Canada: 2018 Ontario Budget Analysis

On Wednesday, March 28, 2018, Ontario Finance Minister Charles Sousa tabled the government's 2018-19 pre-election fiscal plan, 2018 Ontario Budget: A Plan for Care and Community. Major themes from the $150 billion budget focused on social spending: "Improving Health and Mental Health;" "Supporting Parents and Caregivers;" "Helping the Most Vulnerable;" "Caring for Seniors;" and "Support for Drugs and Dental Care."

Analysis

In the 2018 Ontario Budget, the government proposes to increase access to public services in health care, childcare and pharmacare, in part by eliminating costs for low-income earners and social assistance recipients. It appears that the government will try to pass most of its budget measures before the election campaign officially begins on May 9, with the provincial election scheduled for June 7, 2018.

Fiscal outlook

Despite the projected $642 million surplus the government produced in 2017-18, the 2018 Ontario Budget will not see the government in the black again until 2024-25. The government projects deficits of $6.7 billion in 2018-19, $6.6 billion in 2019-20, and $6.5 billion in 2020-21.

Total revenue is forecast to increase from $152.5 billion in 2018-19 to $163.8 billion in 2020-21. Total expenses are projected to increase from $158.5 billion to $169.6 billion over the same period. Debt servicing costs will increase from $12 billion each year to $16.9 billion or 8.8 percent of total revenues in 2025-26.

Taxes

Personal income tax

The 2018 Ontario Budget proposes to eliminate Ontario's Personal Income Tax ("PIT"), a surtax that functions as a tax on tax. The PIT brackets and rates will be adjusted due to the elimination of the surtax.

As a result, 1.8 million taxpayers earning $71,500 to $220,000 in annual income will now pay $200 more a year, on average, and 680,000 taxpayers will see their taxes reduced by an average of $130 a year. The top marginal PIT rate of 20.53 percent is maintained, meaning taxpayers earning more than $220,000 in annual income will not pay any additional tax.

The eliminated surtax increases the tax burden of most high-earners but does not raise taxes on the highest-earning taxpayers. Overall, 83 percent of Ontario's 11 million tax filers (9.2 million individuals) should not experience any increase in their PIT. If the proposed changes pass, it will be effective July 1, 2018.

The chart below outlines the impact of the proposed changes to PIT rates and brackets in Ontario.

Figure 1: Table 5.1, 2018 Ontario Budget (page 285)

Corporate income tax

The small business Corporate Income Tax ("CIT") rate is reduced to 3.5 percent effective January 1, 2018. The general CIT is maintained at the rate of 11.5 percent.

Charitable tax

The Ontario government will provide relief for taxpayers making an eligible charitable donation that would otherwise decrease as a result of the eliminated surtax.

To reduce the impact, the Ontario Charitable Donation Tax Credit ("OCDTC") will increase to 17.5 percent to match the top rate for previous surtax payers. The first $200 of donations will continue to be eligible for an unchanged OCDTC rate of 5.05 percent.

Sin tax

Tobacco taxes will increase to 18.475 cents per cigarette and per gram of tobacco products, which amounts to $4 per carton for 2018-19. This change is effective 12:01 on March 29, 2018. The government will further increase the rate by $4 per carton in 2019.

Economic competitiveness

  • The Ontario Research and Development Tax Credit ("ORDTC") is a 3.5 percent non-refundable tax credit on eligible R&D expenditures incurred on or after March 28, 2018. Companies are eligible for an enhanced rate of 5.5 percent on expenditures over $1 million in taxation;
  • The 8 percent Ontario Innovation Tax Credit ("OITC") for small and medium-sized companies on eligible R&D expenditures will be enhanced to encourage companies to make R&D investments. For qualified expenditures that are (1) attributable to Ontario operations and (2) incurred on or after March 28, 2018, a company may qualify for the OITC.  The OITC rate will vary depending on the R&D expenditures to gross revenues ratio.

Cannabis

Ontario will receive 75 percent of the federal excise duty collected on cannabis for sale in the province. As a matter of policy, the Ontario government takes the position that the appropriate taxation on cannabis sale is an essential part of eliminating the black market. Nonetheless, the province does not expect to turn a profit in its first years of cannabis legalization due to the startup costs and the establishment of a retail network.

The Ontario Cannabis Retail Corporation, a Crown corporation and Liquor Control Board of Ontario subsidiary, will manage the sales and distribution of cannabis within the province. The province will work with municipalities to prepare for the legalization of cannabis through the Ontario Cannabis Legalization Implementation Fund. Municipalities will receive $40 million over the first two years to implement the legal use of recreational cannabis. If the federal excise duty from recreational cannabis exceeds $100 million in the first two years of legalization, Ontario will provide municipalities with 50  percent of the surplus.

Cannabis will be subject to the full 13 percent HST, subject to an 8 percent rebate for status Indians.

The Ontario Cannabis Retail Corporation, operating as the Ontario Cannabis store, will have new stand-alone storefronts and an online distribution channel.

Education

As part of the government's plans to invest in social services, some pre-budget announcements were made through the GSN and EPO funding memoranda explained in more detail below.

