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2012 Ontario Budget Backgrounder

Finance Minister Duncan’s 2012 Budget proclaims that Ontario’s real GDP has fully recovered from the global recession of 2008–09. However, the fiscal deficit continues to threaten the province’s financial well being resulting in the need for significant reductions in government spending. Both the Conference Board of Canada and the province’s own Commission on the Reform of Ontario’s Public Services – chaired by Don Drummond project annual deficits of $25 billion if no action is taken to control expenditures.

Economic Factors

Ontario’s 2011/12 fiscal deficit is projected to be $15.3 billion which represents a $1.3 billion increase over 2010/11. Over the next 3 years the Budget proposes reductions in spending growth and cost containment of $17.7 billion, combined with a projected increase in revenues of $4.4 billion “without raising taxes”. The 2014-2015 fiscal plan still calls for a $10.7 billion deficit and increase in the province’s debts. The table below provides a summary of the province’s projected fiscal situation over the next 3 fiscal years.

The Budget is premised on the government’s ability to dramatically reduce Program spending growth to 1 per cent annually between 2012 and 2015 through the following measures:

Controlling compensation costs by:

1. attempting to freeze compensation levels
2. passing legislation to make arbitration more accountable and efficient;
3. controlling public sector pensions;
4. extending pay freeze to four years for executives at hospitals, colleges, universities, school boards and agencies;
5. reducing the public sector by 1,000 full time equivalents;
6. freezing MPP salaries for two additional years.

The Ontario government proposes to balance the province’s finances by 2017-18. In its latest Economic Forecast, TD Economics projects real GDP. growth in the Canadian economy of 2.2%, while the budget papers project the Ontario economy to grow at 1.7 per cent in 2012, 2.2 per cent in 2013 and 2.4 per cent in 2014.

Non-tax highlights of the budget include the following:

Education

• Committed to fully implementing full-day kindergarten by 2014;
• Keeping a cap on class sizes in the early grades;
• Must achieve two-year wage freeze with teachers, no incremental increases on the salary grid for two years, end to the sick-leave plan that allows a partial payment for up to 200 unused sick days upon retirement;

Healthcare

• Keep growth in spending to an average of 2.1 percent annually over next 3 years.
• Maintain total physician compensation at current levels through the upcoming negotiations with the Ontario Medical Association.
• Ontario seniors with incomes over $100,000 to pay a larger share of their prescription drug costs.

Public Sector Pensions

• Limiting additional government contributions while asking employees to share pension costs equally with the employer.
• Asking public-sector workers to make their pensions sustainable by reducing future benefits before asking for additional contributions from taxpayers.

Increased Fees

User fees in many areas are being increased:

• Increase in a variety of transportation-related fees
• Implement water taking charges to expand the user-pay base to include construction, petroleum,mining, food production and recreational facilities.
• Increase fee structure for Environmental Compliance Approvals and the Environmental Activity and Sector Registry.
• Raising tonnage fees for larger generators of hazardous waste.

Northern Ontario

• Proposed mine developments currently under consideration in the Ring of Fire expected to create more than 1,500 permanent jobs.
• Divesting of or closing down some parts of Ontario Northland Transportation Commission to save approximately $250 million over 3 years.

Electricity Costs –Ontario Clean Energy Benefit (OCEB)

In an effort to reduce the impact of the increases to the cost of electricity resulting from the July 1, 2010 implementation of the province’s harmonized sales tax (HST) and the government’s green energy initiatives, the OCEB was introduced on January 1, 2011 to provide a 10 per cent benefit to residential and certain farm and small business customers. The government now proposes to cap the monthly amount of the benefit such that only the first 3,000 kilowatt-hours (kWh) of electricity consumed in a month will qualify for the OCEB. The government estimates that the changes to the OCEB will result in $500M of additional revenue over 4 years.

Tax Measures

The following is a summary of the tax highlights from the 2012 Ontario Budget.

A. Business

Corporate Income Tax (CIT) Rate Freeze and Consequential Amendment to the Taxpayer Protection Act, 1999

As outlined in the table below, the general CIT rate is legislated to decrease from its current rate of 11.50%to 11.00%on July 1, 2012 and to 10.00%on July 1, 2013. Citing revenue needs, the government proposes to freeze the CIT rate at its current 11.50%rate until the budget is balanced, planned to occur in the 2017-18 fiscal year. As illustrated in the table below, no changes are proposed to the tax rates applicable to corporate income that qualifies for the small business or M&P rates.

The government’s proposal to freeze the CIT rate violates the Taxpayer Protection Act, 1999 - which would otherwise require a province-wide referendum to approve such freeze. In order to avoid such referendum, the province proposes to amend the Taxpayer Protection Act, 1999 to exclude its CIT revenue raising measures.

