Tax Collection / Coordination Agreements

Memorandum of agreement concerning a Canada-Ontario comprehensive integrated tax co-ordination agreement

BETWEEN:

The Government of Canada (referred to as "Canada"), as represented by the Minister of Finance of Canada

AND:

The Government of Ontario (referred to as "Ontario"), as represented by the Minister of Finance of Ontario;

Preamble

This memorandum of Agreement ("MOA") reflects the strong commitment by Canada and Ontario to work collaboratively to build a stronger economic foundation.

Pursuant to this MOA, both parties commit to using their best efforts to negotiate a new Canada-Ontario Comprehensive Integrated Tax Co-ordination Agreement (hereafter referred to as the "Canada-Ontario CITCA"), together with any necessary related agreements, whereby the Canada Revenue Agency ("CRA")and the Canada Border Services Agency ("CBSA") will administer an Ontario Value-Added Tax ("OVAT").

This MOA forms the framework for concluding the Canada-Ontario CITCA.

Canada-Ontario Comprehensive Integrated Tax Co-ordination Agreement

Canada and Ontario agree to make their best efforts to fulfill the undertakings set out in this MOA in order that all policy and administrative details are finalized, including any necessary legislative processes and the signing of appropriate agreements, before March 31, 2010, except where otherwise specified in this MOA.

Canada undertakes to seek the approval of the Governor in Council to enter into an agreement under Part III.1 of the Federal-Provincial Fiscal Arrangements Act consistent with the terms of this MOA. The parties understand that this MOA does not constitute an agreement pursuant to subsection 8.3(1) of the Federal-Provincial Fiscal Arrangements Act.

Ontario undertakes to seek authority to enter into the Canada-Ontario CITCA.

Canada and Ontario will use their best efforts to conclude the Canada-Ontario CITCA within six months of having signed this MOA.

Implementation Date

Subject to both Parties having signed the Canada-Ontario CITCA, and subject to legislative approval, the Parties will work toward the imposition of the proposed OVAT by the CRA/CBSA on July 1, 2010. Subject to these approvals, the CRA/CBSA will have the necessary systems in place to effectively implement the OVAT on July 1, 2010.

Federal Transitional Assistance to Ontario

To help offset the transition costs associated with the implementation of the OVAT and the winding down of the retail sales tax administration in Ontario and because moving to an OVAT would support economic growth and job creation, Canada will make two transfer payments totalling $4,300 million to Ontario. The schedule of transfer payments will be as follows: $3,000 million upon the date of imposition of the OVAT and $1,300 million one year following the date of imposition of the OVAT provided the tax continues to be in place one year after the date of imposition of the OVAT.

Ontario agrees to remain a party to the Canada-Ontario CITCA for a period of at least five years following imposition.

Ontario Value-Added Tax

An 8% OVAT would be implemented under the federal Excise Tax Act. Ontario will propose legislation to give effect to the Canada-Ontario CITCA and any other provincially administered measures appropriate to the transition to the OVAT.

The OVAT would have the same tax base as the Goods and Services Tax (GST), subject to the exceptions described below.

Provincial Tax Policy Flexibility

The Canada-Ontario CITCA will confirm Ontario's flexibility, subject to reasonable notice provisions, to:

• increase or decrease the OVAT rate after two years from the date of OVAT implementation;
• designate a limited number of OVAT point-of-sale rebates, not exceeding 5%, in aggregate, of the estimated GST base for Ontario subject to data availability and definitions used in the Canadian System of National Accounts or other mutually agreed upon data sources, definitions and methodologies. For greater certainty, point-of-sale rebates that Canada agrees to administer for Ontario will include children's clothing, feminine hygiene products and books;
• temporarily deny for a period of up to five years a portion, up to 100%, of allowable business input tax credits ("ITCs") based on a select list of items to be determined by Ontario (not to apply beyond the items subject to the current ITCs denials under the Quebec Sales Tax). Following this period, full ITCs will be phased-in, in equal annual proportions, over a period of up to three years. Ontario would advance the timeline for the phase-in of full ITCs should fiscal circumstances allow; and
• set OVAT rebate rates and thresholds for Municipalities, Universities, Schools, Colleges and Hospitals (MUSH),Charities, qualifying NPOs and New Housing, subject to matching other federal GST administrative and structural parameters.

Canada agrees to introduce legislation to enable the tax policy flexibility noted herein.

Common Tax Base

Except as provided in this MOA under the heading Provincial Tax Policy Flexibility, Ontario will enter into the Canada-Ontario CITCA and will be bound by tax base changes made by Canada with respect to the GST. However, where Canada proposes a tax base change that would result in a reduction of more than one percent of OVAT revenues (net of provincial rebates provided for under this MOA, and ITCs), Canada may implement the change only if the Minister of Finance of Ontario provides written agreement to the change prior to implementation. If Canada implements the tax base change without consulting Ontario, or proceeds without Ontario's written agreement, Canada agrees to fully compensate Ontario for the revenue reduction for every year that the change remains in place and the Canada-Ontario CITCA remains in force.

Canada and Ontario will develop reasonable notice provisions in the Canada-Ontario CITCA.

Collection and Administration

The OVAT, including all eligible rebates and temporarily restricted ITCs provided for in this MOA under the heading Provincial Tax Policy Flexibility, will be collected and administered, at mutually agreed upon service and compliance levels, by the CRA/CBSA at no charge to Ontario. In addition, Canada will be solely responsible for all CRA/CBSA startup and ongoing costs, including their development and systems costs.

