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                                         THE 2001 ONTARIO BUDGET

 

 

 

The Ontario Finance Minister, James Flaherty, delivered the 2001 Ontario budget (the “Budget”) on May 9, 2001. The Budget completes the Government’s 1999 promise to cut personal income tax rates by 20% by calendar 2003.   In addition, the Budget finalizes the scheduled implementation for the corporate income tax rate cuts first announced in the 2000 budget, as well as reducing provincial capital tax to numerous corporations.  Finally, the Budget outlines increased funding and new initiatives in order to improve the quality of life in Ontario.

 

The significant proposed tax changes are discussed below.

 

 

Personal Income Tax Measures

 

Personal Income Tax Rates

 

The Budget proposes cuts to the Ontario low and middle personal income tax rates for 2002 and 2003. While the top Ontario personal income tax rates will remain unchanged, as shown below, all Ontario taxpayers will benefit from the modest reduction in the personal income tax rates on the low and middle income brackets.  The impact of the rate cuts to the low and middle income tax brackets is shown on page 2.

 

The maximum combined federal and Ontario tax rates for 2001 and future years are as follows:

 

 

Surtax and Tax Reduction

 

Ontario currently has a two-tiered surtax which is calculated as a percentage of basic Ontario tax in excess of specified amounts.  The first-tier surtax will be eliminated effective January 1, 2003.  However, the surtax applicable to income in excess of $63,365 (indexed for inflation after 2001) will remain unchanged.

Combined Federal and Ontario Personal Tax Rates

 

The following combined federal and Ontario personal income tax rates will apply to 2001 to 2003:

 

 

(1)                         This chart assumes that the 2000 federal budget, the 2000 federal mini-budget and the 2000 and 2001 Ontario budget tax rates are enacted as announced.  The tax brackets shown above reflect all applicable taxes and surtaxes, and do not include any personal tax credits.  This chart shows the 2001 tax brackets, which will be indexed for inflation after 2001.

 

Equity in Education Tax Credit

 

The Budget proposes a refundable tax credit, effective for the 2002 and subsequent taxation years, that will be provided in respect of kindergarten, elementary and secondary tuition fees at independent schools in Ontario.  This annual credit will apply to the first $7,000 per child of tuition fees (not including expenses for books, sports, uniforms, computers, travel, boarding etc.).

 

This tax credit is proposed to be phased in over a five-year period, beginning with tuition fees paid in respect of instruction commencing in 2002.  The proposed credit rates are as follows:

 

 

Consultations are to take place to identify an appropriate framework for establishing eligibility for this credit.

 

Alternative Minimum Tax

 

For 2001, the Ontario alternative minimum tax (“AMT”) will be calculated as 38.75 per cent of the federal AMT in excess of the federal regular tax.  The Ontario AMT will be added to Ontario tax calculated under the regular rules.

 

As a result of the changes to Ontario tax rates proposed in this Budget, the Ontario AMT percentage for 2002 will be reduced to 37.81 per cent.

 

Non-Refundable Credits

 

As announced in 2000, enhancements are proposed to certain Ontario non-refundable credits. These enhancements will be effective January 1, 2001.

 

 

These Ontario non-refundable tax credits are calculated using the lowest Ontario tax rate for the appropriate taxation year.

 

Medical Expenses Tax Credit

 

A claim for medical expenses 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, the claim made for 2001 by an individual for the medical expenses of a dependant will be reduced by 26.35 per cent of the amount by which the dependant’s net income exceeds the basic personal amount.

 

For 2002, the claim made by an individual for medical expenses of a dependant will be reduced by 25.71 per cent of the amount by which the dependant’s net income exceeds the basic personal amount.

 

 

Corporate Income Tax Measures

 

General Income Tax Rate

 

The Ontario general corporate income tax rate is to be reduced from its current level of 14%, as follows:

 

-        effective January 1, 2002, the tax rate will be 12.5%;

-        effective January 1, 2003, the tax rate will be 11%;

-        effective January 1, 2004, the tax rate will be 9.5%;

-        effective January 1, 2005, the tax rate will be 8%.

