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Creating a more Competitive Tax System

Archived Backgrounder

Creating a more Competitive Tax System

Ministry of Finance

In the 2009 Ontario Budget, the McGuinty government proposed a progressive tax package to position Ontario's economy for long-term competitiveness.  These tax changes would support job creation and attract business investment.

The 2009 Fall Economic Statement provides additional details on the government's proposed changes to create a more competitive and modern tax system.

HARMONIZED SALES TAX

To further strengthen Ontario's economic growth and tax competitiveness, the 2009 Budget proposed that, effective on July 1, 2010, the Retail Sales Tax (RST) would be replaced with a value-added tax and combined with the federal Goods and Services Tax (GST) to create a federally administered Harmonized Sales Tax (HST). 

The HST would have a combined rate of 13 per cent.  The provincial portion would be eight per cent and the federal portion would be five per cent.

Ontario's announcement of its proposed move to a value-added sales tax was followed by a similar announcement from British Columbia.  These two provinces would join three Atlantic provinces (New Brunswick, Nova Scotia, Newfoundland and Labrador) and Quebec, all of which have had value-added taxes since the 1990s.

HOW THE PROPOSED TAX CHANGES WOULD BENEFIT PEOPLE

Ontarians would benefit from a stronger, more competitive economy that creates more jobs, provides higher incomes and better supports the public services on which people depend.

People would also benefit from permanent income tax cuts, enriched tax credits and transition payments.

Personal Income Tax (PIT) Cuts

The 2009 Budget proposed $10.6 billion in tax relief to Ontarians over three years to provide PIT cuts, enhance the sales and property tax credits, and help consumers adjust to the HST.

The government is proposing to cut the first tax bracket rate from 6.05 per cent to 5.05 per cent on the first $36,848 of taxable income (adjusted for inflation).

The PIT changes proposed in the 2009 Budget would benefit about 4.3 million individuals and families in Ontario, providing more than $1.1 billion annually in broadly based PIT cuts.

Approximately 90,000 lower-income taxpayers would no longer pay Ontario PIT, and about 93 per cent of Ontario taxpayers would get a PIT cut.

SALES AND PROPERTY TAX CREDITS FOR LOW- TO MIDDLE-INCOME ONTARIANS

As announced in the 2009 Budget, the government is proposing to introduce two new separate and enhanced tax credits -- the Ontario Sales Tax Credit and the Ontario Property Tax Credit -- to replace the existing combined property and sales tax credits.  An additional $1 billion in annual property and sales tax relief would be provided to low- to middle-income Ontarians through the new credits.

Ontario Sales Tax Credit

The proposed Ontario Sales Tax Credit would be paid quarterly beginning in August 2010.

The tax credit would provide about 2.9 million low- to middle-income families and individuals with annual assistance of up to $260 for each adult and child. 

Ontario Property Tax Credit

The proposed enhanced Ontario Property Tax Credit would be paid annually to low- to middle-income Ontario homeowners and renters. Like the existing property tax relief, it would be based on occupancy cost -- that is, property tax paid or 20 per cent of rent paid. 

Seniors would be able to claim up to $625 plus 10 per cent of occupancy cost.  Non-seniors would be able to claim up to $250 plus 10 per cent of occupancy cost.  The maximum credit would be $1,025 for seniors and $900 for non-seniors, and would not exceed occupancy cost.  

SALES TAX TRANSITION BENEFIT

To help Ontarians adjust to the HST, the government would provide up to three non-taxable payments to eligible Ontario residents in June 2010, December 2010 and June 2011:

  • Eligible families (including single parents) with adjusted family net incomes of $160,000 or less would receive three payments totalling $1,000
  • Eligible single individuals with adjusted net incomes of $80,000 or less would receive three payments totalling $300. 

The proposed transition benefit would provide about $4 billion to 6.5 million eligible individuals and families.

COMPETITIVE BUSINESS TAXES

The 2009 Budget proposed $4.5 billion in tax relief over three years to lower business costs, enhance Ontario's competitiveness and support growing small businesses.  These measures would build on tax cuts already in place, such as the elimination of the Capital Tax on July 1, 2010. 

The 2009 Budget proposed to permanently and significantly reduce taxes for large and small businesses across the province.  Corporate Income Tax Rates (CIT) would be cut, beginning July 1, 2010, as follows:

  • The general CIT rate would be cut from 14 per cent to 12 per cent and further reduced to 10 per cent over three years
  • The CIT rate on manufacturing and processing, mining, logging, farming and fishing income would be cut from 12 per cent to 10 per cent
  • The small business CIT rate would be cut from 5.5 per cent to 4.5 per cent
  • The small business deduction surtax of 4.25 per cent would be eliminated.

Once the proposed Ontario CIT rate cuts are fully implemented, Ontario's combined federal-provincial CIT rate of 25 per cent would be lower than the current average corporate tax rate among developed countries.

The HST, when fully implemented, would save businesses $4.5 billion a year through input tax credits on business purchases. Business inputs are the costs of goods and services that a business purchases to conduct its operations.  Input tax credits can generally be claimed by a business for the tax paid to provide taxable goods and services.  In addition, businesses would save more than $500 million a year in compliance costs from the move to a single HST administration.

Ontario's Marginal Effective Tax Rate (METR) on new business investment would be cut in half, making Ontario one of the most competitive jurisdictions in the industrialized world for new investment. 

Learn more about the proposed Harmonized Sales Tax.

See the estimates of Ontario tax expenditures in the Transparency in Taxation, 2009 report.

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