It may be a bit of an overstatement to say that the Ontario economy is under siege.  But there’s no denying that the rise of the Canadian dollar, which has made resource-rich western provinces wealthy, has done the opposite in Ontario, causing major damage to its manufacturing infrastructure[1].  Office construction in downtown Toronto has been flat for years.    

One would think that the Ontario government would be pulling out a lot of stops to counter these effects.  There should be corporate tax decreases, incentives and changes to the Ontario legal environment, to promote manufacturing and attempt to maintain corporate head offices in Ontario.

Instead, not only was the March 23^rd Ontario budget virtually bereft of tax incentives, but with continued deficits, I think that the message it sends is one of indifference toward the corporate sector. 

The only corporate tax reduction in the budget was a 5% provincial capital tax reduction starting in 2007.[2]  The budget papers state – and I quote – that this is one of the “key elements” for “maintaining a competitive tax and business environment . . . to encourage investment growth”[3]. 

Is this a joke?  While the former Liberal government proposed to eliminate federal capital tax completely this year, the actual reduction in capital tax is from .3% to .285% in 2007 and 2008[4].  This amounts to a $1,500 reduction per $10M of taxable capital.  The sum total of tax benefits from Budget 2006 for such a corporation would be $3,000 – actually less, since these taxes are deductible federally.

While the Quebec, B.C. and Manitoba budgets are receptive to the federal proposal to increase the dividend tax credit, the budget papers indicate that Ontario will “review” the federal legislation and respond when it becomes available[5].  This statement sure restores business confidence!

About the only glimmer of hope in the budget is a continuing initiative to eliminate the double audit jeopardy that Ontario corporations face as a result of the dual corporate tax regime.  The budget indicates that Ontario intends to enter into a tax collection agreement with the federal government whereby there would be one audit, performed by the CRA.  While this agreement is a number of years off, the governments have in the meantime been working on a “memorandum of agreement”, which, when finalized, would start the process whereby audits could be delegated to the CRA.[6]  But don’t hold your breath.  The memorandum awaits the review of the new federal government, after which human resources issues must be dealt with and CRA auditors must be trained in Ontario tax.  Even then, it is expected that the single-audit system will be phased-in.[7]  Meanwhile, the red tape continues.

Hard to Kill

The fact of the matter is that the Ontario tax system is replete with tax burdens and anomalies which the current government has done nothing to deal with.  Some of these include: a ceiling-less Employee Health Tax which exacts a burdensome toll charge on owner-manager bonuses; the small business “claw-back” - which imposes an effective marginal tax rate of about 41% for corporate income between $400,000 and about $1.13M; a 1.5% land transfer tax[8] - a significant disincentive to real estate transactions.  Even dying is expensive in Ontario, due to 1.5% probate fees[9] – the highest in the country.

Recent tax-related initiatives do little to instill a sense of confidence in our current government.  An example is the legislation allowing family members of Ontario dentists and physicians to be shareholders of medical and dental professional corporations.  Recall that they were enacted as a bargaining concession to physicians.  A review of the provisions reveals that they are of little benefit[10].  This means either that the legislation is inept, or duplicitously designed for this result - I am not sure which.  But neither alternative is particularly reassuring.

As for the non-tax legislative environment, once upon a time, Ontario was considered to be exemplary in having up-to-date corporate-commercial laws.  In recent years this seems to have become less of a priority.  For example, there have been relatively few recent changes to the Business Corporations Act, whereas Alberta and B.C. recently modernized their legislation (Alberta now has ULCs). 

On Deadly Ground

In my view, the budget does little to address the significant threats to Ontario’s economy.  As the McGuinty regime progresses, its indifference toward the corporate sector becomes more and more apparent.  In fact, rather than decreasing provincial corporate taxes as the previous government had planned to do, practically the first thing the Liberals did when they took office was to increase the general corporate tax rate - to 14%, one of the highest levels in Canada.