As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

12/13/06  Ontario Province Of               18-K        3/31/06    2:1.1M                                   Bowne - Bot/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 18-K        Annual Report of a Foreign Government or Political  HTML     12K 
                          Subdivision                                            
 2: EX-99.(D)   Miscellaneous Exhibit                               HTML    974K 

Exhibit (d)

      THE DELIVERY OF THIS DOCUMENT AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS DOCUMENT (OTHERWISE THAN AS PART OF A PROSPECTUS CONTAINED IN A REGISTRATION STATEMENT FILED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED) IS FOR INFORMATION PURPOSES ONLY AND IS NOT INTENDED TO BE USED OR RELIED UPON IN CONNECTION WITH THE PURCHASE OR SALE OF ANY SECURITIES OF THE PROVINCE OF ONTARIO, IS NOT A PROSPECTUS, INFORMATION MEMORANDUM OR SIMILAR DOCUMENT AND IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OF THE PROVINCE OF ONTARIO.

TABLE OF CONTENTS

      The following information is a summary only and is qualified in its entirety by the detailed information elsewhere in this document. Unless otherwise indicated, all dollar amounts are expressed in Canadian dollars.

Area and Population

      The Province of Ontario covers an area of approximately 1,076,395 square kilometers (415,598 square miles), about 10.8% of Canada, and is about 11.0% as large as the United States. The estimated population of Ontario on July 1, 2006 was 12.7 million, or 38.9% of Canada’s population of 32.6 million. Since 1992, the populations of Ontario and Canada have increased at average annual rates of 1.3% and 1.0%, respectively. Although it constitutes only 12% of the area of the Province, Southern Ontario contains approximately 93.6% of the Province’s population. The population of the Greater Toronto Area, the largest metropolitan area in Canada, was estimated to be 5.76 million on July 1, 2005.

Government

      Canada is a federation with a parliamentary system of government. Constitutional responsibilities are divided between the federal government, the 10 provinces and the 3 territories.

      The Premier of the Province of Ontario (“Premier”) is traditionally the leader of the political party with the greatest number of members elected to the legislative assembly of the Province (“Legislative Assembly”). The Cabinet through the Lieutenant Governor, who represents the Crown, formally exercises executive power. Cabinet ministers are usually nominated from among members of the Premier’s party.

      The Legislative Assembly consists of 103 seats, each representing a specified territorial division of the Province, and is elected for a five-year term. A dissolution of the Legislative Assembly prior to the end of the five-year term may be requested by the Premier at the Premier’s own volition or if the government loses the confidence of the Legislative Assembly by being defeated on an important vote.

      The last Provincial election was held on October 2, 2003. Present party standings in the Legislative Assembly are: Liberal Party of Ontario, 68 seats; Progressive Conservative Party of Ontario, 23 seats; New Democratic Party of Ontario, 9 seats and vacant, 3 seats. The current government of the Province is formed by the Liberal Party.

Economic Setting

      Gross Domestic Product (“GDP”) at current market prices in 2005 was $537,657 million, representing 39.2% of the Canadian GDP. Personal income per capita in 2005 was $33,141, or 4.2% above the national average.

      An indication of the Province’s importance in several areas of Canadian economic activity is illustrated below.

     The Provincial economy displays many of the characteristics of a mature economy, including substantial secondary and service sectors. In broad terms, the primary sector is composed of agriculture, mining and forestry, while manufacturing, utilities and construction form the secondary sector. The remaining categories, such as transportation, communication, wholesale and retail trade and business

and public service, make up the service sector. Ontario shows a stronger concentration in manufacturing than both the United States and the whole of Canada.

(at 1997 Prices)

Foreign Relations

      The Province has no direct diplomatic relations with foreign countries, but has developed a high degree of international activity in order to facilitate investment in Ontario.

(1) Major Economic Indicators

Overview

      Ontario’s GDP at current market prices in 2005 was $537,657 million. GDP in constant 1997 dollars (“Real GDP”) was $483,962 million in 2005, an increase of 2.8% over 2004. The five-year average annual growth rate of real GDP from 2001 to 2005 was 2.4%. Real GDP in 2005 increased at a quarterly rate of 0.4% in the first quarter, 0.5% in the second quarter, 0.4% in the third quarter and 0.3% in the fourth quarter.

      Ontario’s economy grew by 2.8% in 2005, following growth of 3.2% in 2004. Economic growth was fuelled by strong domestic demand in 2005. Consumer spending grew by 3.7% while housing construction advanced 1.8%. Business investment in machinery and equipment was up a strong 11.1%, partially offset by slower non-residential construction investment which declined by 0.8%. Despite a high Canadian dollar, Ontario exports increased for the second straight year in 2005, growing by 1.7% after a 5.3% advance in 2004.

      The following table provides a summary of major economic indicators for Ontario from 2001 to 2005. For the most recently available economic indicators, See “2. Economy — (2) Recent Economic Developments”.

Personal Expenditure

      In 2005, personal expenditure on consumer goods and services, the largest component of GDP, increased 5.3% over 2004. From 2001 through 2005, personal expenditure increased at an average annual rate of 4.9%.

Government Expenditure

      Expenditure by the federal, provincial and municipal governments in Ontario (excluding transfer payments and subsidies) comprised 20.8% of provincial output in 2005.⁽¹⁾ From 2001 through 2005, government expenditure increased at an average annual rate of 6.3%.

Capital Expenditure

      In 2005, total capital expenditure was $97,653 million, or 18.2% of GDP, up 5.8% from $92,286 million in 2004. The major sources of total capital expenditure were housing (31.8%), trade, finance, commercial and information and cultural industries (27.5%), institutional services and government departments (15.3%), manufacturing (10.5%), transportation, warehousing and utilities (8.5%), primary and construction industries (4.9%) and professional, scientific and technical services (1.5%). From 2001 through 2005, total capital expenditure increased at an average annual rate of 4.7%.

      Business gross fixed capital formation in 2005 was $84,598 million. This accounted for 86.6% of total capital expenditure and 15.7% of GDP at current market prices.

Exports and Imports

      In 2005, Ontario’s exports of goods and services totaled $329,094 million, the equivalent of 61.2% of Ontario’s nominal GDP, of which 70.5% were international exports and 29.5% were interprovincial exports. By comparison, Ontario international exports represented 44.6% of Canada’s total exports. Ontario’s imports of goods and services totaled $296,631 million in 2005, resulting in a positive overall trade balance of $32,463 million.

      Ontario’s international goods exports include: motor vehicles and parts, which accounted for 44.1% of its total value of merchandise exports in 2005; capital equipment such as machinery, electrical and electronic goods, and scientific and professional equipment, which accounted for 20.5%; industrial materials such as steel, chemicals, plastics and rubber, which accounted for 19.2%; agricultural, forestry, energy and mining-related products, which accounted for 9.7%; and consumer goods such as furniture, drugs and clothing, which accounted for 4.2%.

