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                                              2000 ONTARIO BUDGET

 

 

 

The Ontario Finance Minister Ernie Eves delivered the 2000 Ontario budget on May 2, 2000. The budget fulfills the Government’s promise to balance its budget, and provides welcome income tax cuts for individuals and corporations.   The Government committed to increase its health care funding and infrastructure spending in order to provide strong and safe communities.

 

To promote job growth and investment, Ontario announced a reduction in the Ontario general corporate income tax rate from 15.5% to 14.5%, effective immediately.  On January 1, 2001, the tax rate will be further reduced to 14%.  Within 6 years, the general corporate income tax rate is targetted to decrease to 8%.  The Ontario small business tax rate will be immediately reduced from 8% to 7%.  The implementation of the previously scheduled small business tax rate decreases will be accelerated such that all rate cuts will be achieved by January 1, 2005, when the small business rate will be decreased to 4%.  Concurrently, the amount of income eligible for the small business tax rate will be increased from $200,000 to $400,000, with such increase being phased in over 5 years.  The benefit of the small business deduction currently phases out where the corporation’s taxable income is between $200,000 and $500,000.  The budget proposes to increase the phase out range over a five-year period commencing January 1, 2001.  The small business deduction phase-out range will ultimately be increased to be between $400,000 and $1,000,000 by January 1, 2005.

 

Beginning with the 2000 taxation year, Ontario will initiate a personal “made-for-Ontario” tax-on-income system.  Currently, Ontario personal tax is calculated as a percentage of basic federal tax.  This means that prior to the budget, Ontario automatically paralleled the personal federal tax system.  The new system will enable Ontario the flexibility to vary the computation of taxable income and to set its own tax brackets and non-refundable tax credits.

 

The Ontario personal tax rates are set to decrease.  The maximum combined personal tax rate on ordinary income will decrease from 48.75% in 1999 to 47.86% in 2000 and 47.57% in 2001. As a result of Ontario revenues exceeding the 1999 budget forecasts, the Province will pay a “dividend” of up to $200 to every eligible Ontario taxpayer for the 1999 taxation year.

 

The significant proposed tax changes are discussed below.

 

Personal Income Tax Measures

 

New Ontario Tax-On-Income System

 

Ontario income tax will now be calculated on taxable income and not on basic federal tax.  For the 2000 and subsequent years, Ontario will decide how much tax is to be applied at a given level of income.  Ontario will no longer be required to match federal brackets. This new approach allows the Government to deliver initiatives that would not have been possible under the old system. The maximum combined federal and Ontario tax rates for 1999 and 2000 are as follows:

 

 

This budget also proposes that Ontario’s new system will be fully indexed to inflation, starting in the 2001 taxation year.  The tax system is specifically protected against future rate increases by the Taxpayer Protection Act.

 

The budget proposes that, beginning with the 2000 taxation year, Ontario’s tax brackets and rates may be set independently of the federal tax brackets and rates.  However, for the 2000 taxation year, the tax brackets and credit amounts will be the same as the current federal amounts.  The budget proposes a reduction in the Ontario personal income tax rates to be applied to the first and middle income brackets effective July 1, 2000.

 

Surtax and Tax Reduction

 

Ontario’s two-tiered surtax will be maintained under the budget, but it is proposed that the basic Ontario tax thresholds above which the surtax rates apply will be adjusted.  This change will not impact the top marginal rate, but does have the effect of paralleling the reduction in the first and middle personal income tax rates.

 

The Ontario Tax Reduction, which reduces or eliminates Ontario personal income tax payable by taxpayers with low and moderate incomes, will also be modified to reflect the changes to the first and middle tax brackets.

 

Taxpayer Dividend

 

The robust Ontario economy has allowed tax revenue to exceed 1999 budget forecasts.  As a result, the Province will be able to eliminate the deficit one year ahead of schedule and still provide a dividend of up to $ 200 of Ontario personal income tax to every eligible Ontario taxpayer for the 1999 taxation year.  Eligible Ontario taxpayers will receive a refund of their 1999 Ontario personal income tax, including any surtax, and after deducting the Ontario Tax Reduction and any foreign tax credits, to a maximum of $ 200.  A minimum rebate of $ 25 will be paid to taxpayers with 1999 Ontario personal income tax greater than $ 0 and up to $ 25.  Taxpayers who do not file their 1999 personal tax returns by December 31, 2000 will not be entitled to receive a rebate.

 

Capital Gains Inclusion Rate

 

The budget proposes that the capital gains inclusion rate be reduced from 75% to 50%, phased in over the next five years.

