No New Taxes and a Little Relief

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Introduction

On March 23, 2006, Ontario's Minister of Finance, The Honourable Dwight Duncan, presented the province's 2006 budget. The budget does not change personal or corporate income tax rates, but does accelerate Ontario's capital tax rate cut. This and other key tax measures are discussed below.

Personal Tax Measures

Personal tax rates

The budget does not change personal tax rates. Top combined 2006 personal tax rates are outlined in the following table. For 2006, top rates apply to taxable income above $118,285.

The table below shows the combined federal and Ontario income tax payable at various income levels and the additional tax due to the health premium.



Dividend tax credit

Ontario will await further details before announcing whether it will mirror federal proposals announced on November 23, 2005, that reduce personal income taxes on certain dividends paid by Canadian-controlled private corporations and on all dividends paid by other Canadian-resident corporations.

Property and Sales Tax Credits for seniors

The income threshold at which the Ontario Property and Sales Tax Credits for senior couples are reduced will increase above the 2005 level of $22,250. The new threshold will be announced when the federal government finalizes Old Age Security and Guaranteed Income Supplement amounts for 2006.

Corporate Tax Measures

Corporate tax rates

The budget proposes no new changes to the province's corporate tax rates, which will remain as follows.

Capital taxes

The budget accelerates Ontario’s capital tax rate cut, but does not change scheduled increases to the capital tax deduction.

Capital tax rates

The 2004 Ontario budget had proposed to reduce capital taxes, starting January 1, 2009, and eliminate them by January 1, 2012. The 2006 budget accelerates this plan by reducing capital tax rates, beginning January 1, 2007. The rate reductions after December 31, 2008 remain unchanged, except that Ontario intends to eliminate the capital tax in 2010, subject to affordability. The figures in bold italics shown below are the rates proposed by the 2006 budget.

Capital tax deduction

The budget does not change planned increases to the capital deduction summarized in the table below.

Business losses

The November 2005 federal Economic and Fiscal Update extended the carryforward period from 10 to 20 years for business losses incurred or earned in taxation years ending after 2005. Subject to the passage of federal legislation, Ontario will parallel this federal proposal.

Capital cost allowance

The November 2005 federal Economic and Fiscal Update accelerated the capital cost allowance for certain co-generation systems acquired after November 13, 2005 that use black liquor, a renewable energy source. Subject to the passage of federal regulations, Ontario will parallel this proposal.

Film and media tax incentives

The budget extends and enhances the province's film and media tax incentives.

Ontario Production Services Tax Credit

With respect to Ontario's Production Services Tax Credit, the budget reiterates Ontario's previous announcement that the enhanced rate of 18% on eligible labour expenditures will be extended one year to March 31, 2007.

Ontario Interactive Digital Media Tax Credit (OIDMTC)

The OIDMTC is a tax credit that reduces the cost of developing interactive digital media products, such as educational CD-ROMs and games, in Ontario. The budget expands the OIDMTC for expenditures incurred after March 23, 2006 and before January 1, 2010 by:

• increasing the rate from 20% to 30% for qualifying corporations with annual gross revenues up to $20 million and total assets up to $10 million; and
• extending eligibility for the OIDMTC at the 20% rate to qualifying corporations that:
  
  
  • have annual gross revenues exceeding $20 million and total assets exceeding $10 million; or
  • perform fee-for-service work in Ontario, under contract with an arms-length party to develop an eligible interactive digital media product.
  
  

Corporate tax collection agreement

In 2004, the federal and Ontario governments agreed to explore the integration of their corporate tax collection and processing systems to eliminate duplication and reduce tax-related administrative and compliance costs for Ontario businesses. The Ontario and federal governments intend to enter into a corporate income tax collection agreement and have made significant progress in addressing the issues surrounding a single corporate tax administration.

Ontario will introduce legislation that will authorize the province to:

• sign a corporate income tax collection agreement with the federal government;
• delegate the collection of other Ontario corporate taxes (e.g., capital tax) to the federal government; and
• allow the Canada Revenue Agency to audit Ontario corporate taxes for taxation years ending before the commencement of a corporate tax collection agreement.