      Ontario’s leading interprovincial exports include financial, insurance and real estate services, wholesale trade, food products, transportation equipment, chemicals and electrical equipment.

      Under the Free Trade Agreement (“FTA”), which came into force on January 1, 1989, tariffs between the United States and Canada were phased out entirely on January 1, 1999. The North American Free Trade Agreement (“NAFTA”) between Canada, Mexico and the United States, which came into effect on January 1, 1994, liberalizes trade with Mexico and improves on many of the provisions of the FTA. A bilateral free-trade agreement between Canada and Chile came into force on July 5, 1997. Canada-Chile agreement, which provides for the liberalization of trade and investment between the two countries, was negotiated to serve as an interim step to bridge Chile’s accession to NAFTA. In addition, a new World Trade Organization Agreement (“WTO”) (formerly the General Agreement on Trade and Tariffs) was implemented on January 1, 1995. It has resulted in a 40% reduction in average tariffs worldwide and makes major advances in rules governing trade in agriculture, services and intellectual property.

(2) Recent Economic Developments

      Real output in the Ontario economy grew by 0.2% (0.8% annualized) in the second quarter of 2006, measured in 1997 dollars, down from a 0.4% pace (1.4% annualized) in the first quarter of 2006. In current dollars, nominal GDP grew by 0.5% to reach an annualized level of $550.7 billion.

      Real economic growth in the second quarter was supported by a 1.5% increase in business investment and by Ontario consumer spending which grew by 0.9%. Final domestic demand increased by 0.7% (3.0% annualized) in real terms.

      Over the first ten months of 2006, Ontario employment is up by 96,400 jobs or 1.5%, compared to the same period in 2005. The unemployment rate was 6.4% in October.

      In September 2006, the Ontario Consumer Price Index (“CPI”) inflation rate was 0.2%.

Economic Outlook: 2006 to 2009

      The 2006 Ontario Economic Outlook and Fiscal Review, released on October 26, 2006, presented the forecast for the Ontario economy for 2006 to 2009. The economic forecast underlying the fiscal plan is intended to be prudent, taking into account external developments and continuing risks. The Ministry of Finance is projecting real GDP growth of 1.6% for 2006, 2.0% for 2007, 3.0% for 2008 and 3.1% for 2009. These projections are below the average private-sector forecast in every year. Ontario’s nominal GDP growth is expected to be 3.0% in 2006, followed by 3.7% in 2007, 4.7% in 2008 and 4.8% in 2009.

      Ontario’s CPI inflation rate is expected to average 1.9% in 2006. Ontario’s CPI inflation rate is expected to fall to 1.6% in 2007, reflecting lower energy prices, the impact of the 1% GST reduction and a gradual slowing in home-replacement costs. Once the impact of the GST cut no longer affects year-to-year prices changes and energy prices stabilize, CPI inflation is projected to rise to an average of 1.8% in both 2008 and 2009. Ontario’s unemployment rate is expected to trend down, declining from 6.3% in 2006 to 6.1% in 2009.

      External factors have a significant bearing on the performance of the Ontario economy and deviations from their projected path can cause the province’s growth to be slower or faster. As a result, the 2006 Ontario Economic Outlook and Fiscal Review is based on assumptions about key features of the external environment, including interest rates, oil prices, the exchange rate and the U.S. economy.

      The Canadian three-month treasury bill rate is projected to average 4.0% in 2006, 4.2% in 2007, 4.5% in 2008 and 4.6% in 2009. Ten-year Government of Canada bond yields are forecast to average 4.3% in 2006, 4.4% in 2007, 4.9% in 2008 and 5.2% in 2009. These interest rate assumptions are in line with private-sector forecasts. For planning purposes, crude oil prices are projected to average $67.50 US per barrel in 2006, easing to $65 US in 2007, $64 US in 2008 and $60 US in 2009. The exchange rate is forecast to average 88.5 cents US in 2006 and 89.0 cents US in 2007, 2008 and 2009.

      The strength and composition of the U.S. expansion are key determinants of the pace of growth in Ontario. The U.S. economy is Ontario’s largest export market. Economists project U.S. real GDP growth of 3.4 per cent in 2006, 2.6 per cent in 2007 and 3.1 per cent in 2008.

(3) Structure of the Economy

Secondary Industries

      Manufacturing. Ontario is Canada’s leading manufacturing province. In 2005, Ontario’s manufacturing volume of output (measured in 1997 dollars) totaled about $93 billion, or 50.5% of the national total. The contribution of manufacturing output to Ontario’s total GDP (measured in 1997 dollars) was 20.9%.

(Chained 1997 dollars)

      Transportation equipment is Ontario’s largest manufacturing industry measured by output. In 2005, output in this sector totaled $20.9 billion, or 22.5% of total Ontario manufacturing output. Ontario accounts for about 93% of Canadian-manufactured motor vehicles, parts and accessories GDP, and 16.4% of North America’s motor vehicle assembly. Ontario’s international trade surplus in automotive products was $15.5 billion in 2005. Capital investment in Ontario’s transportation equipment industry totaled $3.2 billion in 2005 and capital investment intentions for 2006, according to the latest survey from Statistics Canada, are $3.2 billion.

      In 2005, 58.5% of Canada’s machinery, electrical, electronic and computer products were produced in Ontario. A number of firms with worldwide reputations in the design, manufacture and distribution of high technology products are based in the Province. Ontario manufacturers as a whole conducted $4.7 billion worth of industrial research and development in 2003, and accounted for 58.9% of total Canadian manufacturing industrial research and development.

      Construction. Ontario’s capital spending on construction includes buildings, roads and other facilities. Construction spending intentions, according to the latest survey from Statistics Canada, indicate an expected rise of 5.2% in 2006 to $53.5 billion. The highest increase is in business at 18.3%, followed by government and institutions at 6.4%. In 2006, capital spending intentions on housing construction constitutes the largest share, representing 52.8% of the total.

Primary Industries

      Agriculture. Ontario has a large and highly diversified agricultural sector. Agricultural activity can be found in most areas of the Province, but production is concentrated in southwestern Ontario, which is located at roughly the same latitude as Northern California and has a climate moderated by the Great Lakes. Provincial agricultural production, based on farm cash receipts, was valued at $8.21 billion in 2005, or 25.7% of the Canadian total. Of this, total livestock receipts were $4.56 billion, and crop receipts were $3.65 billion.

      Mining. Ontario’s value of mineral production was $7,215 million in 2005. Ontario accounted for 30.0% of Canadian mineral production in 2005, excluding oil and gas. The Province’s most important minerals in terms of 2005 value of production were: nickel, $2,116 million; gold, $1,227 million; copper $797 million, cement, $659 million; stone, $552 million and sand and gravel, $463 million. Ontario’s value of mineral production was more than $7 billion for the second year in a row due to higher prices for nickel and other metals.

