000 or less. Families with annual net income above this threshold have benefits reduced by 3.4 cents for every dollar of income over $20,000. The one-time OCB payment is based on the number of children registered for the Canada Child Tax Benefit in the family as of July 1, 2007 and the adjusted family net income as reported on 2006 income tax returns.

Starting in July 2008, OCB payments will be made on a monthly basis over a benefit year from July to June and delivered through the personal income tax system. At that time, monthly OCB payments will be included with the Canada Child Tax Benefit (CCTB) and National Child Benefit Supplement (NCBS) payments. The OCB will also be increased to $600 annually per child, reduced by 8% of adjusted family net income over $20,000. Also, at that time, the existing Ontario Child Care Supplement for Working Families (OCCS) will be consolidated with the OCB. Families receiving a larger OCCS payment than the proposed OCB payment will continue to receive the extra amount of the OCCS benefit until the OCCS is phased out. Annual maximum benefits per child will continue to be increased annually – to $805 in 2009, $900 in 2010 and $1,100 in 2011. Once the OCB is fully implemented in 2011, the OCCS will be phased out over a period of seven years. [Note: The 2009 Ontario budget accelerated the phase-in of maximum OCB payments by two years so that the maximum annual amount per child is $1,100 as of July 1, 2009.]

Ontario minimum wage (2007 Ontario Budget) - The Ontario general minimum wage rate will be raised from $8.00 an hour to $10.25 over a three-year phase-in period. The minimum wage will be hiked by 75 cents an hour on March 31 of each of the next three years starting in 2008.

Other minimum wage rates also increase March 31, 2010 for:

• students under 18 years old and employed for not more than 28 hours a week increased from $8.90 to $9.60 per hour
• liquor servers increased from $8.25 to $8.90 per hour.

Ontario RST Exemption for Bicycles and Related Safety Equipment (November 9, 2007) – The Ontario Ministry of Revenue announced a temporary RST exemption for bicycles costing $1,000 or less and related safety equipment purchased on or after December 1, 2007, and on or before November 30, 2008. [Note: The 2008 budget extended this exemption for purchases made on or before December31, 2010.]

Labour Sponsored Investment Funds (LSIFs) (Ontario Economic Outlook and Fiscal Review -December 13, 2007) - The phase-out of the Labour Sponsored Investment Fund (LSIF) Tax Credit will be extended by one year to the end of the 2011 taxation year, and the maximum qualifying investment will be increased to $7,500 from $5,000 for 2007 and later years . The 15% (20% for ROIF funds) tax credit rate will be maintained until the end of 2009 (this implies a maximum credit of $1,125 on ordinary LSIF investments and $1,500 for ROIF investments for 2007 to 2009). The rate will be lowered to 10% for 2010 and 5% for 2011 and the tax credit will be eliminated for tax years after 2011.

Senior Homeowners’ Property Tax Grant (2008 Ontario Budget) - The budget announced a new Senior Homeowners’ Property Tax Grant to start in 2009. In early 2009, eligible seniors who own their own homes will be able to receive a grant of up to $250 in respect of their 2009 property taxes. The maximum annual grant increases to $500 for 2010 and subsequent years. Eligible single seniors with income under $35,000 a year, and senior couples with income under $45,000 a year would receive the maximum grant. Single seniors with income between $35,000 and $50,000, and senior couples with income between $45,000 and $60,000, will also be eligible to receive a grant, reduced proportionately based on 1.667% of income above the lower thresholds. Only one spouse for senior couples can apply for the grant if living together on December 31. Eligible seniors would apply for the grant when filing their 2008 and subsequent income tax returns. The proposed Senior Homeowners’ Property Tax Grant will be available in addition to the current Property Tax Credit for Seniors. The 2009 grant should have been paid within 4 to 8 weeks after the 2008 Notice of Assessment was received.

Ontario Tax Exemption for Commercialization (OTEC) (2008 Ontario Budget) – The government is proposing a ten-year tax exemption from Ontario corporate income tax and corporate minimum tax for new corporations that commercialize intellectual property developed by qualifying Canadian universities, colleges or research institutes. The OTEC is available to qualifying corporations established after March 24, 2008 and before March 25, 2012, incorporated in Canada and that derive all or substantially all of their income from eligible commercialization activities carried on in Canada.

