CORPORATE INCOME TAX MEASURES

Income Tax Rates

The Budget left corporate income tax rates unchanged. However, in November 2003, the new government proposed in the Fiscal Responsibility Act that the rates effective January 1, 2004, would be as follows:

The same Act accelerated to $400,000 the threshold for income eligible for the small business rate, also effective January 1, 2004.

Capital Cost Allowance (CCA) Enhancements

The Budget proposes to parallel the CCA changes announced in the 2004 Federal budget. Those changes are to increase the CCA rate from 30% to 45% for computer equipment, and an increase from 20% to 30% for data network infrastructure equipment. These changes are effective for acquisitions after March 22, 2004.

Capital Tax

It had been the prior government's intention to eliminate capital tax by 2008, although no schedule had been determined. The current Budget contains a timetable for both the elimination of capital tax by January 1, 2012, and a gradual reduction in rates until then.

The tables on the next page set out the government's proposed plan to eliminate the capital tax:

Although the capital tax is proposed to be eliminated by 2012, the government wants to protect the current capital tax base. Therefore, amendments are proposed to the definition of "current accounts payable" in response to a recent court decision. Effective for taxation years ending after today's Budget, the definition would be amended to confirm that it applies only to amounts payable to the supplier for purchases of goods and services and not amounts owed to a creditor (e.g., a finance company).

The proposal would also clarify that liabilities incurred in connection with the purchase or trading of shares, bonds or other securities are not considered current accounts payable and are therefore included in taxable capital. This measure is effective for taxation years ending after May 19, 1993.

Employer Health Tax (EHT)

The government announced its intention to appeal the April 27, 2004 judgment of the Ontario Superior Court of Justice that ruled that Ontario-based professional sports teams should not pay EHT with respect to the portion of salaries paid for games played outside Ontario. For greater certainty, it is proposed, retroactive to January 1, 1990, that EHT be payable on all remuneration in cases where a person reports to a permanent establishment in Ontario.

The definition of remuneration for purposes of EHT is being clarified to ensure that it continues to include all taxable benefits and allowances received by an individual pursuant to sections 5, 6 or 7 of the Income Tax Act. This measure is also retroactive to January 1, 1990.

The Budget proposes to simplify the process for paying EHT. Currently, instalment payments for a particular month are required on the 15th of that month, using an estimate based on the prior month's payroll. Instead, payments will be made on the 15th day of the following month based on the actual payroll for that prior month. This proposal will be effective January 1, 2005. Therefore, the first instalment for 2005 will be due February 15, 2005, based on January 2005 payroll.

Penalties for late-filed EHT returns will be increased to be consistent with late-filing penalties under the Corporations Tax Act. The increases will apply for taxation years ending after May 18, 2004.

Apprenticeship Training Tax Credit (ATTC)

The Budget introduces the ATTC, which is intended to encourage the hiring of apprentices in targeted skilled trades. Construction, motive power, industrial and services trades are included. Qualifying service trades are those eligible under the apprenticeship component of the Co-operative Education Tax Credit. Both corporations and unincorporated businesses will be eligible for a 25 per cent refundable tax credit on eligible expenses incurred with respect to eligible apprentices. The rate will be 30 per cent for businesses with total payroll of $400,000 or less.

The credit is capped at $5,000 per year per eligible apprentice to a maximum of $15,000 over the first 36 months of apprenticeship. The $5,000 maximum annual credit will be pro-rated for the number of days that the apprentice is employed with that employer during the year.

Eligible apprentices are those in their first 36 months of an apprenticeship training program in a qualified skilled trade on or after May 19, 2004 and who have commenced employment before January 1, 2008. Eligible expenditures are salaries and wages paid to an eligible apprentice after May 18, 2004 and before January 1, 2011. The government intends to consult with interested parties prior to December 31, 2007 to determine whether or not the ATTC should be extended.

Co-operative Education Tax Credit (CETC)

The CETC is a refundable tax credit to employers on salaries and wages paid to students and apprentices in qualifying work placements. Certain changes are proposed to the CETC, consequential on the introduction of the Apprenticeship Training Tax Credit.

The CETC will continue to be available for qualifying co-op placements which are not apprenticeships. There will be transitional rules for apprenticeships where the first 36 months straddle May 18, 2004. Essentially, salaries paid before May 19, 2004 will qualify for the CETC and those after will qualify for the ATTC.

For apprenticeships not in their first 36 months and for certain work placements in non co-op approved fields of study, no credit will be available for salaries and wages paid after December 31, 2004. Such employment commencing after October 25, 2004 will not qualify.

Ontario Film and Television Tax Credit (OFTTC)

Ontario-based, Canadian-controlled production companies are currently eligible for a 20 per cent refundable tax credit on Ontario labour expenditures for film and television productions. The Budget proposes to enhance this credit. Qualifying labour expenditures will no longer be reduced by equity investments from Canadian government film agencies, effective for productions commencing principal photography after March 27, 2003.

Qualifying labour expenditures will now be able to be incurred as early as two years before the commencement of principal photography. In addition, a production will no longer be disqualified where a person other than the production company holds an interest therein, unless the production or investors are associated with a tax shelter. These changes parallel federal changes introduced November 14, 2003 and are effective on the same dates, generally November 14, 2003.

Other Credits

The Budget proposes to eliminate the Workplace Accessibility Tax Incentive, the Workplace Child Care Tax Incentive and the Graduate Transitions Tax Credit (GTTC) for expenditures made after December 31, 2004. For the GTTC, employment must commence on or before July 5, 2004 to qualify.

Donations, sales or licences after December 31, 2004 will not qualify for the Educational Technology Tax Incentive. For licences granted before January 1, 2005, no amount is available for deduction or credit after December 31, 2004.

Resource Allowance

For Federal purposes, the 25 per cent resource allowance was replaced by a deduction for Crown royalties and mining taxes paid. These measures are effective for taxation years ending after December 31, 2002. Ontario will not adopt these measures, but rather will retain the 25 per cent resource allowance and will reinstate the non-deductibility of crown royalties and mining taxes retroactive to the introduction of the Federal changes