     Forestry. Ontario has about 557,000 square kilometers of productive forestland representing 63% of Ontario’s total land area. Timber harvests amounted to approximately 25.2 million cubic meters in 2004. This supported various wood and paper industries in the Province whose value of shipments totaled $16.7 billion in 2005, and equaled 25.6% of the Canadian total.

Energy

      In 2003, the composition of Ontario’s primary energy consumption was: crude oil 30.8%, natural gas and liquids 34.8%, coal 15.1%, nuclear 6.5%, hydro-generated electricity 3.8%, biomass 2.5%, and net inflow of secondary energy 6.4%.

      Total primary energy consumption in 2003 was 3,435 Petajoules, an increase of 1.1% from 3,396 Petajoules in 2002. There were small declines in the use of crude oil and coal, and no change in the use of natural gas and natural gas liquids. Net secondary inflows increased from 165 Petajoules to 221 Petajoules. Secondary inflows consist mainly of automotive fuels of which Ontario is a net importer, plus adjustments such as inventory changes.

Service Sector

      The service sector is the largest component of Ontario’s economy, accounting for approximately 70% of Ontario’s GDP (measured in 1997 dollars) in 2005. Ontario has a modern and diversified services sector. It includes a wide variety of industries serving businesses, individuals and governments.

(measured in 1997 dollars)

      Finance, insurance and real estate are the largest component of Ontario’s service sector output. In 2005, Ontario’s share accounted for 48.9% of Canada’s finance, insurance and real estate output, the highest share of any province.

      Ontario’s sizable financial services sector is a by-product of the large number of head offices of industrial and financial companies located in the Toronto area. The Toronto Stock Exchange (“TSX”) is Canada’s premiere stock exchange with a value of trading of just over one trillion dollars in 2005.

      Ontario also has strong professional, scientific and technical services output, accounting for 48.5% of the Canadian total. Wholesale and retail trade help support the spending of business and consumers, including investment and imports. Ontario accounts for 43.9% of Canada’s wholesale and retail trade output and 42.7% of Canada’s information and cultural services.

(4) Labour Force

      From 2000 to 2005, Ontario’s labour force increased at an average annual rate of 2.2%, while Canada’s increased at an average annual rate of 1.8%. During 2005, the Ontario labour force averaged approximately 6.8 million persons. In 2005, the Ontario participation rate of 68.0% was 0.8 percentage points higher than the Canadian rate. Reflecting the industrial structure of the Province, 98.5% of

employment was in the non-agricultural sector. The service sector, which has been a major source of employment growth, accounted for 74.4% of Ontario’s employment, while manufacturing and construction accounted for 22.8% and agriculture, utilities and other primary industries accounted for 2.8%. In 2005, the unemployment rate averaged 6.6%, 0.2 percentage points below the national average of 6.8%.

(5) Social Security System

      The Province provides a wide range of health care, social services and income security assistance to Ontarians. Until 1995-96, the Province received funding for health care from the Federal Government under the Established Programs Financing (“EPF”) arrangements. This national funding arrangement provided support for the provision of provincial health care programs as well as postsecondary education.

      The Province also provides income security assistance to individuals and families to replace earnings or provide income support. Until 1995-96, income supplementation related to defined needs was provided, when necessary, on a cost-shared basis with the Federal Government under the Canada Assistance Plan (“CAP”). In its 1995 budget, the Federal Government announced major cutbacks to social transfers to the provincial and territorial governments. Beginning in 1996-97, the EPF arrangements and CAP were replaced by the Canada Health and Social Transfer (“CHST”). Effective April 1, 2004, the CHST was split into two separate transfers: the Canada Health Transfer (“CHT”), designated specifically for health care; and the Canada Social Transfer (“CST”) for postsecondary education and social services. See “3. Public Finance — (3) Revenue — Federal Government Payments” below.

      The Federal Government also administers the Employment Insurance (“EI”) program, a national, contributory unemployment insurance scheme, and the Canada Pension Plan (“CPP”), a national, contributory earnings-related pension system. CPP benefits include retirement pensions, disability pensions, survivor benefits, orphans’ benefits and death benefits. In 2005, Ontario residents received about $12.4 billion in benefits from the CPP and about $4.3 billion in total benefits from EI. Both of these programs are financed through payroll taxes paid by employers and employees. The EI Account is included in the federal budget and is administered through a federal ministry. The CPP Account is separate from the federal budget, managed independently by the CPP Investment Board and invested in marketable and non-marketable securities.

      The Federal Government also provides universal and income-tested support for senior citizens through Old Age Security (“OAS”) pensions, the Guaranteed Income Supplement (“GIS”) program and Spouse’s Allowance. The Ontario government provides an income-tested supplement for seniors, the Guaranteed Annual Income System (“GAINS”), which is paid to GIS recipients with low incomes. In 2005, seniors in Ontario received a total of about $10.6 billion from these federal programs and about $100 million from GAINS.

      In addition, the federal and provincial governments provide cash transfers to families raising children. The federally administered Canada Child Tax Benefit (“CCTB”) and National Child Benefit (“NCB”) Supplement provide basic benefits to most families with children and targeted benefits to low-income families with children. In 2004 Ontario families received about $3.1 billion in benefits from these programs. The Ontario government provides children’s benefits through the Ontario Child Care Supplement (“OCCS”) for Working Families. The OCCS provides approximately $200 million annually in tax-free benefits to low- to middle-income working families with young children.

      The Ontario government and municipalities jointly share responsibility for providing income support to individuals and families whose income is insufficient to meet their basic needs. In 2005-06, the Province provided an estimated $4.9 billion through social assistance and related programs. Twenty per cent of the expenditure in respect of financial assistance for persons with disabilities and drug benefits for all recipients was recovered from municipalities in the same year.

(6) Government Responsibilities and Relationships

Constitutional Framework

      Canada is a federation and its constitution (“Constitution”) provides for a division of responsibilities between the federal and provincial governments. Each province and the Federal Government have supremacy within its respective sphere of assigned responsibilities. Jurisdiction over the establishment and operation of municipalities is granted exclusively to the provinces.

      The Federal Government is empowered to raise money by any mode or system of taxation. It has exclusive jurisdiction over such matters as the regulation of trade and commerce, currency and coinage, banks and banking, national defence, foreign affairs, postal services, railways and navigation, as well as those areas not exclusively assigned to the provinces. Each province has authority to raise revenue through direct taxation within the province. Areas of provincial constitutional authority include health care, education, social services, municipal institutions, property and civil rights and natural resources.

      The Constitution of Canada was amended in 1982. The Constitution Act, 1982 (“Constitution Act”) established a Charter of Rights and Freedoms and a procedure for amending the Constitution. Nothing in the Constitution Act diminishes the taxing or spending authority of the provinces.