Ontario Interactive Digital Media Tax Credit (OIDMTC) (2008 Ontario Budget) – The OIDMTC provides a refundable tax credit for eligible expenditures made in the creation, marketing and distribution of interactive digital media. The budget proposes to enhance the OIDMTC and extend the time period for qualifying expenditures. The general tax credit rate for corporations that do not qualify for the special small business tax credit rate and for fee-for-service work, will be increased from 20% to 25%, effective for qualifying expenditures incurred after March 25, 2008 and before January 1, 2012. The enhanced tax credit rate of 30% for eligible small business corporations will be extended from the end of 2009 to qualifying expenditures incurred before January 1, 2012. Also, the eligibility period for qualifying labour expenditures will be extended from two to three years for products completed after March 25, 2007.

Harmonized Sales Tax (2009 Ontario Budget)

Budget 2009 announced the adoption of the Harmonized Sales Tax in Ontario, to replace the existing Ontario Retail Sales Tax (ORST), effective July 1, 2010. The HST rate in Ontario will be 13%, consisting of an 8% provincial tax rate combined with a 5% federal GST rate. The combined value-added sales tax will be administered by the Canada Revenue Agency (CRA) and the Canada Border Services Agency. Under the Memorandum Agreement with the federal government, Ontario will receive $4.3 billion in transfer support payments to support the transition.

Businesses will generally be eligible to claim input tax credits (ITCs) for HST they pay, thereby eliminating most taxes on business inputs. This should reduce costs for businesses where these supplies may be subject to tax under the current ORST system. Businesses selling taxable or zero-rated goods and services would be able to claim ITCs on purchases as under the federal GST. This would include farmers and ranchers selling mostly zero-rated commodities who should see larger refunds under the HST system. Businesses selling tax-exempt goods or services (e.g. financial institutions) will be unable to claim ITCs as under the federal GST. Small supplier rules under the federal GST system will also be paralleled, so that businesses with total taxable revenues of $30,000 or less annually will not be required to register for HST purposes. Exported goods generally would be free of embedded sales tax making Ontario exports more competitive.

Large businesses (those with annual taxable sales in excess of $10 million) and financial institutions will be unable to claim ITCs in certain areas on the Ontario portion of the HST for the first five years of HST implementation. The temporary ITC restrictions for large businesses are:

• energy, except where used to produce goods for sale;
• telecommunication services other than internet access or toll-free numbers;
• road vehicles weighing less than 3,000 kg (and parts and certain services) and fuel to power those vehicles (e.g. passenger vehicles, taxis, minibuses, small trucks etc.); and
• food, beverages and entertainment.

Note: The Ontario government announced in “Ontario’s Tax Plan for Jobs and Growth” (Nov. 16, 2009) that to support Ontario farmers, these temporary ITC restrictions will not apply to farming businesses.

To support small business for costs of changing their point-of-sale and accounting systems for the HST, a Small Business Transition Credit will be introduced providing a one-time credit of up to $1,000 for eligible businesses payable on the first HST return filed after June 2010. The credit will be available to businesses, other than financial institutions, with annual revenues from taxable sales of less than $2 million. Credit amounts will be based on total taxable revenues in the first full fiscal quarter of the business starting after June 30, 2010, as follows:

• businesses with taxable revenues up to $15,000 will be eligible to receive a $300 credit;
• businesses with taxable revenues over $15,000 and up to $50,000 will be eligible to receive a credit amount based on 2% of taxable revenues for the quarter;
• businesses with taxable revenues over $50,000 and up to $500,000 will be eligible to receive a credit of $1,000.

[Note: The 2010 Ontario Budget announced that a technical amendment would be made to prescribe the 12-month period for calculating the $2 million taxable sales threshold for purposes of the Small Business Transition Credit.]

The HST system in Ontario will generally follow the same rules and tax base as the federal GST with several exceptions noted below:

• Point-of-sale exemptions from the 8% provincial portion of the HST will apply for books, feminine hygiene products, children’s clothing and footwear, children’s car seats and car booster seats, and diapers.
• A New Housing Rebate for the 8% provincial portion of HST will apply for new homes costing up to $500,000. Purchasers of newly constructed homes will be eligible to claim a rebate of 75% of the 8% provincial portion of tax paid on the purchase price of a home to be used as a new primary residence. This rebate will be reduced for homes costing between $400,000 and $500,000.The HST will not apply to resale homes. [Note: The Ontario government announced on June 19, 2009 that all new home buyers will now qualify for the PST rebate on the first $400,000 of the purchase price, regardless of the final cost. The maximum rebate under this measure is $24,000 (75% x $400,000 x 8%). The province also proposed a rebate for new residential rental properties in an effort to generate the construction of more affordable rental units. Another change announced to the rebate program would exempt new homes from the PST portion of the HST if the purchase agreement was signed before June 18, 2009, even if ownership is not transferred before July 1, 2010.]
• The current ORST rate of 5% on transient accommodation will increase to the 8% provincial rate with the adoption of HST.
• An Ontario sales tax will apply to private sales of used motor vehicles, to which GST does not apply.
• Certain insurance premiums which are currently taxable under the ORST system (e.g. employer group benefits, P&C), will continue to be taxable at the 8% provincial rate with the adoption of GST.
• Current ORST rates on sales of alcoholic beverages of 10% (licensed establishments) and 12% (retail stores) will be reduced to the 8% provincial rate with adoption of HST. As a result, the government intends to hike other fees, levies and charges on alcohol to ensure prices don’t drop along with the taxes.

The HST would not be charged on the following items that are currently not subject to RST: basic groceries; prescription drugs; some medical devices; municipal public transit; health and education services; legal aid; most financial services; child care; tutoring; music lessons; residential rents and condo fees.

General HST Transitional Rules (Ontario and BC) – CRA GST/HST Notice No. 247 (October 2009) contains guidelines to assist businesses and consumers in understanding how the transitional rules for the proposed HST and wind down of the RST would apply to transactions made by GST/HST registrants that straddle the July 1, 2010 implementation date for the proposed Ontario and BC HST. For the most part, the two provinces have chosen identical dates and rules. Also see Information Notice No. 3 General Transitional Rules for Ontario HST that provides additional details of Ontario’s transitional measures for the HST.

Tangible Personal Property (Goods) - The HST would generally apply to goods when the goods are delivered, and ownership is transferred, to the purchaser on or after July 1, 2010. The HST would apply to prepaid amounts that are paid or payable after May 1, 2010 for goods provided on or after July 1, 2010. Neither the Ontario nor BC component of the HST applies to a prepayment of consideration that was due or paid before October 15, 2009.

A non-consumer such as a business or NPO must self-assess the provincial component of HST on a prepayment due or paid after October 14, 2009 and before May 1, 2010 if the non-consumer does not acquire goods for use exclusively in its commercial activities; if it uses “simplified” remittance methods under the ETA; or if it qualifies as a selected listed financial institution.

Services - The HST would generally apply to the portion of services performed on or after July 1, 2010. The HST would apply to prepaid amounts that are paid or payable on or after May 1, 2010 for services provided on or after July 1, 2010. The HST would not generally apply, however, to a service where substantially all (90% or more) of the service is performed before July 2010. As in the case of a sale of goods, prepayments due or paid after October 14, 2009 and before May 1, 2010 for services may be subject to the above self-assessment rules.

There are specific transitional rules for funeral and cemetery services, passenger transportation services, freight transportation services, and prepaid subscriptions to newspapers, magazines and other periodicals.

For services to be performed on or after July 1, 2010, with prepayment between March 26, 2009 and May 1, 2010, HST will apply to a prepayment from a “business” customer, but only the 5% GST will apply to prepayments from an individual (i.e. a consumer). For prepayments due from May 1 to July 1, 2010, the portion of the prepayment relating to services performed after July 1, 2010 will be subject to HST.

Leases and Licenses – The RST would generally apply to a supply of taxable goods by way of lease, license or similar arrangement for the part of a lease interval that occurs before July 1, 2010. The HST would generally apply to a supply of property – including certain goods and non-residential real property – for the part of a lease interval that occurs on or after July 1, 2010. However, the RST would continue to apply, and the HST would not apply, to a lease interval that begins before July 2010 and ends before July 31, 2010.

Real Property (other than residential housing) – The HST would generally apply to a supply of real property (other than residential housing) by way of sale if both ownership and possession of the property are transferred to the purchaser on or after July 1, 2010.

Ontario RST Cut-off Date – Ontario has announced that any outstanding RST will become payable as of October 31, 2010 under the transitional rules to facilitate the winding down of RST. BC has not yet announced a similar cut-off date.

Ontario HST Additional Point-of-Sale Exemptions (November 12, 2009) – The Ontario government will exempt qualifying prepared food and beverages that are ready for immediate consumption and are sold for $4 or less (excluding HST) along with print newspapers from the 8% provincial component of the new HST. This extends an existing RST exemption that has existed since 1961. Qualifying items would include: food or beverages heated for consumption; salads; sandwiches and similar products; and platters of cheese, cold cuts, fruit or beverages and other arrangements of prepared food. Alcoholic beverages will not be a qualifying exempt beverage. Magazines and periodicals will also not be exempt under the new changes.