For greater clarity, these costs will not reduce or be offset against the $4,300 million in total transfer payments provided for in this MOA under the heading Federal Transitional Assistance to Ontario.

Payment of Revenues Collected

Canada and Ontario agree that revenues payable to Ontario will be based on the revenue allocation framework as set out under the Canada-Ontario CITCA, subject to the following:

• Canada agrees to pay Ontario its revenue entitlements on a daily basis. For greater clarity, the allocation for a tax entitlement year will be paid to Ontario in estimated daily amounts determined using the revenue allocation framework beginning July 1, 2010. The payments will be based on the estimate for the tax entitlement year, and will include adjustments to these amounts relating to scheduled revisions and reconciliations as provided for under the revenue allocation framework.

The revenue allocation framework to be included in the Canada-Ontario CITCA will be based on the framework in the CITCA between Canada and the HST provinces.

Exchange of Information and Other Agreements

There will be full co-operation between Canada and Ontario with respect to the exchange of information relating to the OVAT. The specific terms on information exchange and mutual assistance will be provided for in agreements to be entered into between Canada and Ontario (e.g., the CRA and Ontario and the CBSA and Ontario). Such agreements will ensure the timely provision of available OVAT specific data and other OVAT-related information to Ontario, as maybe disclosed pursuant to the appropriate laws and regulations.

Canada and Ontario will work to establish mechanism(s)/agreement(s) to provide for the management of issues related to client services, compliance and enforcement of the OVAT by the CRA/CBSA.

Best efforts will be made to conclude these agreements in a timeframe that is consistent with, and no later than, the target date for the conclusion of the Canada-Ontario CITCA noted earlier.

Human Resources

Canada and Ontario acknowledge that they each must consider relevant legislation and policies, and have collective agreement obligations with their respective bargaining agents. Within this context, the Parties agree to negotiate the best possible arrangements, to be contained within a Human Resources Agreement, for employment at CRA/CBSA within Ontario, of Ontario Public Service employees affected by this MOA.

CRA Administration of OVAT in Ontario

Given the significant presence of CRA/CBSA activity and operations in Ontario, and the previous clause pertaining to Human Resources, Canada will maximize the amount of activities and operations carried on in Ontario for OVAT.

Where it can be demonstrated, with respect to specific OVAT activities and operations, that the effective administration of OVAT would be jeopardized if the activities and operations are performed in Ontario, Canada will use best efforts to maximize employment opportunities in Ontario for a corresponding number of Ontario employees affected by this initiative, within departments or agencies of the federal government.

Audit

The Ontario Minister of Finance may designate a person to examine such books and records, excluding information which is protected by law, as maybe relevant in order to permit such person to report in respect of the payments made to Ontario under the Canada-Ontario CITCA.

Appointment of Panel

Canada and Ontario agree to jointly appoint a Panel or Individual, within 6 months following the implementation of the OVAT, to review and make recommendations on possible improvements to the:

• administrative and policy information available on the OVAT;
• revenue allocation framework, such as replacement by a system that would provide the distribution of revenue to Ontario, and Harmonized Sales Tax provinces, based on actual sales of goods and services in such provinces; and
• governance and organizational structures of the various committees under the Canada-Ontario CITCA.

The Panel or Individual will report back to the parties within one year of being appointed.

Canada and Ontario agree to consider revising the Canada-Ontario CITCA as appropriate to reflect the recommendations of the Panel or Individual. Canada will consult with the existing Harmonized Sales Tax provinces.

Ontario Retail Sales Tax

Ontario will be responsible for winding down its retail sales tax to the extent that it is to be replaced by the OVAT.

CRA/CBSA and Ontario will have the option of agreeing on the CRA/CBSA providing client services, collections, audit, rulings, objections and appeal activities in respect of the retail sales tax on an incremental fee for service basis over the transition period.

Constitutional Jurisdiction Not Waived

Neither Canada nor Ontario shall be deemed to have surrendered or abandoned any of its powers, rights, privileges or authorities under the Constitution Acts, 1867-1982, and any amendments thereto, or otherwise, or to have impaired any such powers, rights, privileges, or authorities.

Confidentiality

Pending a public announcement by Ontario that it is introducing an OVAT, Canada commits to taking all steps to embargo the existence of this MOA and to not disclose in any way federal-provincial discussions relating to the development, negotiation and execution of this MOA or to an OVAT. The Parties agree not to disclose this MOA unless mutually agreed to in writing or required by law.

THIS MEMORANDUM OF AGREEMENT ENTERED INTO ON:

Memorandum of Agreement Concerning a Single Administration of Ontario Corporate Tax

BETWEEN:

The Government of Canada (referred to in this MOA as "Canada"), as represented by the Minister of Finance and the Minister of National Revenue

AND:

The Government of Ontario (referred to in this MOA as "Ontario"), as represented by the Minister of Finance

1. Introduction

On May 13, 2004, Canada and Ontario signed a Memorandum of Agreement on Collaboration in the Delivery of Public Service. It provides a framework for governments to pursue service delivery and innovative initiatives aimed at responding to the needs of citizens in Ontario. The parties signed an Addendum to that agreement on May 17, 2005 to accelerate progress on the implementation of the agreement and expand their commitment to shared prosperity and meeting the needs of Ontarians and all Canadians.