 

In the 2000 taxation year, the budget proposes to reduce the inclusion rate for capital gains that result from dispositions after February 27, 2000, from 75% to 66 2/3%.  Starting in the 2001 taxation year, Ontario’s inclusion rate will be further cut from 66 2/3% to 62%.  It will be further reduced to 50% by 2004.

 

Adjustments are proposed in respect of related items: allowable business investment losses; net capital losses of other years; the $ 500,000 lifetime capital gains exemption for qualified small business corporation shares and qualified farm property; and the preferential inclusion rate that arises from donating publicly traded securities.

 

 

(1) For Ontario tax purposes only.

(2) For capital gains realized after February 27, 2000.

 

Tax-on-Income Technical Issues

 

The following tax treatment is proposed for technical aspects of Ontario’s personal income tax system in 2000 and 2001:

 

§       The budget proposes to set the Ontario dividend tax credit at 38.5% of the federal dividend tax credit.

 

§       In 2000, Ontario alternative minimum tax (“AMT”) will be calculated as 37.5% (36.5% in 2001) of the additional tax attributable to the federal AMT calculation and will be added to Ontario tax calculated under the regular rules.

 

§       A claim for medical expenses that were paid for a dependant, other than a spouse, must be reduced where the dependant’s net income exceeds the basic personal amount.  For Ontario purposes, it is proposed that the claim made by an individual, for the medical expenses of a dependant that exceed the dependant’s basic personal amount, be reduced by 25.5% in 2000 and 24.8% in 2001.

 

§       It is proposed that inter-vivos trusts will be taxed at Ontario’s highest personal income tax rate,  while testamentary trusts will be subject to the Ontario graduated rates.

 

§       Under the 1999 federal budget, a special “kiddie tax” was proposed in respect of certain income of minor children.  Ontario proposes to parallel this kiddie tax by charging Ontario tax at the highest rate on the income of minors subject to the federal kiddie tax.

§       An individual with business income in more than one province is required to allocate this business income between the provinces.  It is proposed that the basic Ontario tax on the total taxable income will be adjusted to reflect the Ontario portion of taxable income, based on the federal allocation formula.

 

§       A change in the ordering of non-refundable tax credits is proposed to ensure the maximum benefits may be realized by taxpayers.

 

§       Ontario will allow an overseas employment tax credit calculated as 38.5% of the federal credit.

 

§       Ontario will parallel the federal rules which allow the averaging of certain lump sum pension and disability payments over a number of years.

 

Ontario Research Employee Stock Option Deduction

 

The budget proposes a special Ontario Research Employee Stock Option Deduction to help Ontario companies to attract and retain highly skilled workers.  This deduction will be available in respect of the taxable amount of stock option benefits and capital gains arising from the sale of shares acquired through the exercise of employee stock options granted after Royal Assent of the enabling legislation.  The maximum deduction available to an individual in any year will be $ 100,000.

 

Eligible Employee

 

An individual will be an eligible employee for a taxation year if:

 

§       the employee spends at least 30% of his or her time undertaking directly, supervising or supporting the performance of scientific research and experimental development (“R & D”) in Ontario, in the corporation’s taxation year in which the stock option agreement is entered into;

 

§       he or she is employed by the eligible corporation for at least six consecutive months;

 

§       he or she is not a specified shareholder (which generally means the employee does not own, directly or indirectly, 10% or more of any class of shares of the corporation);

 

§       in respect of a claim for a deduction for stock option benefits, the employee is a resident of Ontario

 

(i)         on December 31 of the year in which an eligible stock option agreement is entered into; and

(ii)       the deduction in respect of the eligible stock option is claimed; and

 

§       in respect of a claim for a deduction for capital gains, the employee is a resident of Ontario

 

(i)         on December 31 of the year in which the agreement is entered into; and

(ii)       on December 31 of the year in which the underlying shares are sold.

 

Eligible Stock Options

 

Eligible stock options will be those that qualify for a deduction under the Income Tax Act (Canada), and that are not to replace existing options granted under an agreement that was entered into before the effective date.

 

Eligible Capital Gain

 

Eligible capital gains will be those arising from the sale of shares acquired by exercising eligible stock options.

 

Eligible Corporation

 

An eligible corporation is a corporation that:

 

§       carries on a business through a permanent establishment in Ontario;

 

§       directly undertakes R & D in Ontario; and

 

§       incurs an amount of eligible R & D expenditures that is at least:

 

(i)         $ 25 million; or

(ii)       10% of the aggregate total revenue

 

in the taxation year immediately preceding the year in which the stock option agreement is entered into.

 

Eligible R & D Expenditures

 

Eligible R & D expenditures will be those that qualify for the Ontario R & D Super Allowance.