Operational Framework

      Ontario administers its constitutional responsibilities through government ministries and provincially created bodies such as government-owned corporations (“Crown corporations”), agencies, boards, commissions, municipalities, school boards and hospital boards. The use of these quasi-independent bodies decentralizes the administration of provincial responsibilities. However, the Province has elected to centralize the financing of these bodies by retaining the major taxing and borrowing powers at the provincial level. Some municipalities borrow in their own names in various capital markets (See “4. Public Debt — (3) Consolidated Debt of the Ontario Public Sector” below) as did Ontario Hydro prior to its

restructuring in April 1999 (See “4. Public Debt — (2) Assets and Liabilities, (iii) Liabilities — Ontario Electricity Industry” below).

Implications for Provincial Financial Statements

      The provinces have been assisted with their responsibilities in areas such as health, postsecondary education and social assistance by transfer payment arrangements between the federal and provincial governments. Through these arrangements, the Federal Government provides revenues to provincial governments to finance programs under provincial jurisdiction.

      Federal-provincial funding arrangements create extensive financial interrelationships between the Province, the Federal Government and provincially-created bodies. These financial interrelationships are important in understanding the revenue, expense and financing activity of the Province. For example, in fiscal 2006-07, approximately 16.1% of the Province’s revenue is expected to come from the Federal Government.

      Investing in provincially-created bodies has an impact on the reporting of assets. As at March 31, 2006, approximately 36.2% (2005, 29.8%) of the Financial Assets of the Province could be attributed to these intermediary activities. (See “4. Public Debt — (2) Assets and Liabilities” below).

      Annually, the Province publishes its Public Accounts, which include the Annual Report and Consolidated Financial Statements for the fiscal year ended March 31, together with ministry statements, detailed schedules of ministry expenses, financial statements of significant provincial corporations, boards and commissions that are part of the government reporting entity and other miscellaneous financial statements. The Auditor General of Ontario examines the Public Accounts of the Province and provides an opinion on the Consolidated Financial Statements to the Legislative Assembly. In addition, the Auditor General of Ontario is required to submit an annual report to the Legislative Assembly.

Summary of Significant Accounting Policies

Basis of Accounting

      The Consolidated Financial Statements are prepared in accordance with the accounting principles for governments recommended by the Public Sector Accounting Board (“PSAB”) of the Canadian Institute of Chartered Accountants (“CICA”) and, where applicable, the recommendations of the Accounting Standards Board (“AcSB”) of the CICA.

Reporting Entity

      The Consolidated Financial Statements report the activities of the Consolidated Revenue Fund combined with those organizations that are controlled by the government as defined in PSAB standards.

      Commencing April 1, 2005 public hospitals, specialty psychiatric hospitals, school boards, school authorities and colleges, collectively referred to as the “Broader Public Sector (BPS) organizations”, are included in the government reporting entity under the revised PSAB accounting standard. The BPS organizations are consolidated on a sector basis in the financial statements.

      Other organizations that are controlled by the Province are individually consolidated provided they meet one of the following criteria: i) their revenues, expenses, assets or liabilities are greater than $50 million, or ii) their outside sources of revenues, deficit or surplus are greater than $10 million.

      The activities of smaller organizations that do not meet the above criteria are reflected in the financial statements through the accounts of the ministries responsible for them. Trusts administered by the government on behalf of other parties are excluded from the reporting entity.

Principles of Consolidation

      Government organizations, except for government business enterprises and broader public sector organizations, are consolidated on a line-by-line basis with the Consolidated Revenue Fund in the Consolidated Financial Statements. Where necessary, adjustments are made to present the accounts of these organizations on a basis consistent with the accounting policies described below, and to eliminate significant inter-organization accounts and transactions.

      Government business enterprises are defined as those government organizations that i) have the financial and operating authority to carry on a business, ii) have as their principal activity and source of revenue the selling of goods and services to individuals and non-government organizations and iii) are able to maintain their operations and meet their obligations from revenues generated outside the government reporting entity. The activities of government business enterprises are recorded in the financial statements using the modified equity method. Under this method, their combined net assets are included in the financial statements as Investment in Government Business Enterprises on the Consolidated Statement of Financial Position and their combined net income is shown as a separate item, Income from Investment in Government Business Enterprises, on the Consolidated Statement of Operations. Government business enterprises are reported in accordance with the accounting principles generally accepted for business enterprises.

      Broader Public Sector organizations are recorded in the financial statements using the modified equity method. Under the modified equity method, their combined net assets are included in the

Consolidated Statement of Financial Position as Net Assets of Broader Public Sector Organizations. Their combined net expenses, that is, the total annual expenses of all BPS organizations net of revenues they receive from sources other than the Province, are included on a sector basis in Expenses on the Consolidated Statement of Operations. The combined net expenses of hospitals are included with Health expenses, school board net expenses are included with Education expenses, and college net expenses are included in Training, Colleges and Universities expenses in the Consolidated Statement of Operations. Significant gains and losses resulting from inter-organizational transactions occurring from within the government reporting entity are eliminated upon consolidation. BPS organizations are reported in accordance with the accounting principles generally accepted for their sector, except that the school boards sector has been adjusted to a full accrual basis of accounting upon consolidation.

Measurement Uncertainty

      Uncertainty in the determination of the amount at which an item is recognized in the financial statements is known as measurement uncertainty. Such uncertainty exists when it is reasonably possible that there could be a material variance between the recognized amount and another reasonably possible amount.

      Measurement uncertainty in the financial statements and notes thereto exists in the valuation of the power purchase contracts, the accruals for pensions and other employee future benefits obligations, the value of tangible capital assets, and the accruals for personal income and corporations tax revenues.

      The nature of the uncertainty in the valuation of the power purchase contracts arises from fluctuations in market prices that would impact this liability. The uncertainty related to pensions and other employee future benefits accruals arises because actual results may differ significantly from the Province’s best estimate of expected results (for example, difference between actual results and actuarial assumptions regarding return on investment of pension fund assets and health care cost trend rates for retiree benefits). Uncertainty in the value of tangible capital assets exists because estimates of historical cost are used when actual cost is unknown and because of differences between estimated useful lives and actual useful lives. Uncertainty related to the accrual for personal income tax and corporations tax revenues arises because of the possible differences between the estimated and actual economic growth and the impact of future tax assessments on taxes receivable.

      Estimates are based on the best information available at the time of preparation of the financial statements and are reviewed annually to reflect new information as it becomes available.

Revenues

      Revenues are recognized in the fiscal year that the events giving rise to the revenues occur and they are earned. Amounts received prior to the end of the year, which relate to revenues that will be earned in a subsequent fiscal year, are deferred and reported as liabilities.

Expenses

      Expenses are recognized in the fiscal year that the events giving rise to the expense occur and resources are consumed. Expenses include:

      Transfer payments are recognized in the year during which the payment is authorized, all eligibility criteria are met and a reasonable estimate of the amount can be made.

