Tax Letters: Ontario Budget Highlights 2012

Date: March, 2012

Today, Ontario Finance Minister, Dwight Duncan tabled the province’s 2012 budget. This year’s budget, entitled “Strong Action for Ontario,” proposes a five-year plan to eliminate the province’s deficit and balance the budget by 2017-18.

The McGuinty government presented an austere budget, marked by freezing planned tax reduction programs (for corporate income tax and business education tax), cutting business subsidies, capping clean energy benefit rebates, and proposing hardline measures against those participating in the underground economy (e.g., committing tax evasion), to name a few.

No new taxes or tax rate increases were introduced.

The deficit for 2011–12 is now projected to be $15.3 billion, which is a $1 billion improvement from the deficit forecast in the 2011 budget. For 2012–13, the deficit is projected to be $15.2 billion, consistent with the plan to balance the budget laid out in the 2011 budget. We have summarized the major tax measures announced from today’s budget.

BUSINESS TAX

CORPORATE INCOME TAX RATES

The budget proposes to freeze the general corporate income tax rate at 11.5% until the budget is balanced (proposed to be in 2017-18). Previously, the general corporate income tax rate was to be reduced to 11% on July 1, 2012 and to 10% on July 1, 2013. The budget suggests that corporate income tax rate reductions will resume when Ontario balances its budget.

The tax income rate for manufacturing and processing will remain at 10% and the small business rate for Canadian controlled private companies on the first $500,000 of active business income will remain at 4.5%.

BUSINESS EDUCATION TAX (BET)

BET is a component of property taxes levied on Ontario businesses. In 2007, Ontario announced a seven-year plan to cut high BET rates and alleviate the property tax burden on businesses. The 2012 budget proposes to freeze the BET reduction plan, beginning in 2013. The budget suggests that the BET rate reductions will resume when the budget is balanced.

MINING SECTOR REVIEW

Ontario previously introduced several mining tax incentives designed to encourage investment when corporate income tax rates were high. Since Ontario mining operations have benefited from recent changes to the province’s tax regime (i.e., reductions in corporate income tax rates, elimination of capital tax, etc.), the government intends to work with stakeholders in reviewing the current mining tax system “to ensure Ontario receives fair compensation for its non-renewable resources.”

BUSINESS RESEARCH AND DEVELOPMENT

The budget points out that the federal government recently received a report on federal support for innovation that included recommendations to simplifythe Scientific Research and Experimental Development (SR&ED) tax credit.

Ontario intends to review the effectiveness of tax credits for Research &Development (R&D) in supporting innovation and the overall framework of provincial and federal direct and indirect business supports. The government will seek advice from the Jobs and Prosperity Council on improvements to R&D tax support that would increase R&D expenditures in the province and simplify compliance and administration under the tax system.

APPRENTICESHIP TRAINING

Ontario will review the effectiveness and efficiency of the Apprenticeship Training Tax Credit in promoting apprenticeship completions. Linking support to the completion of apprenticeships would further strengthen the apprenticeship system in Ontario.

THE UNDERGROUND ECONOMY

The budget notes that Quebec has adopted several measures to address tax losses from businesses that engage in the underground economy in that province. The budget proposes to adopt similar measures in Ontario, including fines and penalties and disclosure requirements, to:

  • Mitigate the use of point-of-sale software designed to electronically conceal sales;
  • Enhance information sharing across ministries, municipalities and with the Canada Revenue Agency (CRA); and
  • Identify those who facilitate or participate in tax evasion schemes.

CORPORATE TAX AVOIDANCE

Ontario will consider implementing various measures used by Quebec to fight aggressive tax planning in that province. Ontario will work with the federal government, Ontario businesses and stakeholder groups to ensure that income and losses are allocated to the province where the underlying economic activity has occurred.

Ontario proposes to work with the federal government to explore the extent to which the CRA can address this issue under the tax collection agreement, and to implement supplementary Ontario measures if required to achieve this result.

LOSS UTILIZATION

The budget states that the federal government has an administrative practice that facilitates an informal loss transfer system between corporate group members. This practice can have a permanent impact on a province’s revenue when losses are transferred between corporations within a corporate group and across provincial borders.

Ontario will continue to work with the federal government and other provinces to ensure that corporations apply losses in a manner that is fair and reasonable and that upholds the long-standing principles that underlie the interprovincial allocation of income.

CAPPING THE ONTARIO CLEAN ENERGY BENEFIT (OCEB) FOR LARGE USERS

The budget proposes to cap the 10% OCEB for large users. A cap of 3,000 kilowatt-hours per month would apply effective September 1, 2012. The budget suggests almost all residential customers and most small retail businesses would continue receiving the full 10% benefit.

PERSONAL TAX

ONTARIO DRUG BENEFIT (ODB)

The ODB partially pays for prescription drugs for Ontario seniors. Under current legislation, benefits are not income tested. There is an annual deductible of $100 per person and a patient co-payment of $6.11 per prescription.

For low-income seniors, the deductible is waived and the co-payment reduced to $2 per prescription. The budget proposes to introduce an income-based deductible, effective August 2014. For single seniors, the deductible will become $100 plus 3% of net income in excess of $100,000. For senior couples, the deductible will become $200 plus 3% of combined net income in excess of $160,000. The co-payment will remain at $6.11 per prescription. The reduction for low-income seniors will be maintained.

ONTARIO TRILLIUM BENEFIT (OTB)

The 2011 budget introduced the OTB, which combined the Ontario Sales Tax Credit, Ontario Energy and Property Tax Credit and Northern Ontario Energy Credit. To better match the payment of these refundable tax credits to when people incur expenses, starting in July2012, the OTB will be paid monthly to provide individuals with their 2012 credits based on their 2011 tax returns. In the coming year, the government will look at options for providing people with a choice of receiving either monthly payments or a single payment after the year has ended.

HEALTHY HOMES RENOVATION TAX CREDIT (HHRTC)

The budget confirms the HHRTC, which has already been introduced in the legislature. The HHRTC is a refundable tax credit of up to $1,500 per annum on expenditures for permanent home modifications to improve access for seniors or help a senior to be more mobile or functional in their home. The credit will be computed at 15% of eligible expenditures to a maximum of $10,000 per annum per household. It will apply to expenditures after September 2011 and will be effective for 2012 and subsequent years. It is available to senior homeowners, tenants and people who share a home with a senior relative.

RETAIL SALES TAX (RST)

RETAIL SALES TAX REFUNDS AND REBATES

In order to continue to facilitate the wind down of RST, the budget proposes to shorten the RST refund and rebate period. Currently, a taxpayer may apply for refunds and rebates of RST until the time limits for claiming them have expired, or June 30, 2014, whichever is earlier. Proposed amendments would require such applications to be made on or before December 31, 2012.

The current refund and rebate application periods will continue for RST paid in respect of insurance premiums or private transfer of used vehicles.

The information contained in this Tax Letter is of a general nature and should not be acted upon without appropriate professional advice following a thorough examination of the particular situation.

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