Retail Sales Tax Measures

Retail sales tax exemptions

The budget extends or enhances the following retail sales tax exemptions:

• Destination marketing fees –The retail sales tax exemption for destination marketing fees will be extended to fees billed before July 1, 2007.
• Complimentary admission ticket donations –The retail sales tax exemption available to owners and operators of places of amusement for donations of admission tickets to registered charities, will be extended to tickets donated after March 23, 2006 to community colleges, schools and universities and to certain not-for-profit organizations.
  
  

Retail sales tax rebate

For qualifying hybrid electric vehicles delivered to purchasers after March 23, 2006, the maximum retail sales tax rebate will double from $1,000 to $2,000 per vehicle. The rebate, including this enhancement, will expire March 31, 2012. The maximum rebate for alternative fuel vehicles other than hybrid electric vehicles will remain unchanged.

Clearance certificates

A clearance certificate is required when assets are sold in the course of a sale of a business to which the Bulk Sales Act applies. The clearance certificate provisions will be amended to ensure that outstanding taxes may be collected from vendors even after the certificate has been issued. This measure will not affect the purchaser's protection associated with a clearance certificate.

Other Tax Measures

Tax compliance and costs

The budget reminds taxpayers of initiatives underway to simplify tax compliance for Ontario taxpayers:

• Employer Health Tax instalments – Since January 1, 2005, EHT instalments are based on actual (not estimated) payroll.
• Land Transfer Tax Refunds for New Home Buyers – Land Transfer Tax refund applications for first-time purchasers of newly constructed homes can now be submitted electronically.
• Pilot project for small software businesses – This project, which allows for an optional method of calculating Retail Sales Tax on contracts involving both taxable and non-taxable services, will proceed April 1, 2006.
  

Expenses to issue shares, options and other interests

Ontario will harmonize with federal legislation, released on November 17, 2005, that limits the expense taxpayers can claim in respect of certain transactions, such as the issuance of shares. See our Tax Memo, "Draft Legislation Overrides Alcatel – Affects SR&ED ITCs and More (Revised December 21, 2005)" on www.pwc.com/ca.

Labour-Sponsored Investment Funds (LSIFs)

Investors that purchase LSIF shares can receive a provincial tax credit until the end of the 2010 tax year. Ontario will introduce amendments to the Community Small Business Investment Funds Act that will:

• allow LSIFs more flexibility in managing their portfolios by expanding the types of investments they can hold;
• parallel federal investment rules and restrictions; and
• create wind-up rules.
  

Land transfer tax

Amendments to the Land Transfer Tax Act will reinforce the original intent of the rules that deal with the deferral and cancellation of tax for unregistered transfers of land between affiliated corporations.

Mining tax

The income tax restriction on deducting fines and penalties, announced in the 2004 federal budget, will be extended to the computation of tax payable under the Mining Tax Act. The measure will apply to fines and penalties imposed after March 23, 2006.

Agricultural cooperatives

The 2005 federal budget allows members of eligible agricultural cooperatives to defer paying tax on patronage dividends paid in the form of eligible shares rather than as cash distributions, if certain conditions are met. If this measure is implemented federally, Ontario will parallel this measure for both individual and corporate members of agricultural cooperatives.

Ethanol production

Effective January 1, 2007, Ontario will remove the exclusion of ethanol from the definition of gasoline under the Gasoline Tax Act. As a result, ethanol will be subject to the same tax treatment as gasoline.

Electricity

The budget makes the following announcements concerning municipal electricity utilities (MEUs):

• Refund of transfer tax – Ontario has developed rules that allow for the refund of the MEU transfer tax when the proceeds of a transfer are reinvested in other eligible electricity assets. A draft of the proposed rules will be posted on the Ministry of Finance Web site for comment, with a view to finalizing the proposals in the summer of 2006.
• Payments-in-lieu of tax (PIL) – MEUs will not be allowed to deduct the value of gifts made to an Ontario municipality after March 22, 2006. This measure will prevent an MEU from making a deductible donation to its municipal shareholder in lieu of paying to it an after-PIL dividend.
  

Tobacco tax

Ontario will strengthen its tobacco-related enforcement activities. These measures will include enhancements to expand information-sharing among provincial, municipal and federal counterparts.

Technical amendments

Ontario will amend its provincial statutes to improve effectiveness and enforcement, as well as to enhance legislative clarity and flexibility.