      Interest on Debt includes the following: i) interest on outstanding debt net of interest income on investments and loans; ii) amortization of foreign exchange gains or losses; iii) amortization of debt

discounts, premiums and commissions; iv) amortization of deferred hedging gains and losses; and v) servicing and other costs.

      Employee future benefits such as pensions, other retirement benefits and entitlements upon termination are recognized as expenses over the years in which the benefits are earned by employees. These expenses are the government’s share of the cost of benefits including the current year’s cost of benefits, interest on the net benefits liability or surplus, amortization of actuarial gains or losses, cost of or gain on plan amendment and other adjustments.

      Other employee future benefits are either recognized in the period the event that obligates the government occurs or when the benefits are earned and accumulated by employees.

      The costs of buildings and transportation infrastructure owned by the Province are amortized and recognized as expenses over their estimated useful lives on a straight-line basis. Amortization of tangible capital assets owned by government organizations consolidated in the financial statements is also included in expenses.

      The Province is phasing in the implementation of PSAB recommendations on tangible capital assets. Consequently, the costs of acquisition of other tangible capital assets owned by the Province, such as furniture and vehicles, are recorded as expenses. Also, for significant capital leases entered into by the Province, an amount equal to the present value of the minimum lease payments required over the term of the lease continues to be recorded as an expense at the inception of the lease, with an offsetting liability recorded for the lease obligation.

Liabilities

      Liabilities are recorded to the extent that they represent present obligations of the government to outside parties as a result of events and transactions occurring prior to the end of the fiscal year. The settlement of liabilities will result in sacrifice of economic benefits in the future.

      Liabilities include probable losses on loan guarantees issued by the government, and contingencies when it is likely that a loss will be realized and the amount can be reasonably determined.

      Liabilities also include obligations to government business enterprises.

Debt

      Debt is comprised of treasury bills, commercial paper, medium and long-term notes, savings bonds, debentures and loans.

      Debt denominated in foreign currencies that has been hedged is recorded at the Canadian dollar equivalent using the rates of exchange established by the terms of the hedge agreements. Other foreign currency debt, liabilities and assets are translated to Canadian dollars at year-end rates of exchange and any exchange gains or losses are amortized over the remaining term to maturity.

      The Province uses derivative financial instruments (derivatives) for the purposes of minimizing interest costs and to manage risk. The Province does not use derivatives for speculative purposes. Derivatives are financial contracts, the value of which is derived from underlying instruments. Gains or losses arising from derivative transactions are deferred and amortized over the remaining life of the related debt issue.

Pensions and Other Employee Future Benefits

      The liabilities for pensions and other employee future benefits are calculated on an actuarial basis using the government’s best estimates of future inflation rates, investment returns, employee salary levels and other underlying assumptions, and where applicable, the government’s borrowing rate. When actual plan experience of pensions, other retirement benefits and termination pay differs from that expected, or when assumptions are revised, actuarial gains and losses arise. These gains and losses are amortized over the expected average remaining service life of plan members.

      The liabilities for Employee Future Benefits such as pensions, other retirement benefits and termination pay represent the government’s share of the actuarial present values of benefits attributed to services rendered by employees and former employees, less its share of the assets of the plans. In

addition, the liability includes the Province’s share of the unamortized balance of actuarial gains or losses, and other adjustments primarily for differences between the fiscal year-ends of the pension plans and the Province.

Assets

      Assets are resources controlled by the government from which it will derive future benefits. Assets are recognized in the year the events giving rise to the government’s control of the benefit occur.

Financial Assets

      Financial assets are resources that can be used to discharge existing liabilities or finance future operations. They include cash, temporary investments, accounts receivable, loans receivable, advances, and investments in government business enterprises.

      Temporary investments are recorded at the lower of cost or fair value.

      Accounts receivables are recorded at cost. Valuation allowances are made when collectibility is considered doubtful.

      Loans receivable with significant concessionary terms are considered in part as grants and are recorded on the date of issuance at face value discounted by the amount of the grant portion. The grant portion is recognized as an expense at the date of issuance of the loan. The amount of the loan discount is amortized to revenue over the term of the loan. Loans receivable include amounts owing from government business enterprises.

      Investment in Government Business Enterprises represents the net assets of government business enterprises recorded on the modified equity basis as described under Principles of Consolidation.

Net Assets of Broader Public Sector Organizations

      The net assets of the broader public sector (BPS) organizations are comprised of tangible capital assets and financial assets of BPS organizations net of their liabilities. While the assets of BPS organizations are consolidated, they are owned, managed and operated by members of the BPS organizations. Tangible capital assets of hospitals and colleges are recorded at historical cost in their financial statements. Although school boards do not presently record tangible capital assets in their financial statements, their financial information has been adjusted upon consolidation to recognize the estimated historical cost of their land and building assets.

Tangible Capital Assets

      Tangible capital assets are recorded at historical cost. Historical cost includes the costs directly related to the acquisition, design, construction, development, improvement or betterment of tangible capital assets. Cost includes overheads directly attributable to construction and development but excludes interest. Estimated historical cost was used to record existing tangible capital assets if actual cost was unknown when the Province first implemented tangible capital assets accounting.

      As the Province is phasing in the implementation of PSAB recommendations on provincially owned tangible capital assets, the following categories are included under tangible capital assets and recorded at historical cost: land, buildings and transportation infrastructure owned by the Province; and all tangible capital assets owned by government organizations that are consolidated in the financial statements. The remaining other tangible capital assets comprised primarily of leased assets, computers, equipment, vehicles and furniture are expensed as acquired. The Province intends to apply PSAB’s recommendations on the remaining other tangible capital assets in 2008-09.

      Maintenance and repair costs are recognized as an expense when incurred. Betterments or improvements that significantly increase or prolong the service life or capacity of a tangible capital asset are capitalized.

Trust Funds

      Trust funds that have been deposited into the Consolidated Revenue Fund are included in Other Liabilities on the Consolidated Statement of Financial Position.

The Budget

      Traditionally, a Budget is tabled each year by the Ontario Minister of Finance in the Legislative Assembly, setting out the expense and revenue forecast for activities to be undertaken for Provincial purposes. In addition, a publication entitled “Ontario Finances” provides a quarterly update to reflect in-year developments, budget performance and policy actions and the “Ontario Economic Outlook and Fiscal Review” traditionally provides a more comprehensive update of second quarter numbers.

(2) Fiscal Position

      The following table provides an overview of the Province’s revenue and expense for each of the fiscal years in the five-year period ending March 31, 2006 plus the current outlook for 2006-07 as presented in the 2006 Ontario Economic Outlook and Fiscal Review. Beginning with the 2006 Ontario Budget, the presentation of expense changed to provide details on a total expense basis, rather than differentiating between operating and capital expense. This change in presentation is consistent with Public Sector Accounting Board principles.

