The Ontario Finance Minister Ernie Eves delivered the 1999 Ontario Budget on May 4, 1999.  In the budget, the government continues its income tax reductions by including further tax cuts.  The significant proposed tax changes as well as other developments of interest are discussed below:

Personal Income Tax Rates

The Ontario personal income tax rate will be reduced to 38.5% of basic federal tax from 40.5% effective July 1, 1999, which results in an effective Ontario tax rate of 39.5% of basic federal tax for the 1999 year.  To parallel the reduction in the personal income tax rate, the thresholds above which the Fair Share Health Care Levy (FSHCL) will apply have been adjusted to maintain the income levels at which the FSHCL becomes payable.

Tax Credit for Employee Stock Options

The budget introduces a non-refundable tax credit that will reduce or eliminate the Ontario personal income tax on the exercise or disposition of stock options granted by research and development corporations to its eligible employees.  To qualify for the credit, the following conditions must be met:

1.        The individual must be employed by an eligible corporation when the option is granted and the employee must be a resident of Ontario on December 31 of both the year in which he is granted the option and the year in which he claims the 25% deduction for tax purposes with respect to the stock option benefit.  In order to be an eligible corporation, the corporation must have a permanent establishment in Ontario and directly undertake scientific research and experimental development in Ontario.

2.        The individual does not own, directly or indirectly, 10% or more of any class of shares of the eligible corporation.  As well, the individual cannot be a director of the corporation unless they also perform other employment duties for the corporation.

3.        The credit will be available for a lifetime maximum of $ 1 million of stock option benefits reported by the individual.

Capital Tax

The budget proposes measures to enhance and simplify the capital tax exemption for small business as follows:

·       A corporation or a group of associated corporations that have aggregate taxable capital under $ 2 million would be exempt from capital tax.

·       The full capital tax rate will be phased-in for corporations or a group of associated corporations with aggregate taxable capital greater than $ 2 million and less than $ 4 million.  The increase in the threshold at which the full capital tax rates applies will be phased in over 5 years.  The first threshold will be $ 2.4 million for the period of May 5 to December 31, 1999, and the threshold will increase by $ 400,000 for each of the next four calendar years.  In 2003 and later years, the threshold will be $ 4 million.  The threshold amounts will be prorated where the corporation’s taxation year straddles any of the phase-in dates.

Where taxable capital exceeds the threshold for a year, the maximum capital tax rate of 0.3% applies.

Expansion Of The Ontario Innovation Tax Credit (OITC)

The OITC is a 10% refundable tax credit for research and development carried out in Ontario.  Previously, the OITC was only available to qualifying small and medium-sized Canadian-controlled private corporations.  The Budget proposes to extend the OITC to public and other private corporations.

Under present rules, in order to obtain the full OITC, the corporation’s taxable capital for purpose of the federal large corporation’s tax (LCT) must not exceed $ 10 million in the preceding taxation year.  Effective for taxation years ending after May 4, 1999, the full OITC will be available to corporations with taxable capital of up to $ 25 million and benefits will be fully phased out when taxable capital reaches $ 50 million.  These measures will be prorated for taxation years straddling May 4, 1999.

Co-Operative Education Tax Credit (“CETC”)

To provide incentive to Ontario businesses to acquire skills in Leading-Edge Technology (“LET”) and to assist in find and training new workers in these fields, the budget proposes to expand the incentives for hiring workers through the LET component of the CETC which was first announced in the 1997 Budget.

Effective for apprentices whose employment commences after May 4, 1999, the budget proposes to extend the maximum period for which salary, wages and benefits that are eligible for the tax credit from 16 to 24 months.  As a result, the maximum tax credit for each apprentice will increase to $ 6,000.

Corporate Minimum Tax

The budget announced changes to improve the fairness of the corporate minimum tax by allowing interest paid on debt that is treated as equity for accounting purposes to be a reduction from a corporation’s adjusted net income.  This change will be effective for interest paid after May 4, 1999.

Royalties Paid to Non-Residents

The budget proposes to exempt, from the add back rule, all royalties paid to non-residents with respect to computer software or patents and information concerning industrial, commercial or scientific experience whether or not a tax treaty exempts the royalty from federal taxes under the Income Tax Act (Canada).  This change would be effective for royalties incurred after May 4, 1999.

Retail Sales Tax

Threshold amounts for extended filing periods for retail sales tax returns will be increased to allow more vendors to remit less frequently.  As well, the purchase exemption certificate system will be simplified to reduce compliance costs for vendors.

Land Transfer Tax

The budget extends the deadline for the Land Transfer Tax Refund with respect to the purchase of newly built homes by first time home buyers under an agreement entered on or before March 31, 2000 where the purchaser takes possession no later than December 31, 2000 and the transfer is registered no later than December 31, 2001.  The budget also proposes to increase the maximum Land Transfer Tax Refund from $ 1,725 to $ 2,000 for agreements entered into after March 31, 2000.

Other Matters

The budget also announced several changes to simplify tax compliance and include:

-          Employers with total annual Ontario remuneration of under $ 600,000 will no longer be required to pay Employer Health Tax (“EHT”) installments, and would remit tax owing only once a year along with their EHT annual return, effective January 1, 2000.

-          A new short-form Ontario tax return may be filed by eligible small business corporations for taxation years ending after December 31, 1999.  An eligible small business corporation must be:

-        exempt from capital tax

-        have taxable income not greater than $ 200,000, and

-        not be associated with a larger corporate group.