The government estimates that the freeze to the CIT will result in approximately $1.5 billion of additional revenue over the next 3 years.

Based on these proposals, the combined federal and Ontario corporate tax rates will be as follows:

Business Education Taxes

The government proposes to freeze Business Education Tax (BET) reductions, starting in 2013. Eligible new construction will, however, continue to benefit from fully reduced BET rates as will businesses in Northern Ontario.

Mining Sector

The Province plans to review the Ontario mining tax to ensure Ontario receives fair compensation for its non-renewable resources.

Apprenticeship Training

The government plans to review the effectiveness and efficiency of the Apprenticeship Training Tax Credit and is considering linking this credit to an apprentice’s completion of their apprenticeship program.

Research and Development

The government plans to obtain advice from the Jobs and Prosperity Council to find improvements which simplify compliance and administration, while increasing research and development expenditures in the province.

Employer Health Tax

The Province proposes to no longer be bound by federal rulings on the determination of whether people are employees or self-employed when determining Employer Health Tax.

Retail Sales Tax

The government proposes to accelerate the wind-down of the Retail Sales Tax earlier by moving up the final date to apply for a refund or rebate to December 31, 2012 (from June 30, 2014), except with respect to insurance premiums or private transfers of used vehicles.

Pensions

The government proposes to extend solvency funding relief to sponsors of private sector defined benefit pension plans. Starting with actuarial valuation report filings on or after September 30, 2011, plan administrators may choose to consolidate existing solvency payment schedules into a new five-year payment schedule; and extend the solvency payment schedule to a maximum of 10 years for a new solvency deficiency determined in the report (with consent from beneficiaries).

Extend temporary solvency funding relief for private sector pension plans by allowing employers to use letters of credit to cover up to 15 percent of solvency liabilities. Employers will also be allowed to start making special payments one year after a valuation date.

B. Personal

Ontario Trillium Benefit

The Ontario Trillium Benefit was introduced in 2011 and represents a combination of the Ontario Sales Tax Credit, Ontario Energy and Property Tax Credit and Northern Ontario Energy Tax Credit. Eligible taxpayers who file their 2011 tax returns, will start receiving this benefit monthly. The government is reviewing their ability to provide a single lump sum payment option in the future.

Healthy Homes Renovation Tax Credit

Announced in the fall, the new Healthy Homes Renovation Tax Credit is a refundable 15%tax credit on up to $10,000 of annual eligible home renovation expenses that improve accessibility or help seniors with mobility at home. If passed, this credit will be available to be claimed by seniors or family members living with a senior on their annual tax return, beginning with the 2012 personal tax return. Renovation expenses that qualify may also be claimed as a medical expense tax credit.

Ontario Child Benefits

Maximum benefits will increase from $1,100 in July 2012 to $1,210 in July 2013 and increase again to $1,310 in July 2014.

Collecting Fines under Provincial Offences Act

The government is proposing to refuse to issue renewals of vehicle license plates for unpaid fines related to the operation of vehicles. As well, the government is proposing a mechanism whereby unpaid fines would be set-off against tax refunds issued by the CRA.

C. ENFORCEMENT

Protection of Tax Base and Enhanced Collection

Ontario plans to continue working with the federal government to protect its tax base against inter-provincial profit shifting and loss plans that undermine Ontario’s tax base. In addition, Ontario is considering implementing measures similar to those introduced by Quebec to address aggressive tax planning.

Ontario plans to adopt proposals to improve enforcement, increase information sharing and require increased disclosure by Ontario businesses to combat the underground economy.

The government plans to introduce amendments to enhance their ability to collect tax debts, including enhancement and standardization of garnishment provisions.

The budget proposes to require that recipients of government grants and assistance must be compliant with their tax obligations, as well as bidders seeking to fulfill provincially funded contracts.

Ontario plans to adopt proposals to improve enforcement, increase information sharing and require increased disclosure by Ontario businesses to combat the underground economy.

The government plans to introduce amendments to enhance their ability to collect tax debts, including enhancement and standardization of garnishment provisions.

The budget proposes to require that recipients of government grants and assistance must be compliant with their tax obligations, as well as bidders seeking to fulfill provincially funded contracts.

Tobacco Tax

Effective October 1, 2012, raw leaf tobacco will be regulated under the Tobacco Tax Act. To allow tracking through the supply chain, tobacco growers, dealers, processors, importers, exporters and certain transporters will be required to register and report with the Ministry of Finance. Regulations will be drafted in consultation with key stakeholders including First Nations leadership.

This communication contains a general overview of the subject matter and is current as of the date of publication. The information should not be regarded as a substitute for professional advice. MNP LLP accepts no responsibility for any loss or damage caused by your reliance on information contained in this publication.