Fiscal Outlook 2006-07

      As at September 30, 2006, Ontario is projecting a deficit of $1,949 million for 2006-07. This represents an in-year improvement of $401 million from the deficit target of $2,350 million set out in the 2006 Ontario Budget. The current 2006-07 fiscal outlook maintains a $1,000 million reserve to protect the

fiscal plan against unexpected and adverse changes in the economic and fiscal outlook. If the reserve is not required by the end of the fiscal year, the deficit is projected to be $949 million.

      The 2005-06 Actual and 2006-07 current outlook presented below are from material presented in the 2006 Ontario Economic Outlook and Fiscal Review.

Revenues

      Total revenue is projected at $87,044 million in 2006-07, up $2,818 million or 3.3% from the estimate for 2005-06. About 60 per cent of the increase, or $1,642 million, is due to higher taxation revenues driven by economic growth, most significantly Personal Income Tax and Retail Sales Tax. $778 million of the revenue increase is due to higher projected non-tax revenue largely from sales and rentals. $787 million of the increase is due to higher federal transfer payments while income from government enterprises is projected to decline by $389 million.

      Personal Income Tax (“PIT”) revenue in 2006-07 is projected to increase by $1,280 million, or 6.1%. This increase is due to wage and salary growth of 4.3 per cent in 2006 and 4.1 per cent in 2007 and adjustments with respect to prior years’ PIT revenues which raised 2006-07 PIT revenues relative to 2005-06.

      Retail Sales Tax (“RST”) revenue is expected to increase by $611 million or 3.9% in 2006-07 reflecting projected growth in retail sales of 4.2% in 2006.

      Corporations Tax (“CT”) revenue in 2006-07 is projected to decrease by $399 million or 4.0% from 2005-06.This is based on a projected decline in pre-tax corporate profits of 1.0% in 2006 and adjustments with respect to prior years’ CT revenues that lowered 2006-07 revenues relative to 2005-06.

      Ontario Health Premium revenue is expected to increase $191 million or 8.1% to $2.5 billion in 2006-07 reflecting projected personal income growth of 4.6%. in 2006.

      Employer Health Tax is expected to increase by $102 million or 2.4% in 2006-07 based largely on projected wages and salaries growth of 4.3% in 2006.

      Revenue from all other taxation revenue sources combined is expected to decrease by $143 million, or 2.1% largely due to the decline in Electricity Payments-In-Lieu of Taxes from Ontario Power Generation Inc. (“OPG”) as a result of the three year extension and initial lowering of the transitional revenue limit on most of OPG’s unregulated output, as well as electricity price and demand projections based on normal weather conditions after the unusually warm summer in 2005.

      Federal payments are expected to rise by $787 million or 5.9% in 2006-07. This increase is mainly due to increased health and social transfers as well as Ontario’s share of Government of Canada transfers to all provinces and territories under the federal trusts announced in the 2006 federal budget

and confirmed by the recently released federal financial results for 2005-06. The 2006-07 forecast for federal payments also includes funding under the 2005 Canada-Ontario Agreement.

      Income from Investment in Government Business Enterprises is expected to decrease by $389 million in 2006-07, or 9.0%. This is due mainly to a decrease in projected net incomes from the Ontario Lottery and Gaming Corporation (“OLGC”), and the combined incomes of OPG and Hydro One Inc. (“Hydro One”). The OLGC decline is largely due to continued competitive pressures on border casinos. The combined OPG and Hydro One decrease is due to higher-than-expected net income in 2005-06, which was the result of higher electricity prices and demand during the unusually hot summer. In addition, OPG net income is also expected to decline as a result of the government’s strategic decision to improve electricity price stability for Ontario electricity consumers by extending for three years, and initially lowering, the revenue limit on most of OPG’s unregulated output.

      Other Non-Tax Revenue is expected to rise by $778 million, or 11.5% in 2006-07. This is due primarily to a $573 million increase in sales and rentals revenue reflecting the expected gross amount of the Province’s share of proceeds related to the Teranet Income Fund initial public offering announced on June 16, 2006 and reflected in the 2006 Ontario Economic Outlook and Fiscal Review. Other factors include higher reimbursements from municipalities related to provincial expenditures on social services and an increase in royalties following a one-time $70 million retroactive reduction in 2005-06 Crown stumpage fees to assist the forestry sector.

Expense

      Total expense for 2006-07 is projected to be $87,993 million, an increase of $4,066 million from the 2005-06 actual results of $83,927 million. This increase in expense is primarily due to higher levels of spending on health care, education, postsecondary education and social services as well as higher interest-on-debt expense.

(3) Revenue

      The following table sets forth historical revenue information for each of the fiscal years in the five-year period ended March 31, 2006 and 2006-07 forecast information presented in the 2006 Ontario Budget and updated in the 2006 Ontario Economic Outlook and Fiscal Review.

      Total revenue in fiscal 2006-07 is projected to be $87,044 million. Tax revenue is projected at $61,559 million or 70.7% of total revenue. Federal transfers, at $14,038 million, are 16.1% of total revenue. Income from Investment in Government Business Enterprises is projected to be $3,920 million, 4.5% of total revenue. All Other Non-Tax Revenues are projected to be $7,527 million, 8.6% of total revenue.

Taxation

      The Constitution provides for a division of taxation authority between the federal and provincial governments. Local governments derive their taxing powers from the Province. In accordance with its policy of centralized financing, the Province has delegated its taxing powers respecting real property taxes to local governments.

      Personal Income Tax. Ontario and the Federal Government impose a personal income tax (“PIT”) on individuals resident in Ontario. This tax is the Province’s largest single source of revenue.

      Ontario basic PIT is calculated as a percentage of taxable income. It is collected by the Federal Government on Ontario’s behalf. The tax rates for 2006 are as follows: 6.05% of the first $34,758 of

taxable income plus 9.15% of the portion of taxable income between $34,758 and $69,517, plus 11.16% of the portion of taxable income over $69,517. Ontario non-refundable tax credits are provided to recognize individual and family circumstances (e.g., basic amount, spouse, medical expenses), at the rate of 6.05% in 2006 (and 11.16% for charitable donations in excess of $200), before calculating the provincial surtax or Ontario Tax Reduction.

      Ontario also applies a surtax on taxpayers with higher incomes. For the 2006 taxation year, the surtax is equal to 20% of basic Ontario PIT in excess of $4,016, plus an additional 36% of basic Ontario PIT in excess of $5,065. For taxpayers with low or moderate incomes, the Ontario Tax Reduction reduces or eliminates Ontario PIT.