 

Deductions from Income

 

A deduction from taxable income of the employee will be allowed in respect of the aggregate of:

 

(i)       the taxable portion of eligible stock option benefits; and

(ii)     eligible taxable capital gains

 

not exceeding $ 100,000 for the year.

 

Effective Date

 

The deduction will be available for eligible stock options granted after Royal Assent of the enabling legislation.

 

Enhanced Tax Deduction for Purchasers of Flow-Through Shares

 

The budget proposes to provide a new flow-through share incentive by offering eligible individual shareholders a bonus deduction, in addition to the 100% currently available, in respect of the eligible corporate mining exploration expenses.

 

Ontario Child Care Supplement for Working Families

 

The budget proposes to introduce a new single parent’s benefit as part of the Ontario Child Care Supplement for Working Families.

Corporate Income Tax Measures

 

General Income Tax Rate

 

Effective May 2, 2000, the general corporate tax rate will be reduced from 15.5% to 14.5%.  On January 1, 2001, the tax rate will be further reduced to 14%.  The general corporate tax rate is ultimately set to decrease to 8% over the six-year phase-in period.

 

Tax Rate on Manufacturing and Processing Income

 

Effective May 2, 2000, the tax rate on income from manufacturing and processing, mining, logging, farming and fishing will be reduced from 13.5% to 12.5%.  On January 1, 2001, the tax rate will be further reduced to 12%.  The tax rate will ultimately be decreased to 8%, over the six-year phase-in period.

 

Tax Rate on Small Business Income

 

The Ontario Government’s 1998 schedule to cut the small business tax rate imposed on the active business income of a Canadian controlled private corporation (“CCPC”) from 9.5% in 1998 to 4.75% by 2006 will be accelerated as follows:

 

-        effective May 2, 2000, the income tax rate will be reduced from 8% to 7%;

-        effective January 1, 2001, the tax rate will be 6.5%;

-        effective January 1, 2002, the tax rate will be 6%;

-        effective January 1, 2003, the tax rate will be 5.5%;

-        effective January 1, 2004, the tax rate will be 5%; and

-        effective January 1, 2005, the tax rate will be 4%.

 

All Tax Rates

 

All tax rate reductions will be prorated for taxation years straddling the effective dates.

 

Extending the Small Business Income Tax Rate to More Small Businesses

 

Currently, the small business deduction reduces the Ontario corporate income tax rate from 15.5% to 8% for small CCPCs.  The full small business deduction is available to CCPCs with taxable income of up to $ 200,000.  The benefit of the small business deduction begins to be phased out where taxable income is $ 200,000 and is fully phased out at $ 500,000 of taxable income.

 

The budget proposes to extend the lower small business corporate income tax rate to businesses with up to $ 400,000 of taxable income, phased in over a five-year period.  The small business deduction phase-out range will be changed to apply to income between $ 400,000 and $ 1,000,000.

 

The scheduled increases in the threshold of income eligible for the small business deduction and the phase-out range will be as follows:

 

§       effective January 1, 2001, the threshold will be raised to $ 240,000 with the phase-out range extending from $ 240,000 to $ 600,000;

 

§       effective January 1, 2002, the threshold will be raised to $ 280,000 with the phase-out range extending from $ 280,000 to $ 700,000;

§       effective January 1, 2003, the threshold will be raised to $ 320,000 with the phase-out range extending from $ 320,000 to $ 800,000;

 

§       effective January 1, 2004, the threshold will be raised to $ 360,000 with the phase-out range extending from $ 360,000 to $ 900,000; and

 

§       effective January 1, 2005, the threshold will be raised to $ 400,000 with the phase-out range extending from $ 400,000 to $ 1,000,000.

 

The increases in the threshold will be prorated for taxation years straddling the effective dates.

 

Combined Federal and Ontario Corporate Tax Rates

 

The following rates⁽¹⁾ will apply to corporations subject to Ontario tax:

 

(1)     Assumes the 2000 federal budget and the 2000 Ontario budget tax rates are enacted as announced.

(2)     The rates shown reflect the tax rates on the band of income specified.  The rates do not include the impact of the claw back of the Ontario small business deduction on the income below the small business threshold, where applicable.

(3)     The rates shown reflect the tax rates on the band of income specified.  The rates do not include the impact of the claw back of the Ontario small business deduction on the income below the small business threshold, where applicable.  Income in excess of $ 400,000 will be taxed at the Manufacturing Income rate or the General Income rate, as applicable.

 

Capital Gains Inclusion Rate

 

For dispositions of property after February 27, 2000 and before January 1, 2001, the inclusion rate for capital gains and losses will be reduced from 75% to 66 2/3%.  For dispositions occurring on or after January 1, 2001, the inclusion rate will be reduced from 66 2/3% to 62%, and will be further reduced to 50% by 2004.  The phase-in to the 50% inclusion rate will parallel the scheduled reductions in the inclusion rate for individuals.