As part of that Addendum, Canada and Ontario committed to conclude, as soon as possible, an agreement to create a single administration of corporate income tax. This included a commitment, on behalf of Canada, to fund the administrative, transition and enhanced audit costs associated with a single administration of corporation income tax. Furthermore, Canada agreed to pay $400 million to Ontario in two cash instalments ($250 million in 2007-08 and $150 million in 2008-09) to assist the province in ensuring a smooth transition to a single corporate tax administration. (Annex A describes the specifics of the funding commitment.)

The purpose of this Memorandum of Agreement (MOA), which includes the Annexes, is to outline the various undertakings by both Canada and Ontario that would allow for the amendment of the existing Canada-Ontario Tax Collection Agreement (TCA) to include Chapter 3 – Corporation Income Tax of the model tax collection agreement (Model TCA), which would be substantially similar to the attached Annex B. This initiative will increase the harmonization of the tax systems in Canada, reduce compliance costs for businesses and reduce administration costs for governments. This initiative will also require the negotiation of further arrangements between the Canada Revenue Agency (CRA) and Ontario, as described in Annex C: a Service Management Framework Agreement, Memoranda of Understanding, Transition Agreements and a Human Resources Agreement.

2. General Covenant and Interpretation

2.1. The parties agree to make best efforts to procure the enactment of any legislation as may be required for the purposes of this MOA and acknowledge that arrangements subsequent to this MOA may be subject to the parties obtaining Governor-in-Council or Lieutenant Governor-in-Council approvals.

2.2. The following applies in this MOA:

(a) a reference to provisions of the Provincial Act means the Corporations Tax Act, R.S.O. 1990, c. C. 40, in effect at the time this MOA is signed; and

(b) a reference to the Federal Act means the Income Tax Act, R.S.C.1985, c. 1 (5th Supp.), in effect at the time this MOA is signed.

3. Tax Collection Agreement for Corporation Income Tax

3.1. Canada and Ontario agree to amend the TCA to add a Chapter 3. That chapter will include the following provisions whereby Canada will administer:

a. a surtax substantially similar to that imposed under section 41.1 of the Provincial Act;

b. a lower manufacturing and processing tax rate that encompasses the provisions of section 43 of the Provincial Act; and,

c. a corporate minimum tax similar to that imposed under Part II.1 of the Provincial Act.

3.2. To the extent requested by Ontario, Canada agrees to administer:

a. Ontario tax measures substantially similar to those in effect at the time this MOA is signed, and described in section 1 of Annex D;

b. Ontario tax measures in respect of outlays or expenses that replace tax measures in effect at the time this MOA is signed, and described in section 2 of Annex D; and,

c. any other Ontario tax measures that may be introduced prior to the effective date of the amended TCA, provided such measures are in conformity with the TCA.

3.3. Ontario acknowledges that administrative fees will be payable, in accordance with section 3.6 of the Model TCA, for the administration of the measures described in clauses 3.1 and 3.2.

4. Transition

4.1. Canada undertakes to

a. work with the provinces and territories to establish a timetable to implement, no later than the beginning of the first taxation year of TCA administration, the following provisions:i. central paymaster rules – it is proposed that Part IV of the Regulations made pursuant to the Federal Act be amended to include rules for central paymasters similar to those in section 302.1 of Regulation 183 made pursuant to the Provincial Act;

ii. permanent establishment definition – it is proposed that Part IV of the Regulations made pursuant to the Federal Act be amended so that a corporation with no other permanent establishment would have a permanent establishment in the place designated in its charter or bylaws as being its head office or registered office;

iii. foreign insurance premiums – it is proposed that Part IV of the Regulations made pursuant to the Federal Act be amended to allocate, in an appropriate manner, to an insurance company operating from a permanent establishment in a particular Canadian province or territory, the company's foreign insurance premiums (i.e., insurance premiums paid to the company by non-residents or in respect of property situated outside Canada) attributable to countries other than Canada in which the company does not maintain a permanent establishment; and

iv. consequential assessments – it is proposed that the Federal Act be amended to provide for an extension of time for assessments that are consequential to assessment actions carried out by another taxing authority. It is acknowledged that the proposed amendments relating to consequential assessments may also require amendments to provincial and territorial legislation.

b. ensure that geographic-based federal measures that reduce the common tax base do not impact provincial and territorial revenues of jurisdictions other than those where the measure applies. It is proposed that Part IV of the Regulations made pursuant to the Federal Act be amended to include a special provision in the allocation formula for international banking centres (IBCs) ensuring that taxable income is allocated prior to claiming the IBC deduction in each province or territory other than Quebec and British Columbia.

c. review all federal non-Part I taxes to determine whether any should be shared with provinces and territories, and provide the results of this review to provinces and territories for discussion.

d. conclude a study on the current timing of payments and consult with provinces and territories on the results. If federal-provincial agreement cannot be reached on the adequacy of the timing of payments, Canada and the provinces and territories will establish a mutually acceptable process for achieving a resolution, which could include involving a third party to provide a recommendation on the appropriate timing of payments. Any adjustment to the timing of corporation income tax payments will be made consistent with subclause 3.7(5) of the Model TCA.