      The Ontario Health Premium (“OHP”) is payable by individuals resident in Ontario on the last day of their taxation year and is based on taxable income. There are five OHP levels, with phase-in rates between levels. No one with taxable income of $20,000 or less pays the OHP. For 2006, the initial OHP level of $300 is phased in at the rate of 6% of taxable income in excess of $20,000, reaching the full amount at a taxable income of $25,000. The increase to the second OHP level of $450 is phased in at a rate of 6% of taxable income from $36,000 to $38,500. Each subsequent increase to the next OHP level is phased in at the rate of 25% over the first $600 of taxable income in the range. The maximum annual OHP amount of $900 is reached at a taxable income of $200,600.

      Retail Sales Tax. Ontario applies an 8% retail sales tax on the purchase of most tangible personal property and certain services. For admission fees to a place of amusement that exceed $4.00 and alcoholic beverages sold at licensed establishments the rate is 10%. Alcoholic beverages sold through retail outlets are taxed at 12%. On transient accommodation, the rate is 5%. Insurance premiums are generally taxed at 8%; however, individual life and health insurance premiums are exempt. The sales tax on motor vehicle insurance premiums and on repairs and replacements made under warranty was eliminated as of April 1, 2004. There are a number of exemptions from retail sales tax, including those for basic groceries, prescription drugs, energy, children’s clothing, farm equipment, farm building materials and production machinery and equipment.

      Under the Retail Sales Tax Act, the Tax for Fuel Conservation is applied to the purchase or lease of a new passenger vehicle or sport utility vehicle and is based on the highway fuel efficiency rating of the vehicle. Trucks, buses and vans are not subject to this tax. The tax applies to all passenger vehicles with a highway fuel efficiency rating of 6.0 or more litres of gasoline or diesel fuel per 100 kilometres and all sport utility vehicles with a highway fuel efficiency rating of 8.0 or more litres of gasoline or diesel fuel per 100 kilometres, and increases as fuel efficiency of the vehicle declines. A $100 tax credit is given to the purchaser of a new passenger car with a highway fuel consumption rating of less than 6.0 litres of gasoline or diesel fuel per 100 kilometres.

      Corporate Income Tax. The Province taxes corporate income allocated to Ontario. The general corporate income tax rate is 14% and the M&P tax rate is 12%. The M&P tax rate is the tax rate on income from manufacturing and processing, mining, logging, fishing and farming.

      The tax rate for small businesses is 5.5%. The income threshold for this special rate is $400,000.

      Ontario provides assistance for scientific research and experimental development (“SR&ED”) activities through: (1) a 10% refundable innovation tax credit for qualified SR&ED expenses; (2) a full deduction for qualified expenses in the year they are incurred; (3) a 20% refundable tax credit for SR&ED done through specified research institutions; and (4) a tax exemption for the federal SR&ED investment tax credit that relates to SR&ED incurred in Ontario.

      Ontario provides a number of refundable tax credits on expenses for certain other corporate activities carried out in Ontario: a 25% to 30% apprenticeship tax credit for hiring qualifying apprentices (effective May 19, 2004), a 10% to 15% co-operative education tax credit for hiring qualifying co-op students; a 30% book publishing tax credit; a 20% computer animation and special effects tax credit; a 30% tax credit for producing domestic film and television productions (40% for first-time producers), with an additional 10% bonus for qualifying regional productions; an 18% film and television production services tax credit for foreign-based and non-certified domestic productions; a 20% to 30% interactive digital media tax credit; and a 20% sound recording tax credit.

      The tax credit rate for domestic film and television productions increased from 20% to 30% effective January 1, 2005 to December 31, 2009. The 10% regional bonus continues and first-time producers are eligible for an enhanced rate of 40%. Also, the tax credit rate for foreign-based and non-certified domestic film and television productions increased from 11% to 18% effective January 1, 2005 to March 31, 2007. A 3% regional bonus was eliminated effective January 1, 2005.

      Ontario also provides additional deductions from income equal to 30% of the capital cost of pollution control equipment and also for the acquisition of new school buses purchased before January 1, 2006.

      Corporations or a group of associated corporations with total assets over $5 million or gross revenues over $10 million are subject to a corporate minimum tax (“CMT”). The CMT is applied at a rate of 4% on accounting income less certain deductions, such as dividend income. The CMT is reduced by regular corporate income tax payable in the year.

      Insurance Premiums Tax. Insurance companies pay a 2% tax on net premiums in respect of accident, sickness and life insurance for persons resident in Ontario. A 3% tax is levied on net premiums in respect of property and any other contract of insurance in Ontario. Contracts in respect of property insurance also bear an additional 0.5% tax on net premiums. A 2% premiums tax is also payable by employers in respect of uninsured benefit arrangements.

      Life insurance companies are subject to a special additional tax of 1.25% on taxable paid-up capital in Ontario. The first $10 million in paid-up capital is exempt from tax. This tax is reduced by regular income tax and any corporate minimum tax payable in the year.

      Capital Tax. The Province levies a capital tax on paid-up capital allocated to Ontario. Insurance companies do not pay this tax. The general capital tax rate is 0.3%. Deposit-taking financial institutions are subject to a capital tax of 0.6% on the first $400 million of taxable capital and 0.9% on taxable capital in excess of $400 million. Non-deposit taking financial institutions are subject to a capital tax of 0.6% on the first $400 million of taxable capital and 0.72% on taxable capital in excess of $400 million. Ontario credit unions, Caisses Populaires and family farm/fishing corporations are exempt from capital tax. Regular corporations and financial institutions are entitled to a $7.5 million deduction from taxable capital in 2005 and $10 million in 2006.

      The 2004 Ontario Budget announced a plan to gradually eliminate the capital tax by 2012. Starting January 1, 2005, the $5 million deduction from taxable capital will be increased by $2.5 million each year until the deduction reaches $15 million on January 1, 2008. Starting January 1, 2009, capital tax rates will be reduced each year until the capital tax is fully eliminated on January 1, 2012.

      The 2006 Ontario Budget built on the government’s original plan by accelerating the capital tax rate cut. Effective January 1, 2007 every corporation still paying capital tax will have its rate in effect for 2006 reduced by 5% — two years earlier than the first scheduled rate cut under the original plan. On January 1, 2009, capital tax rates that were in effect for 2006 will be further reduced by 20%. In the remaining years, capital tax rates that were in effect for 2006 will be further reduced by 25% annually until capital tax is eliminated in 2012.

      A capital tax credit is available to financial institutions that make eligible capital investments in or provide low interest rate loans to Ontario small businesses.

      Mining Tax. The Mining Tax Act levies a tax on profits from the extraction of minerals in Ontario. The tax is levied on the operator’s profit in excess of $500,000. Effective January 1, 2004, the mining tax rate is 10%. There is a three-year or $10 million profit exemption available to new or expanded mines. To assist mines in remote areas of the Province, the three-year exemption is extended to ten years for new remote mines. As well, the profits from remote mines are taxed at a rate of 5% after the 10-year or $10 million profit exemption.