 

The reduction in the capital gains inclusion rate will also apply to allowable business investment losses, net capital losses of other years, capital gains reserves, and donations of listed securities and ecologically sensitive lands.

Educational Technology Tax Incentive

 

The Government is proposing to introduce an Educational Technology Tax Incentive to encourage businesses to support Ontario’s community colleges and universities.  Where donations or price discounts are made by businesses after May 2, 2000 in respect of new teaching equipment and learning technologies, corporations will be eligible for an additional deduction of 15% and unincorporated businesses will be eligible for a refundable tax credit of 5%.

 

Ontario’s Film and Television Tax Incentives

 

The budget proposes a regional bonus under Ontario’s film and television tax credits (“OFTTC”) for productions that have at least five location days in Ontario and at least 85% of location days in Ontario outside the Greater Toronto Area.

 

Other measures will be introduced to enhance and simplify the OFTTC.

 

Ontario Sound Recording Tax Credit

 

The Ontario Sound Recording Tax Credit will be expanded to become available to all Ontario-based, Canadian-controlled sound recording companies.  Currently, the 20% refundable tax credit is available only to certain small recording companies.

 

Ontario Book Publishing Tax Credit

 

The Ontario Book Publishing Tax Credit will be enhanced to further support eligible literary works by Canadian authors.

 

Ontario Interactive Digital Media Tax Credit

 

The Ontario Interactive Digital Media Tax Credit will be extended to include up to $ 100,000 of qualifying marketing and distribution expenses directly related to an eligible interactive digital media product created in Ontario.

 

Ontario R & D Super Allowance

 

Ontario currently provides a special additional Provincial income tax deduction for R & D expenditures undertaken by any corporation in Ontario.  The 2000 federal budget proposes to include in a corporation’s income the amount by which Provincial deductions for R & D (such as the Ontario R & D Super Allowance) exceed the actual amount of the expenditure, for taxation years ending after February 2000.  Ontario does not intend to include in income such Provincial R & D incentives.

 

Tax Harmonization Measures

 

The Government is proposing to parallel the following federal tax measures:

 

§       the changes in the capital cost allowance (“CCA”) allowing for separate manufacturing and processing property classes;

 

§       the increase in the CCA rates for rail assets, electrical generating equipment and production and distribution equipment of a distributor of water or heat; and

§       the extension of the manufacturing and processing tax credit to corporations that produce and sell steam for uses other than the generation of electricity.

 

Employer Health Tax Measures

 

The budget proposes that the Employer Health Tax will no longer apply to employee stock option benefits arising from the exercise or disposition of stock options granted by eligible research and development-intensive companies.  This exemption will be effective May 2, 2000, for stock options exercised after that date.

 

Land Transfer Tax Measures

 

The temporary land transfer tax refund program available to first-time buyers of newly built homes will become permanent.  Under the 1999 Ontario budget, the maximum land transfer tax refund was increased from $ 1,725 to $ 2,000 for agreements entered into after March 31, 2000.  Under the 2000 Ontario budget, the maximum refund amount of $ 2,000 remains.  A qualifying purchaser must apply for the refund no later than 18 months after registration of the home purchase where the refund is not claimed at the time of registration.

 

Retail Sales Tax Measures

 

The Ontario Retail Sales Tax ("RST") on motor vehicle insurance premiums will be immediately reduced from 5% to 4% and will be phased out until it is eliminated in 2004.  RST on repairs and replacements made under warranty will immediately be reduced from 8% to 6% and will be phased out until it is eliminated in 2004.  Legislation will be introduced to exempt from RST donations in kind made to Ontario educational institutions, deposit insurance premiums paid by credit unions, and the purchase of educational CD-ROMs.

 

other business measures

 

Incorporation of Professionals

 

The budget proposes to extend the right to incorporate to all regulated professionals.  Professionals will be able to enjoy many of the same tax and non-tax advantages of incorporation as other businesses; however, their professional liability will not be limited in any way by practising within a professional corporation.  Furthermore, non-members of professional associations will not be permitted to own shares in a professional corporation.  The Government will consult with interested parties in developing legislation to enable the incorporation of professionals while ensuring that the public interest is protected.

 

Short-Form Corporations Tax Return

 

The budget proposes to reduce red tape for small businesses by changing the filing requirements so that more Ontario small businesses will be eligible to use the Short-Form Corporations Tax Return for taxation years ending after 2000.

 

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To discuss the impact of the Ontario budget on your business, please contact your partner at Goldfarb, Shulman, Patel & Co. LLP.