4.2. Ontario undertakes to

a. specify

i. the structure of any required transitional measures (reflecting differences in federal and Ontario tax attributes, such as resource pools, adjusted cost bases, losses available for carryover, balances available for depreciation, as of the beginning of the first taxation year of TCA administration) as debits and credits, and

ii. that transition, as it relates to taxpayers, will occur over a reasonable period of time (e.g. 5 years);b. propose legislation for the structure of tax credits and tax debits that are consistent with this MOA; and

c. propose legislation for the adoption of the federal rules for determining the existence of a permanent establishment in Ontario.

4.3. Canada and Ontario undertake to

a. work collaboratively to ensure the appropriate federal and Ontario treatment of taxes levied by each; e.g., the deductibility of Ontario's special additional tax on life insurers;

b. work collaboratively on issues surrounding inter-provincial anti-avoidance; in particular, as participants of the Federal-Provincial Sub-committee on Tax Avoidance, to examine issues and propose options for addressing them. The Sub-committee is expected to report to the Federal-Provincial Committee on Taxation with recommendations by the Fall of 2006, at which time a review of its accomplishments will be undertaken. Should a consensus on administrative and / or legislative recommendations be reached among members of the Sub-committee, representing Canada, Ontario and provincial governments participating in a corporation income tax collection agreement, Canada agrees to initiate the approval process for these recommendations, including the preparation of any federal draft amendments and model provincial amendments, that are consistent with those recommendations. These proposals would form part of the national initiative described in Annexes A and C.

c. agree on a mutually acceptable timetable for developing and implementing transitional strategies for administrative issues during the move to a single corporate tax administration;

d. agree on an appropriate payments stream during the transition to a single administration of corporation income tax; in particular, to address the cash flow to the province in the year immediately preceding the filing of joint corporate tax returns;

e. establish a communications plan and protocol for stakeholders;

f. work together in preparing the required legislation, with Canada's primary function in this regard being the review of draft legislation prepared by Ontario;

g. develop a transitional mechanism for setting-off overpayments of corporation income tax by a taxpayer arising under the Provincial Act (or a successor to the Provincial Act), after new Chapter 3 of the Model TCA comes into effect, against amounts owed by that taxpayer under that Act for taxation years ending before that time; and

h. explore the feasibility of developing, together with other interested provinces and territories, a refund set-off program that would allow a refund or repayment of corporation income tax to be applied against debts owed by a taxpayer under a designated tax or premium levied by the participating jurisdiction.

5. Timetable

Canada and Ontario agree to make their best efforts to complete the undertakings under this MOA in order that:

a. all policy and administrative details are finalized, including any necessary legislative amendments and the signing of appropriate agreements, before the end of 2007;

b. single corporate tax instalments to the CRA commence in February 2008 (in respect of taxation years ending after December 31, 2008); and

c. full implementation, including the filing of a single corporate tax return, commences as of January 2009 (in respect of taxation years ending after December 31, 2008).

6. Process

The Minister of Finance of Canada, the Minister of National Revenue of Canada and the Minister of Finance of Ontario will oversee the process of implementation of this Agreement.

The Minister of Finance of Canada and the Minister of Finance of Ontario will seek the necessary approvals to implement the amended TCA.

THIS MEMORANDUM OF AGREEMENT ENTERED INTO ON

Annex A

Specifics of funding commitment by Canada and Ontario.

1. Cash Payments

To assist the province in ensuring a smooth transition to a single corporate tax administration, Canada has agreed to pay two cash instalments totalling $400 million to Ontario. These cash instalments will be made as follows:

a. $250 million to be paid on October 1, 2007;

b. $150 million to be paid on October 1, 2008.

2. TCA Costs

2.1. Canada agrees to pay virtually all of the ongoing costs of administering Ontario's corporation income tax under an amended TCA.

2.2. Clause 3.6 of the Model TCA (see Annex B) sets out the rules with respect to the administrative fees payable for a year by Ontario to Canada for the administration of corporation income tax. Consistent with this costing approach, specific elements of the provincial corporation income tax system not covered by the general provisions of the Model TCA, such as a provincial corporate minimum tax, will be costed on an incremental basis by CRA.

3. Other Costs

3.1 Canada agrees to pay

a. as part of the transition to a single administration of Ontario's corporation income tax and corporate minimum tax under an amended TCA, costs incurred by the CRA, estimated not to exceed $260 million for the period 2006-07 to 2009-10, for

i. the development of a single administration system, including information technology and training costs;

ii. integrated audits and other functions in respect of taxation years prior to the implementation of the single tax administration; and

iii. a national initiative comprising

A. enhanced audits of provincial allocation of taxable income by corporations,

B. enhanced targeting of inter-provincial tax avoidance by corporations, and

C. the additional workload relating to the issues under clauses (A) and (B) in the areas of rulings and technical interpretations.

Funding for the national initiative is $25 million annually, of which it is expected that Ontario's share, based upon the province's share of corporation taxable income relative to the other agreeing provinces and territories, will be approximately $15 million annually.

b. Ontario's share of the development costs that were incurred in developing the tax-on-income system for personal income tax in 1999-2000; and

c. for the period beyond 2009-10

i. costs incurred by the CRA relating to the development of a single administration of corporate tax, and any ongoing costs associated with integrated audits of taxation years prior to the implementation of the single tax administration, and,

ii. costs incurred by the CRA relating to a national initiative, consistent with that established during the 2006-07 to 2009-10 period, comprising

A. enhanced audits of provincial allocation of taxable income by corporations,

B. enhanced targeting of inter-provincial tax avoidance by corporations, and

C. the additional workload relating to the issues under clauses (A) and (B) in the areas of rulings and technical interpretations.

