Ontario offers tax cuts, sales tax harmonization

The province of Ontario will face a massive deficit over the next seven years, as the government struggles to right the economy.

Finance Minister Dwight Duncan has projected a massive $56.8-billion deficit over seven years, as the province’s coffers are drained by falling revenues and rising stimulus spending.

“The global crisis has reduced our government’s revenues,” he said. “Total tax revenues declined and will probably do the same in the years ahead.”

The budget allows for $32.5 billion in infrastructure spending over the next two years, including $5 billion from Ottawa. Duncan said this should provide jobs for 300,000 Ontarians.

The budget also promises tax cuts which will benefit 93% of taxpayers, with those earning under $80,000 expected to save 10%.

“The income tax cuts were fairly modest,” says Bob Neale, executive director at Ernst &Young. “There’s really only the reduction in the lowest personal rate, as of January 1, 2010, from 6.05% to 5.05%. When you look at it as an overall reduction percentage, it may be like a 2.5% reduction in your total tax burden.”

For lower-income earners, the personal income tax cuts should offset the increases in sales tax. The advantage of reducing the lowest tax rate diminishes as incomes rise, and higher income taxpayers, who tend to consume more, will see their overall tax burden rise.

“People with higher levels of income will have a higher Ontario tax burden going forward, unless they are saving everything,” he says.

The Ontario Child Benefit will be accelerated to provide up to $1,100 per year, per child to low- and middle-income families.

But the budget was not all handouts and tax cuts. The government plans to reduce the number of public service jobs by 5% over the next three years, through attrition and layoffs. Members of Provincial Parliament will have their salaries frozen for the coming year.

The budget would cut the corporate income tax rate from 14% to 12% by July 1, 2010, then again to 10% in 2013. The small business tax rate will fall from 5.5% to 4.5% by July 2010.

Goodbye PST, hello HST

Investing through mutual funds may get a lot more expensive, as the budget included plans to harmonize that province’s sales tax with the federal GST. The new HST will come into force July 1, 2010, at a rate of 13%.

To ease the transition to the new sales tax, the government is planning to dole out cash payments. A family earning $160,000 or less will receive $1,000, rationed across three payments, starting June 1, 2010. A single person with an income of $80,000 or less will get $300.

Related Stories

Tax harmonization not just “Ontario’s problem” Fund industry rallies against Ontario tax proposal Federal Budget 2009: An advisor’s summary Quebec budget to boost small-cap investment

The mutual fund industry voiced opposition to the plan even before it was announced, with CI Funds’s president Stephen MacPhail even threatening to move the firm to Alberta, which has no provincial sales tax.

“It’s a little disappointing,” says Greg Pollock, president and CEO of Advocis. “It appears that MERs will be impacted by this harmonized tax. It remains to be seen what the long term implications of that are.”

He says Advocis members voiced concern prior to the budget that the HST would discourage investment.

Other fees will also be affected, he points out, such as RRSP administration fees. These are currently taxed at 5%, but in Ontario that will now rise to 13%.

“Currently many of the services are subject to 5% tax [GST],” says Bruce Goudy, tax partner at Ernst & Young. “With services, even investment management fees now being subject to 13%, this is going to create more pressure on investment funds. They will incur more expenses that are partially unrecoverable. That’s going to be a real challenge to investment funds.

“The Quebec model ‘zero-rates’ financial services, which allow them to get back their input tax credits wherever they pay Quebec sales taxes,” he says. “They didn’t go own that route in Ontario.”

There will be some benefit to other industries, however, as harmonization will ease the administrative burden on many businesses that will no longer have to track the provincial and federal sales taxes separately.

“Hopefully, this will take it down to one tax, one audit,” he says. “There’s a lot of self-assessment and tracking of provincial sales tax that financial service industries already do. A lot of that will go away.”

Ian Russell, president and CEO of the Investment Industry Association of Canada, remained focused on the impact on the investment industry.

“Sales taxes on investment management fees, including those on mutual funds, will increase unless exemptions are put in place,” he said. “This will discourage savings and investment and undermine the competiveness of the financial sector.”

Harmonization could also stymie the real estate market, according to the Ontario Real Estate Association. The group estimates homebuyers would pay between $1,750 and $2,325 more in taxes on a range of services involved in a closing the deal.

“Now is not the time to be erecting barriers to homeownership,” said Pauline Aunger, president of OREA. “We need consumers to invest in housing to help get our economy going again.

“These additional taxes could price some homebuyers, especially first-time homebuyers, right out of the market.”

Advocis’s Pollock welcomed the budget’s promise to pursue a single securities regulator, and applauded the pledge to move toward principles-based regulation.

(03/26/09)