 

Tax Rate on Manufacturing and Processing (M&P) Income

 

The Ontario M&P corporate income tax rate is to be reduced from its current level of 12%, as follows:

 

-        effective January 1, 2002, the tax rate will be 11%;

-        effective January 1, 2003, the tax rate will be 10%;

-        effective January 1, 2004, the tax rate will be 9%;

-        effective January 1, 2005, the tax rate will be 8%.

All Ontario Corporate Tax Rates

 

All Ontario corporate tax rate reductions 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 that the 2000 federal budget, the 2000 federal mini-budget and the 2000 and 2001 Ontario budget tax rates are enacted as announced.   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.

 

Capital Taxes

 

Presently, businesses with less than $2 million of taxable paid-up capital are exempt from the Ontario capital tax, and those having between $2 million and $3.2 million of taxable paid-up capital are eligible for reduced capital tax rates.

 

The Budget proposes that, effective January 1, 2002, the above-mentioned capital tax exemption will be replaced with a $5 million deduction from taxable paid-up capital.  This measure equally applies to financial institutions, as it does to regular corporations.  The proposed $5 million deduction will be prorated for taxation years straddling January 1, 2002.

Ontario Scientific Research and Experimental Development (“SR&ED”) Super Allowance

 

In the 2000 federal budget, it was announced that the provincial tax savings related to provincial deductions for SR&ED in excess of actual expenditures would be treated as taxable government assistance.  Since this federal announcement directly impacts on the Ontario Super SR&ED Allowance, the Budget proposes to suspend the Super SR&ED Allowance for two years.  In its place, an exclusion from Ontario taxable income will be permitted for the portion of the federal SR&ED investment tax credits that relate to qualifying Ontario SR&ED expenditures.  This measure will be effective for a twenty-four month period, commencing with the first taxation year for which the proposed federal measure will apply to the corporation.

 

Other Corporate Tax Measures

 

The gross revenue and total asset thresholds for using the Short-form Corporations Tax Return will be increased from $1.5 million to $3 million.  This measure will apply for taxation years commencing after December 31, 2001.

 

Corporations must make monthly installments if their taxes payable exceed $2,000 in the current or preceding year.   For taxation years commencing in 2002, corporations required to make installments will be permitted to pay their installments quarterly if their taxes payable are less than $10,000 in the current or preceding year.

 

For taxation years ending after 2000, corporations will no longer be required to file a copy of their federal T2 return and related schedules with their Ontario corporate income tax returns, provided these documents have been filed with the Canada Customs and Revenue Agency.

 

 

OTHER SPECIFIC TAX MEASURES

 

Capital Gains Inclusion Rate

 

As announced in 2000, for dispositions of capital property on or after October 18, 2000, the inclusion rate for capital gains and losses will be reduced to 50%.

 

Incorporation of Professionals

 

The 2000 Ontario budget first announced the intention to permit individuals who practice in a regulated profession to operate their businesses through a corporation.  By doing so, professionals would be able to enjoy the tax advantages of incorporation.

 

The Budget proposes that technical amendments be made to the Ontario Business Corporations Act to include professional corporations.  These amendments would clarify that the individual’s liability for professional negligence is not limited by virtue of the professional corporation, and that the conditions, prohibitions and restrictions of the particular profession equally applies to professional corporations.

 

 

MUNICIPAL PROPERTY TAXES

 

In 1998, the Province created the “new multi-residential property class” to enable municipalities to apply a lower tax rate to newly built apartment rental buildings for the first eight years after construction. The Budget proposes to extend the time horizon from eight years to thirty-five years for such properties, effective January 1, 2002.

 

 

RETAIL SALES TAX (“RST”)

 

An administrative concession is introduced under which one late filing penalty will be waived for late-filed Ontario RST returns, where the business has had no late-filed returns in the preceding four years, retroactive to July 1, 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.