3.2 Ontario agrees to pay any costs incurred by the province for

a. information technology, training or other human resource costs during the transition to a single administration of corporate tax;

b. any additional services requested of CRA in relation to the administration of the corporation income tax beyond the administration provided under a tax collection agreement; and

c. the administration, by CRA, of any other corporate taxes (referenced in Annex C), as agreed to between Ontario and CRA.

Annex B

Chapter 3 – Corporation Income Tax of the Model TCA

CHAPTER 3
CORPORATION INCOME TAX INTERPRETATION

3.1. (1) The definitions in this subclause apply in this Chapter.

"Common Tax Base" means

(a) taxable income or taxable income earned in Canada, as the case may be, as determined in accordance with Part I of the Federal Act, and

(b) any royalty related tax measure imposed under the Provincial Act.

"Income Tax", in respect of the Province, means the corporation income tax measures imposed under the Provincial Act and administered by Canada in accordance with this Agreement.

"Taxable Income Earned in the Year in the Province" means taxable income earned in the year in the Province by a corporation as determined for the purpose of the definition "taxable income earned in the year in a province" in subsection 124(4) of the Federal Act.

(2) Unless the context otherwise requires, the rules in this Chapter apply with respect to the corporation income tax system.

BASIC CORPORATION INCOME TAX

3.2. The Province will, in respect of each year comprising the Term of this Agreement, impose a general provincial corporation income tax expressed as a percentage in full or one-tenths of percentage points of the Taxable Income Earned in the Year in the Province.

3.3. The Province may, in respect of each year comprising the Term of this Agreement,

(a) impose another provincial rate of tax for corporations eligible for a provincial deduction similar to the small business deduction under section 125 of the Federal Act; and

(b) impose another provincial rate of tax for corporations eligible for the manufacturing and processing profits deduction under section 125.1 of the Federal Act.

TAX PROGRAMS

3.4. Upon agreement, evidenced by an exchange of letters between the Provincial Minister and the Minister, the Minister will amend the Schedule by adding, deleting or changing a reference to a Tax Program. In deciding whether or not to amend the Schedule, in relation to a tax measure, the Minister will consider the following principles:

(a) The tax measure should not materially alter the Common Tax Base, in any of the Agreeing Provinces, except by granting relief by way of a credit in respect of an outlay or an expense.

(b) The tax measure should not impede the free flow of capital, labor, goods and services. In evaluating the tax measure, consideration will be given to whether the measure would have a material impact on the economic and fiscal base of other Agreeing Provinces. In particular, but without limiting the generality of the foregoing, a tax measure should not provide preferential tax treatment only to income, capital or labor located outside the borders of the Province with the requirement that these factors relocate to the Province offering the measure.

(c) The tax measure should be consistent with Canada's international obligations.

3.5. (1) The timing of delivery of a Tax Program set out in any of sections E and F of the Schedule will be negotiated between the Canada Customs and Revenue Agency and the Provincial Minister, with the Canada Customs and Revenue Agency making best efforts to adhere to the Provincial Minister's timetable.

(2) The amounts of the Tax Programs set out in section F of the Schedule and to which a corporation is entitled for a year will be applied by Canada in the following order:

(a) as a deduction from the tax, including interest and penalties, otherwise payable by the corporation under the Provincial Act for that and any preceding year;

(b) as a deduction from any amount owing to Her Majesty in right of any other Agreeing Province or to an aboriginal government in respect of income taxes, including interest and penalties, payable by the corporation for that and any preceding year; and,

(c) as a deduction from any amount owing to Her Majesty in right of Canada in respect of federal tax, contributions under the Canada Pension Plan or premiums under the Employment Insurance Act, S.C. 1996, c.23, including interest and penalties, payable by the corporation in respect of that and any preceding year.

ADMINISTRATIVE FEES

3.6. The following rules apply with respect to the administrative fees payable for a year by the Province to Canada for the administration of Income Tax:

(a) for the general provincial corporation income tax, as described in clause 3.2, for the provincial small business deduction, as described in subclause 3.3(a), and for the provincial manufacturing and processing profits deduction, as described in subclause 3.3(b), the administrative fees are zero, and,

(b) for administration of the Tax Programs related to corporations set out in sections E and F of the Schedule, the fees are calculated in accordance with paragraph 2.7(1)(b) and are deducted in accordance with subclause 2.7(2).

PAYMENTS TO THE PROVINCE

3.7. (1) Canada will make payments to the Province, in accordance with the Federal-Provincial Fiscal Arrangements Act, in respect of each year comprising the Term of this Agreement on account of Income Tax assessed for that year.

(2) Subject to subclause (3), the amount payable to the Province in respect of each year comprising the Term of this Agreement is the amount that is equal to the aggregate of amounts assessed under the Provincial Act on or before December 31 of the year following that year in respect of

(a) Income Tax for the taxation years of corporations ending in the year, and

(b) Income Tax, or adjustments of Income Tax, for previous years comprising the Term of this Agreement, not included in the calculation of the amount payable for a previous year.