Ontario Bill 218 Tabled (November 16, 2009) – The Ontario government introduced Bill 218, legislation giving effect to 2009 budget proposals relating to the new HST and income tax. On November 9, 2009, Canada and Ontario entered into a Comprehensive Integrated Tax Coordination Agreement (CITCA) which will be the foundation for the federal-Ontario HST at the rate of 13% as of July 1, 2010.

Federal/Ontario HST Legislation Passed (December 15, 2009) – The federal (Bill C-62) and Ontario (Bill 218) HST enacting legislation has been passed with both statutes receiving Royal Assent on December 15, 2009.

Personal Tax Changes (2009 Ontario Budget)

New Ontario Sales Tax Transition Benefit – Cash payments will be provided to Ontarians to support the transition to the HST. Benefits under this program would be delivered to eligible Ontario tax filers aged 18 and over in each of June 2010, December 2010 and June 2011. The government would provide eligible families with an income less than $160,000 with three payments totaling $1,000 ($330 + $335 + $335). Eligible individuals who earn less than $80,000 would get three payments totaling $300. The maximum benefit will be reduced by 5% of the recipients’ previous year’s adjusted family net income over $80,000 for single individuals and over $160,000 for families.

To qualify for the two benefits in 2010, a 2009 tax return must be filed, and a 2010 tax return must be filed for the June 2011 benefit.

Ontario Sales Tax Transition Benefit

Personal Income Tax Rates – The lowest personal income tax rate is reduced from 6.05% to 5.05%, effective January 1, 2010. The Ontario Tax Reduction (OTR) providing an additional reduction in income tax of up to $205 per tax filer and $379 per child or disabled or infirm dependant, will not be adjusted for this reduction to the lowest personal income tax rate.

Surtax Thresholds – Ontario surtax thresholds are adjusted as a result of the reduction in the lowest personal income tax rate. Effective for 2010, the surtax is applied at the following rates and thresholds:

• 20% on basic Ontario tax over $3,978 (down from $4,257); and
• 36% on basic Ontario tax over $5,091 (down from $5,370).

New Ontario Property and Sales Tax Credits – The current combined Ontario Property and Sales Tax Credits is replaced with two new separate Ontario tax credits.

The new Ontario Sales Tax Credit (OSTC) provides a credit of up to $260 for each adult and each child. This amount is reduced by 4% of adjusted net income over $20,000 for individuals and $25,000 for families. These income thresholds are indexed annually. The credit is refundable through advance payments issued quarterly starting July 2010.

The new Ontario Property Tax Credit (OPTC) is available for property tax paid or 20% of rent paid in the amounts of $625 for seniors or $250 for other individuals, plus 10% of occupancy cost. The credit amount is reduced by 2% of adjusted net income over $20,000 for individuals and $25,000 for families. The maximum credit that can be claimed is $1,025 for seniors or $900 for other individuals. Credit amounts and income thresholds are indexed for inflation.

Ontario Dividend Tax Credit Rates – Effective January 1, 2010, the credit rate for eligible dividends is reduced to 6.4% and the rate for ineligible dividends is 4.5%.

Business Tax Changes (2009 Ontario Budget)

Corporate Income Tax Rates – Corporate income tax rates are to be reduced, effective July 1, 2010 as follows:

• the general corporate income tax rate is reduced from 14% to 12%;
• the rate on income from manufacturing and processing, mining, logging, farming, and fishing is reduced from 12% to 10%; and
• the small business rate is reduced from 5.5% to 4.5%.

Further reductions in the general corporate tax rate are proposed as follows:

• effective July 1, 2011, the rate is reduced to 11.5%;
• effective July 1, 2012, the rate is reduced to 11%; and
• effective July 1, 2013, the rate is reduced to 10%.

Small Business Deduction Surtax – The Ontario Small Business Deduction Surtax is eliminated effective July 1, 2010. Currently, the surtax is calculated at 4.25% on income above the small business threshold.

Corporate Minimum Tax (CMT) – The Ontario corporate minimum tax rate is reduced from 4% to 2.7%, effective for taxation years ending after June 30, 2010. Corporations that have (together with associated corporations) total assets below $50 million and annual gross revenues below $100 million are exempt from CMT.