      Employer Health Tax. Ontario levies a payroll tax on Ontario remuneration. Employers with total annual Ontario remuneration of $200,000 or less calculate tax payable at a rate of 0.98%; employers with total annual Ontario remuneration between $200,000 and $400,000 calculate this tax at graduated rates between 0.98% and 1.95%; and employers with total annual Ontario remuneration in excess of $400,000

calculate tax at a rate of 1.95%. A tax exemption is provided for the first $400,000 of total annual Ontario remuneration of private-sector employers.

      Land Transfer Tax. Ontario levies a land transfer tax on the value of consideration of most registered conveyances and unregistered dispositions of beneficial interest in land in Ontario. The land transfer tax applies at graduated rates ranging from 0.5% on the value of consideration of $55,000 or less, 1.0% on the value of consideration between $55,000 and $250,000 and 1.5% on the value of consideration exceeding $250,000. Where the value of consideration exceeds $400,000 and the property contains one or two single-family residences, there is an additional 0.5% (in addition to the 1.5%) tax levied on the amount exceeding $400,000. As part of the 2000 Budget, the land transfer tax refund program for first-time buyers of newly constructed homes was made permanent. Eligible purchasers are entitled to a refund of up to $2,000 under the program.

      Other Significant Taxes. Taxes are applied to the purchases of gasoline (Gasoline Tax Act) and use of diesel fuel (Fuel Tax Act). The taxes apply to gasoline and diesel fuel used in on-road motor vehicles and certain off-road uses (i.e. recreational boats, snowmobiles, lawn mowers). Under the Gasoline Tax Act, the tax rate for gasoline is 14.7 cents per litre; 4.3 cents per litre for propane; and 2.7 cents per litre for fuel used to power aircraft. Under the Fuel Tax Act, the tax rate for diesel fuel is 14.3 cents per litre and 4.5 cents per litre for diesel fuel used to power railroad locomotives.

      Tobacco Tax. Since February 1, 2006, Ontario’s tobacco tax rate is 12.35 cents per cigarette or per gram or part gram of cut tobacco. The tax on cigars is 56.6% of the retail price.

      Race Tracks Tax. Ontario also levies a racetracks tax on wagers on horse races at 0.5% on all bets.

Federal Government Payments

      Approximately 16.1% of the Province’s revenue in fiscal 2006-07, or $14,038 million, will be received through cash payments from the Federal Government. These payments increased by $787 million, from $13,251 million in 2005-06. Federal payments are intended to assist the Province in providing necessary services in areas of provincial jurisdiction.

      Canada Health Transfer (“CHT”) and Canada Social Transfer (“CST”). The largest cash transfers from the Federal Government, in the form of CHT and CST payments, are to assist the Province in providing health care, postsecondary education and other social programs. In fiscal year 2005-06, CHT and CST payments to Ontario were $10,472 million, including $7,148 million in CHT and $3,324 million in CST. An additional $584 million in CHST Supplements was also received in 2005-06. In 2006-07, CHT and CST payments to Ontario are expected to total $11,039 million, including $7,619 million in CHT and $3,420 million in CST.

      The CHT and CST were created April 1, 2004, when the Government of Canada split the Canada Health and Social Transfer (“CHST”) into two separate transfers: the CHT, designated specifically for health care, and the CST for postsecondary education and social programs. The CHST was a block fund contribution by the Federal Government in respect of social programs under the Federal-Provincial Fiscal Arrangements Act. It replaced both the Established Programs Financing (“EPF”) and Canada Assistance Plan (“CAP”) in 1996-97. To receive the CHST cash contribution, provinces must comply with the Canada Health Act and may not impose a residency requirement in determining eligibility for social assistance.

      CHT and CST total entitlements include both cash and tax entitlements. CHT and CST tax entitlements are the value of 13.5 of each province’s personal income tax (“PIT”) points and one corporate income tax (“CIT”) point transferred to provinces in 1977-78 under the EPF arrangements.

      CHST Supplements. At the February 2003 First Ministers’ Meeting (“FMM”), the federal government announced a $2.5 billion CHST Health Supplement, which was allocated on a per capita basis. Ontario recorded its share, $967 million, over three years: $386 million in 2003-04, $387 million in 2004-05, and $194 million in 2005-06, according to the federal draw down schedule.

      At the same FMM, a one-time $2 billion CHST “Top-Up” was created, which the federal government was expected to make available in 2003-04. The $2 billion CHST top-up was provided at the January 2004 FMM. Ontario’s annual allocation was $388 million in 2004-05 and $390 million in 2005-06.

      Only the portions of the CHST Supplements that were expensed have been reported as revenue in Ontario budgets. The CHST Supplements reported as revenue in 2005-06, $584 million, includes $194 million from the 2003-04 CHST Supplement and $390 million from the 2004-05 CHST Supplement. All CHST Supplements will end after 2005-06.

      2004 First Ministers’ Health Care Agreement. At the September 2004 FMM, the Prime Minister and Premiers agreed on a funding framework that would provide $18 billion of funding for health care over six years. As part of this Agreement, in 2006-07, Ontario will receive $467 million from the Wait Times Reduction Fund.

      Other Federal Payments. In 2005-06, the Province received $2,195 million from the Federal Government for programs other than the CHT, CST and CHST Supplements.

      In 2006-07, Ontario expects to receive a total of $2,999 million through other federal programs other than the CHT and CST, including $530 million for social housing, $359 million for infrastructure, $467 million from the Wait Times Reduction Fund and $1,643 million in other federal transfers.

      In the 2006 federal budget, five federal trusts to be paid to provinces and territories were announced. Ontario’s annual allocation of funding from four of these trusts is $456 million in 2006-07, $456 million in 2007-08 and $223 million in 2008-09.

      Fiscal Stabilization. An integral part of federal-provincial fiscal relations is the Federal Government’s obligation to protect provincial revenues. The Federal Government makes cash payments to any province if its revenue falls short of the previous year’s total by 5% or more due to a downturn in economic activity. The most recent payment to Ontario under this program was received in 1995-96 in respect of claims made up to and including the 1992-93 fiscal year.

Other Revenue

      In 2006-07, approximately 13.2% of revenue is expected from sources other than taxation or federal transfers. This category includes the net income of provincially-owned business enterprises such as Liquor Control Board of Ontario, OLGC, Hydro One and OPG. Also included are various Non-Tax revenues such as Vehicle and Driver Registration Fees, Sales and Rentals, Liquor Licence Revenue, and Royalties. The Sales and Rental projection for 2006-07 includes a one-time increase of $573 million reflecting proceeds of the Teranet Income Fund initial public offering, announced on June 16, 2006.

      The following table sets forth historical total expense information for the fiscal year 2001-02. Beginning with the 2006 Ontario Budget, the presentation of expense changed to provide details on a total expense basis, rather than differentiating between operating and capital expense. Historical

program expense figures for the Province of Ontario have been restated to reflect changes in the government’s ministry structure that occurred in fiscal year 2005-06.