(3) In respect of each year comprising the Term of this Agreement, the Minister will

(a) estimate the amounts payable in respect of Income Tax under paragraphs (2)(a) and (2)(b), net of the amounts relating to the Tax Programs related to corporations set out in sections E and F of the Schedule, by applying a methodology agreed to between the Minister and the Provincial Minister,

(b) make payments to the Province on the basis of the estimate referred to in paragraph (a) in twenty-four equal instalments throughout the twelve-month period beginning with the month of March in the year, two of which will be in each such month as follows:

(i) on the first Working Day following the tenth day of the month,

(ii) on the third Working Day following the fifteenth day of the month, and

(c) provide to the Provincial Minister a statement outlining the method of calculating the estimate referred to in paragraph (a) at the time the first instalment is made for that year in respect of the estimate.

(4) If, for a year in respect of which payments are being made in accordance with this clause, it becomes apparent to the parties to this Agreement that the estimate made in accordance with paragraph (3)(a) in respect of that year should be revised, the Minister will, subject to the agreement of the Provincial Minister, make a new estimate and the remaining payments in respect of that year will be adjusted accordingly.

(5) If, for a year in respect of which payments are being made in accordance with this clause, it becomes apparent to the parties to this Agreement that the timing of the payments made in accordance with paragraph (3)(b) should be revised, the Minister may make a new schedule of payments and, by mutual agreement with the Provincial Minister, the payments for subsequent years will be adjusted accordingly.

(6) For each year in respect of which payments in accordance with this clause have been made by Canada to the Province, Canada will provide to the Province information on amounts assessed under subclause (2) as of the last day of May following the end of that year and as of the last day of each subsequent month until the last day of December following the end of that year (each of these days referred to hereafter as the "Cut-off Date"). The information will be provided to the Province no later than one month after the Cut-off Dates.

(7) Following the end of each year in respect of which payments in accordance with this clause have been made by Canada to the Province, and in no case later than November 30 of the year following that year, the Minister will, on the basis of information available on September 30 of the year following that year,

(a) make an interim recalculation of the amount payable to the Province in accordance with subclause (2); and

(b) provide the Provincial Minister with a statement outlining the method and result of that interim recalculation.

(8) Following the end of each year in respect of which payments in accordance with this clause have been made by Canada to the Province, and in no case later than the last day of the fourteenth month following the end of that year, the Minister will, on the basis of information available on December 31 of the year following that year,

(a) make a revised recalculation of the amount payable to the Province in accordance with subclause (2),

(b) provide the Provincial Minister with a statement outlining the method and result of that revised recalculation, and

(c) pay to the Province, no later than the last day of the fifteenth month following the end of that year, the amount, if any, of that revised recalculation that exceeds the total payments made to the Province in respect of that year.

(9) On or before the last day of the twenty-seventh month following the day on which the Term of this Agreement ends in accordance with clause 4.16, on the basis of information available on the last day of the twenty-fourth month following the day on which the Term of this Agreement so ends, the Minister will

(a) calculate the amount of Income Tax assessed for the last year of the Term of this Agreement for any taxation year of corporations that includes December 31 of that last year, which taxation year includes that portion of the taxation year that immediately follows the last year of this Agreement (for those corporations whose taxation years do not coincide with the calendar year),

(b) calculate the amount of Income Tax assessed (other than any reassessments included under paragraph (a)) on or before the last day of the twenty-fourth month following the day on which the Term of this Agreement so ends, in respect of the years comprising the Term of this Agreement that were not included in previous calculations of payments,

(c) provide the Provincial Minister with a statement outlining the method and result of the calculations under paragraphs (a) and (b), and

(d) pay to the Province the amount, if any, calculated in accordance with paragraphs (a) and (b).

(10) On or before March 31 in each year beginning in the fourth year following the last year of this Agreement, on the basis of the information available on December 31 of the preceding year as to Income Tax assessed, the Minister will

(a) recalculate the amount payable to the Province in respect of each year comprising the Term of this Agreement,

(b) provide the Provincial Minister with a statement outlining the method and result of that recalculation, and

(c) pay to the Province the amount, if any, by which the amount of that recalculation exceeds the total of payments made to the Province in respect of the Term of this Agreement.

(11) Notwithstanding anything in this clause, the aggregate of all amounts to be paid to the Province by Canada on account of Income Tax in respect of each year comprising the Term of this Agreement will be the amount that is equal to the total amount of Income Tax assessed in accordance with the Provincial Act.

CHANGES IN PROVINCIAL TAX

3.8. If the Province modifies the tax rates used for the calculation of Income Tax or the amount of income eligible for the small business deduction, the Province will

(a) make the modification effective on the first day of any month and a notice in writing to that effect will be sent to the Minister by the Provincial Minister no later than four months after the effective date of such modification,

(b) make the modification in such manner so that the modified tax rate for the period shall be expressed in full or one-tenths of percentage points, and

(c) state the income eligible for the small business deduction in whole dollars.

Annex C

Memorandum of Understanding
Concerning Administration of Ontario Corporate Taxes

BETWEEN:

The Canada Revenue Agency (referred to in this MOU as "CRA"), as represented by the Commissioner of Revenue

AND:

The Ontario Ministry of Revenue (referred to in this MOU as "Ontario"), as represented by the Commissioner of Revenue

1. Purpose of Understanding

1.1. This Memorandum of Understanding (MOU) is consequential to Canada and Ontario entering into a Memorandum of Agreement Concerning a Single Administration of Ontario Corporate Tax (MOA). The MOA provides for the amendment of the current Tax Collection Agreement (TCA) to add Chapter 3 – Corporation Income Tax, which will result in a single corporate tax administration for Ontario businesses.