The 2018 Ontario Budget includes the following education investments:

  • $2.2 billion over three years to increase access to childcare and affordability for more Ontario families. In September 2020, Ontario will implement free universal licensed childcare for preschool-aged children from the age of two-and-a-half until eligible for kindergarten;
  • $1.6 billion over five years in capital funding to create 45,000 new childcare spaces with a commitment to ensure families with low and middle incomes benefit from access to new spaces through subsidies;
  • A multi-year initiative to modernize curriculum and assessment tools from kindergarten to grade 12 with a focus on improving core skills, such as math and literacy;
  • Expansion of digital learning opportunities by improving access to digital learning tools;
  • $140 million over the next three years in flexible supports to fund 450 new guidance teachers;
  • Improving infrastructure with the investment of $784 million to build 39 new schools and renovate 40 existing schools in 2018-19 with $16 billion in capital grants over 10 years for new and improved schools;
  • $21 million over three years to provide students exposure to visual and performing arts to focus on well-being, equity and new approaches to learning;
  • $49 million to develop programs  in students' cognitive, emotional, social, and physical development; and,
  • $10 million over two years in the revitalization of Indigenous languages.

On Monday, March 26, the Deputy Minister of Education, Bruce Rodrigues, released a memorandum announcing its 2018-19 projected EPO funding.

To streamline the EPO, the ministry will transfer programs to the GSN starting in the 2018-19 school year including Autism Supports and Training and Early Years Leads.

To facilitate the school boards' budget planning for the 2018-19 school year, $246.9 million of EPO funding will be allocated to school boards and authorities. Of this amount, $145.0 million is allocated by the program and by the school board, and $101.9 million has been allocated by the program with school board allocations to be announced later this year. Executive compensation has not been allocated.

Specific school board funding amounts will be based on each board's salary and performance-related pay envelope, and approved maximum rate of increase, minus adjustments to reflect the increases already provided as part of the GSN salary benchmarks for the 2017-18 and 2018-19 school year for other senior administration.

In conjunction with the EPO funding announcement, the Assistant Deputy Minister ("ADM") for Education Labour and Finance, Andrew Davis, released a memorandum that announced GSN funding changes.

  • $72 million ($52 million GSN; $20 million EPO) in special education to address waitlists and increase multi-disciplinary teams and other staffing services;
  • $30 million to increase the Special Incidence Portion allocation supporting students with extraordinary high needs;
  • $46 million for 450 additional teachers to help grade 7 and 8 students transition to high school;
  • $10 million for demographic and growth adjustments through the Diversity in English Language Learners (CELL) component within the Language grant; and
  • $24.5 million, growing to $49.5 million in 2019-20 to fund approximately 180 mental health workers and support students with mental health concerns. The investment also includes annual base funding of $50,000 for all school boards that oversee secondary schools for research into new mental health supports.

Advanced education

In 2017, the Ontario Student Assistance Program ("OSAP") sought to ease access to post-secondary education. Beginning in fall 2018, students applying for OSAP may be eligible for more grants and loans through a reduction in the amount parents are expected to contribute towards their child's education, as well as a reduction in the expected spousal contributions. Free college and university tuition through the OSAP program will continue in 2018.

The province will award $3 billion in capital grants to post-secondary institutions over the next 10 years, and funding under the College Equipment and Renewal Fund will double to $20 million per year.

Health care

The 2018 Ontario Budget increases health care investments by $5 billion over three years. The investments include:

  • $822 million in 2018–19 for hospitals;
  • $19 billion in capital grants to hospitals to build infrastructure over the next 10 years, including a commitment to support the construction of major hospital projects province-wide;
  • A new Ontario Drug and Dental Program for Ontarians who do not have coverage from an extended health plan, starting in summer 2019, representing a total investment of $800 million over the first two years of the program;
  • $330 million and $102 million over three years in the recruitment and expansion of inter-professional primary care teams;
  • $1.8 billion over three years to expand services for people living with developmental disabilities and $62 million in the Ontario Autism Program in 2018–19;
  • $2.1 billion over four years to improve access to mental health care and addictions;
  • $222 million in the implementation of the Strategy to Prevent Opioid Addiction and Overdose; and,
  • $25 million over five years for the Ontario Institute for Regenerative Medicine.

Pharmacare

As part of an expansion in social services, the 2018 Ontario Budget will increase investments in pharmacare by including:

  • Free prescription medication for eligible children and youth under the age of 25;
  • Free shingles vaccine for seniors between 65 and 70 – a savings of approximately $170;
  • A new Ontario Drug and Dental Program will reimburse 80 percent – up to a maximum of $400 per single person, $600 per couple and $700 for a family of four with two children – of eligible prescription drug and dental expenses each year for those without workplace health benefits or not covered by OHIP+ or other government programs.

Additionally, effective August 1, 2019, seniors will benefit from free prescription medications, regardless of income. By eliminating the Ontario Drug Benefit annual deductible and co-pay, this saves the average Ontario senior $240 per year.

