Ryan Tax Alert - Ontario Budget 2008

On March 25, 2008, Minister of Finance Dwight Duncan presented the 2008 Ontario budget. The McGuinty government’s fifth budget focuses primarily on investment in skills and training, lowering business costs, and improving education, health care, support for families and infrastructure. Several interesting commodity tax changes were also announced.

Retail Sales Tax

Returnable Containers

The budget proposes to amend the Retail Sales Tax Act, retroactive to May 7, 1997, in response to a decision by the Ontario Superior Court of Justice in a case involving Procter & Gamble and returnable containers. In that case, for which the decision was recently upheld by the Ontario Court of Appeal, Procter & Gamble successfully argued that the rental of pallets used to deliver product to high volume retailers should not be considered the rental of returnable containers, which would be a taxable supply, but rather the acquisition of containers incorporated into goods for resale, which qualified for exemption.

In contrast to the decision of the courts, the proposed legislative changes will confirm the requirement to pay retail sales tax on purchases of containers and other packing materials that are intended to be returned for reuse for the packaging, shipping or storing of goods, or to be provided for promotional distribution.

Exemption for Newspapers

The province is proposing to amend the legislation to extend the retail sales tax exemption available for newspapers by expanding the definition of “newspaper” to include publications, such as ethnic and community newspapers, with smaller circulations or less frequent distribution. The regulation is expected to be finalized in the spring of 2008, and will be retroactive to January 1, 2000.

Exemption for ENERGY STAR® Household Appliances and Light Bulbs
Ontario created a point-of-sale retail sales tax exemption for certain new ENERGY STAR® qualified household appliances and light bulbs. This relief, which is designed to support energy conservation by reducing the demand for electricity, is presently available for qualifying household products, including non-commercial refrigerators, dehumidifiers, room air conditioners, freezers, dishwashers and clothes washers, as well as certain light bulbs, purchased after July 19, 2007 and before July 20, 2008. The exemption applies to purchases of appliances and light bulbs listed as ENERGY STAR® qualified by the Office of Energy Efficiency, Natural Resources Canada, including appliances rented or leased for at least 365 days. Note that, under the existing rules, the delivery of the appliance must take place on or before September 1, 2008 in order for the exemption to apply.

A proposal is included in this year’s budget to extend this temporary point-of-sale exemption to qualifying household appliances and lighting products acquired before September 1, 2009. To qualify under the new rules, an appliance must be delivered before October 1, 2009.

Exemption for Bicycles and Related Safety Equipment

To encourage Ontarians to stay healthy and be active in their everyday lives, the Ontario government created a temporary point-of-sale retail sales tax exemption for bicycles and related safety equipment. The exemption applies to new or used bicycles (including tricycles and unicycles) purchased on or after December 1, 2007 and before December 1, 2008. Safety equipment related to bicycles, including helmets, reflectors, lights, mirrors, bells and horns, is also eligible for exemption. However, the exemption is restricted to bicycles with a purchase price of $1,000 or less. In addition, this relief does not apply to leases and rentals, bicycle parts and accessories, or the repair, maintenance and assembly of bicycles.

The government is proposing to extend this temporary exemption to qualifying bicycles and related safety equipment purchased before January 1, 2011.

Exemption for Nicotine Replacement Therapies

Ontario announced a retail sales tax exemption for non-prescription nicotine replacement therapies in July, 2007. This point-of-sale exemption applies to over-the-counter purchases of nicotine replacement therapies, which are sold for the sole purpose of assisting the purchaser to stop smoking, acquired after August 12, 2007 and before August 13, 2008. To qualify for this exemption, the nicotine replacement product must have a drug identification number assigned by the federal government.

This budget proposes to make this a permanent exemption. Consequently, effective March 26, 2008, the exemption will cover nicotine replacement therapies that have been assigned a Drug Identification Number or Natural Product Number by the federal government. Qualifying nicotine replacement therapies may be delivered by a number of devices, including transdermal patches, gums, lozenges, inhalers, sprays and sublingual tablets. Note that similar products, which are not registered with a federal Drug Identification Number or Natural Product Number, will continue to be subject to tax.

Exemption for Admissions to Certain Live Theatres

The province currently maintains a temporary retail sales tax exemption for admissions to live theatres with no more than 3,200 seats that present live performances, such as theatre, ballet, opera and orchestra productions. To provide further support to live theatre productions and promote tourism in Ontario, the budget proposes to make this exemption permanent, effective April 1, 2008.

Destination Marketing Fee Exemption

As has been the case over the past few years, the government is proposing to extend the temporary exemption for destination marketing fees. This year’s budget proposes to extend the exemption for two more years, allowing destination marketing fees billed on or before June 30, 2010 to be exempt from the 5 per cent retail sales tax that applies to transient accommodation. Eligibility criteria for this exemption remain unchanged.

Tobacco Tax

Enforcement Initiatives

The province has indicated that it will build on measures enacted in 2004, 2006 and 2007 to improve the enforcement of tax compliance and prevent the illegal manufacture and distribution of tobacco products. The proposals include:

• requiring purchasers or importers of cigarette-making machinery to be registered as manufacturers under the Tobacco Tax Act;
  
  
• the addition of legislative provisions allowing the seizure of tobacco products from persons found to be in violation of the Tobacco Tax Act; and
  
  
• adding minimum penalties to existing tax-based penalties for persons found in violation of the Tobacco Tax Act.

Harmonization

The 2008 federal budget included a pitch for the further harmonization of provincial sales taxes with the GST. Relying on the success of the harmonized provinces (Nova Scotia, New Brunswick and Newfoundland and Labrador) in lowering the marginal effective tax rate on business investment and increasing overall spending on machinery and equipment since the introduction of the HST in 1997, the federal government argues that Ontario Retail Sales Tax deters investment and harms competitiveness by increasing production costs. Noting that harmonization is the “single most important action” that a retail sales tax province could take in order to improve its competitiveness, the federal government reiterated its willingness to work with the remaining retail sales tax provinces in facilitating the transition to provincial value-added taxes harmonized with the GST.

While this budget did not address the issue of harmonization, it should be noted that the federal government entered into negotiations with Ontario in November 2007 in an effort to have the province drop its own retail sales tax in favour of the HST. These negotiations were reported to have broken down, apparently over one major stumbling block, the absence of tax exemptions for certain basic household items within the GST system, which would make these items taxable for Ontarians under the harmonized system being negotiated. In the absence of any further negotiations, it is not clear what the future holds for harmonization in Ontario. However, the fact that negotiations have taken place suggests that the Ontario government may be open to the possibility, and the adoption of HST in Ontario remains a very real possibility.

Other Amendments

Ontario is also proposing amendments to various statues in order to improve administrative effectiveness and enforcement, as well as enhance the integrity of Ontario’s tax and revenue collection system. Legislative statutes to be amended include the:

• Fuel Tax Act;
• Gasoline Tax Act;
• Retail Sales Tax Act; and
• Tobacco Tax Act.

Please note that all of the proposed amendments discussed above must be passed in the Legislature and receive Royal Assent before becoming law.

Full details on the 2008 Ontario budget are available on the province’s web site at:
http://ontariobudget.ca/english/papers_all.html.

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