1.2 Recognizing that a single corporate tax administration will require the development of close working relationships and careful transition planning, the CRA and Ontario have agreed on further undertakings.

1.3 The purpose of this MOU is to provide for the development of certain administrative arrangements with a view to ensuring a smooth transition and ongoing effective management of Ontario corporate taxes by the CRA.

2. Service Management Framework Agreement for Corporation Income Tax

2.1. Pursuant to clause 1.6 of the TCA, the CRA and Ontario will enter into a Service Management Framework Agreement (SMFA) in respect of the Ontario corporation income tax. For the purposes of this MOU, Ontario corporation income tax includes the corporate minimum tax imposed under Part II.1 of the Provincial Act.

2.2 The SMFA will outline a management and accountability framework for the governance of the relationship between Ontario and the CRA consistent with the following principles:

(a) clear roles and responsibilities – The CRA and Ontario will jointly determine the strategic direction of Ontario corporate tax administration, which includes establishing objectives and priorities and addressing issues and risks.

(b) integrity – The CRA will be responsive to Ontario's needs and concerns regarding administration of the province's corporation income tax and will:

(i) employ the same validation and verification procedures and annual service levels as it does for national programs, and

(ii) at the request of Ontario, provide validation and verification procedures at service levels that are above those that CRA establishes annually for national programs and costed on an incremental basis. If the procedure is audit, increased levels of service may be in the form of either restricted or full compliance audits.

collaboration – The CRA and Ontario will actively collaborate to maximize the benefits, effectiveness and efficiency of a single corporate tax administration. This collaboration will include:(i) regular and timely meetings to discuss issues, share knowledge and evaluate results;

(ii) exchanges of information, to the extent permitted by law, on a timely basis to meet each other's needs with respect to:

A. economic and fiscal management,

B. financial and public reporting,

C. tax administration, and

D. accountability.

The CRA and Ontario will, where there are impediments to the release of information held by the CRA or Ontario that is relevant to these purposes, collaborate to resolve such impediments in a manner that is consistent with each other's legislation, roles, responsibilities and related obligations.

(iii) the ongoing identification and implementation of measures to streamline tax administration and minimize compliance burdens on the taxpayers of Ontario.

(b) accountability – The CRA and Ontario are accountable to each other for the success of the SMFA. The CRA is responsible for the day-to-day administration and management of the Ontario corporation income tax, and is accountable to Ontario for results achieved and for reporting on its performance. The SMFA will include the accountability standards, reporting requirements and the procedures if these standards and requirements are not met.

(c) adaptability – The SMFA will be structured so that it is responsive to changing circumstances.

2.3. Within the context of the SMFA and the above principles, further details on the specific services and terms of service delivery would be set out in Service Level Agreements appended to the SMFA.

3. Memoranda of Understanding for Other Taxes

The CRA and Ontario agree to negotiate separate Memoranda of Understanding for the administration, on a cost recovery basis, of:

a. a capital tax similar to that imposed on corporations under Part III of the Provincial Act;

b. a special additional tax on life insurance corporations similar to that imposed under section 74.1 of the Provincial Act; and

c. to the extent that Ontario requests federal administration,

(i) insurance premiums taxes, namely

(A) a tax on insurance corporations similar to that imposed under section 74 of the Provincial Act,

(B) a tax in respect of benefit plans similar to that imposed under section 74.2 of the Provincial Act,

(C) a tax in respect of contracts with unlicensed insurers similar to that imposed under section 74.3 of the Provincial Act, and

(D) a tax on insurance exchanges similar to that imposed under section 74.4 of the Provincial Act,

(ii) a mining tax similar to that imposed on operators under the Mining Tax Act, R.S.O. 1990, c. M 15,

(iii) payments in lieu of federal corporate tax similar to those imposed under section 89 of the Electricity Act, 1998, S.O. 1998, c. 15,

(iv) payments in lieu of provincial corporate tax similar to those imposed under section 90 of the Electricity Act, 1998, S.O. 1998, c. 15,

(v) payments in lieu of federal and provincial tax similar to those imposed on municipal electricity utilities under section 93 of the Electricity Act, 1998, S.O. 1998, c. 15, and

(vi) a transfer tax with regard to municipal electricity property similar to that imposed under section 94 of the Electricity Act, 1998, S.O. 1998, c. 15.

4. Transition

4.1. The CRA will outline its commitments pertaining to the development of the single corporate tax administration and early integration of audit and other functions as required for a smooth transition. The funding for these commitments is described in section 3.1 of Annex A of the MOA and the timetables for implementing the commitments will be provided for in the transition agreements referred to in section 4.3.

4.2. Ontario will

(a) maintain and fund its information technology and administrative systems for a period of time sufficient to process and assess all taxation years ending prior to the implementation of a single corporate tax administration;

(b) provide information technology access and maintain systems as required to facilitate CRA's implementation of a single corporate tax administration; and

(c) establish any new information technology and administrative systems or measures as required to facilitate transition to a single corporate tax administration.

4.3. The CRA and Ontario will

(a) negotiate Transition Agreements on mutually acceptable timetables for developing and implementing transitional strategies for administrative issues during the move to a single corporate tax administration including the early integration of audit and other functions; and

(b) establish a communications plan and protocol on administrative matters for CRA and Ontario stakeholders.