Infrastructure

Most of the infrastructure spending has already been committed in previous budgets. In the next 10 years, $182 billion is allocated for infrastructure projects, including:

  • $79 billion for transit;
  • $25 billion for highways;
  • $19 billion for hospital capital grants;
  • $16 billion for capital grants to build new schools and improve existing buildings.

On March 14, 2018, Canada and Ontario announced the signing of a bilateral agreement that will provide $11.8 billion over the next decade in federal funding dedicated to infrastructure projects through the Investing in Canada Plan.

Energy

Ontario will encourage a low-carbon economy and measures to combat climate change.

On January 1, 2018, Ontario linked its cap-and-trade carbon market to achieve the most cost-effective way to reduce greenhouse gas ("GHG") emissions. Ontario's linking of its cap-and-trade market with those existing in Québec and California forms the world's second-largest carbon market. The provinces anticipate a net GHG reduction of 18.42 million tonnes by 2020 under the cap-and-trade system, compared to a decrease of 12.7 million tonnes under a carbon tax system.

The province will offer Ontario businesses the opportunity to reduce their compliance costs through emissions-reducing technologies and offsetting credits. Additionally, auctions of GHG emission allowances are expected to generate 2.4 billion in proceeds. The province will commit proceeds towards initiatives that may reduce GHG emissions, which include the following priority investments:

  • $960 million to improve energy efficiency in homes, buildings and industry;
  • $200 million in collaborating with partners to achieve emission reduction targets (i.e. supporting municipalities and First Nation communities);
  • $45 million in enhancing research and development for low-carbon clean technology;
  • $160 million in promoting electric vehicles ("EV") by providing incentives for the purchase of EVs and building more EV charging stations;
  • $600 million in modernizing transit, freight and active transportation by linking different modes of low-carbon transit (i.e. GO Regional Express Rail, building bike lanes and bike parking spots); and
  • $25 million in preserving agricultural lands and forests by ensuring the natural environment is used efficiently and sustainably.

The proceeds from Ontario's carbon market were used to launch the Green Ontario Fund, which offered rebates off energy-efficient home improvements, funded carbon reduction projects and encouraged the development of innovative ultra-low carbon technologies and processes.

There is concern that once Ontario joins the Québec-California carbon market, the proceeds from auctions may be lower since it may be cheaper for Ontario businesses to purchase carbon allowances in those jurisdictions. As a result, GHG emissions may not be reduced in Ontario. However, the Liberal government has argued that carbon pollution is a global issue and it is difficult to isolate GHG emission to one jurisdiction. The price of carbon at the 2017 auctions was approximately $18 per tonne, and by 2022, the Ontario government expects the price to be $20 per tonne, providing further incentive for businesses to cut GHG emissions.

Innovation: artificial intelligence, fintech, and data strategy

The 2018 Ontario Budget reaffirms the emphasis on innovative technologies and Ontario's intention to become a leader in AI.

The province invested $30 million in the Vector Institute for Artificial Intelligence for postsecondary institutions to increase graduates in AI-related fields to 1,000 annually within five years.

The government also committed $15 million to fund Artificial Intelligence entrepreneurs over three years through NextAI, an accelerator for AI-enabled startups.

Recognizing the role of AI in health care, the government is investing $10 million for a Centre of Excellence in Health Care Artificial Intelligence (AI) starting in 2018–19. The government is partnering with St. Joseph's Health System Hamilton, Niagara Health System, McMaster Faculty of Health Sciences and the Vector Institute on this initiative.

The government will move forward to establish the Ontario FinTech Accelerator Office, which will help fintech businesses navigate regulatory requirements and access business support resources.

The government will also continue to work on the Regulatory Super Sandbox, which would be operational at the same time as FSRA, discussed below.

Regulation of insurance, financial services, and securities

The government will work on the creation and implementation of the Financial Services Regulatory Authority of Ontario ("FSRA"), a financial services and pension regulator to be operational by April 2019.

The government will introduce amendments to the Insurance Act and the Corporations Act, which will give the FSRA prudential oversight of certain insurance companies incorporated in Ontario. The amendment requires insurers licensed in Ontario to be incorporated in a jurisdiction that meets international solvency standards and will provide FSRA with the authority to make rules.

Ontario will lead in the establishment of the Cooperative Capital Markets Regulatory System (CCMR or Cooperative System), a new federal securities regulator. Ontario plans to transition Ontario Securities Commission staff to the new proposed Capital Markets Regulatory Authority (CMRA) once established.

The government has consulted with stakeholders regarding a framework to regulate financial planners in Ontario. The framework will establish restrictions on the use of titles related to financial planning.

The government will also propose tools for the OSC to enhance and expand its existing enforcement activities, and to strengthen the framework for securing compensation for investors who suffer financial losses due to the acts or omissions of registered firms.

Finally, the government will establish a regulatory regime for financial benchmark administrators, contributors and users to align with international requirements.

Municipal Affairs

Indigenous communities and municipalities will see an increase of $300 million to the Ontario Community Infrastructure Fund (OCIF) by 2018-19 and $40 million over five years for a new Community Transportation Grant Program to improve public transit in underserviced areas. Additionally, municipalities will receive $40 million in the first two years of legalization of cannabis to help address implementation costs.

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