5. Inter-provincial Tax Avoidance

5.1. During the period 2006-07 to 2009-10, CRA will develop and implement a national initiative comprising

(a) enhanced audits of provincial allocation of taxable income by corporations,

(b) enhanced targeting of inter-provincial tax avoidance by corporations, and

(c) the additional workload relating to issues under paragraphs (a) and (b) in the areas of rulings and technical interpretations

as described in section 3.1 of Annex A of the MOA. Recommendations of the Federal-Provincial Sub-committee on Tax Avoidance, as described in paragraph 4.3(b) of the MOA, will be incorporated into CRA's approach to inter-provincial tax avoidance.

5.2. For taxation years prior to the implementation of the single corporate tax administration, Ontario may undertake additional audit activity above that provided by the CRA under paragraph 5.1(b) as required by the province to meet its compliance objectives.

6. Human Resources

6.1. The CRA and Ontario agree that provincial employees possess skills and knowledge that are valuable to the operation of a single corporate tax administration.

6.2. The CRA and Ontario agree that effective management of human resources is an essential component for the foundation of a high-performing organization.

6.3. The CRA and Ontario acknowledge that they each must consider relevant legislation and policies, and have collective agreement obligations with their respective bargaining agents. Within this context, the CRA and Ontario agree to negotiate the best possible arrangements, to be contained within a Human Resources Agreement, for employment of Ontario employees with the CRA.

6.4. The CRA and Ontario agree to disclose, to the extent permitted by law, relevant information that will assist the parties during these negotiations.

6.5. Consistent with the principles of change management, the CRA and Ontario agree to a coordinated approach for employee communication throughout the transition toward a single corporate tax administration.

7. Process

The Commissioner of Revenue of Canada and the Commissioner of Revenue of Ontario will oversee the process of concluding the Service Management Framework Agreement, Memoranda of Understanding, Transition Agreements and the Human Resources Agreement.

8. Coming into Force

This MOU will be effective as of the date that Canada and Ontario sign the MOA concerning a single administration of Ontario corporate tax.

THIS MEMORANDUM OF UNDERSTANDING ENTERED INTO ON

Annex D

1. The Ontario tax measures to which paragraph 3.2(a) of this MOA applies and to be administered by Canada pursuant to Chapter 3 of the Model TCA are as follows:

1. the foreign tax deduction provided for under section 40 of the Provincial Act,
2. the corporate minimum tax credit provided for under section 43.1 of the Provincial Act,
3. the qualifying environmental trust tax credit provided for under section 43.2 of the Provincial Act,
4. the Ontario innovation tax credit provided for under section 43.3 of the Provincial Act,
5. the co-operative education tax credit provided for under section 43.4 of the Provincial Act,
6. the Ontario film and television tax credit provided for under section 43.5 of the Provincial Act,
7. the Ontario book publishing tax credit provided for under section 43.7 of the Provincial Act,
8. the Ontario computer animation and special effects tax credit provided for under section 43.8 of the Provincial Act,
9. the Ontario business-research institute tax credit provided for under section 43.9 of the Provincial Act,
10. the Ontario production services tax credit provided for under section 43.10 of the Provincial Act,
11. the Ontario interactive digital media tax credit provided for under section 43.11 of the Provincial Act,
12. the Ontario sound recording tax credit provided for under section 43.12 of the Provincial Act,
13. the apprenticeship training tax credit provided for under section 43.13 of the Provincial Act,
14. the Ontario capital gains refund for "mutual fund corporations" and "investment corporations", as defined in the Federal Act and provided for under sections 46 and 48 of the Provincial Act, and
15. the additional deduction for credit unions (similar to s.137(3) of the Federal Act) provided for under subsection 51(4) of the Provincial Act.

2. The Ontario tax measures to which paragraph 3.2(b) of this MOA applies and to be administered by Canada in the form of a tax credit pursuant to Chapter 3 of the Model TCA are as follows:

1. the deduction in respect of the capital cost of grain elevators provided for under clause 11(10)(a) of the Provincial Act and subsections 201(8) and 201(9) of Regulation 183 made pursuant to the Provincial Act,
2. the deduction in respect of the capital cost of new technology provided for under paragraph 11(10)(a) of the Provincial Act and section 203 of Regulation 183 made pursuant to the Provincial Act,
3. the deduction in respect of the capital cost of assets relating to electricity generation provided for under paragraph 11(10)(a) of the Provincial Act and section 204 of Regulation 183 made pursuant to the Provincial Act,
4. the rules for the treatment of the federal investment tax credit for scientific research and experimental development provided for under section 11.2 of the Provincial Act,
5. the current cost allowance deduction for pollution control equipment provided for under section 13 of the Provincial Act and section 202 of Regulation 183 made pursuant to the Provincial Act,
6. the deduction for Canadian exploration expense, Canadian development expense and Canadian oil and gas property expense provided for under section 19 of the Provincial Act,
7. the deduction for gifts to Her Majesty in right of Ontario provided for under subsection 34(1.1) of the Provincial Act, and
8. the political donations deduction provided for under section 36 of the Provincial Act.

3. Canada will review the legislation related to the measures included in sections 1 and 2 for which Ontario requests administration and will work with Ontario to resolve any technical and costing issues that may arise.