Canada: Ontario Budget 2012: Tax Measures Focus On Revenue Enhancement And Integrity

On March 27, 2012, Finance Minister Dwight Duncan tabled the Ontario government's 2012 Budget, "Strong Action for Ontario", which lays out a five-year plan to eliminate Ontario's deficit by 2017-18 while protecting and building on Ontario's achievements and ensuring strong job growth into the future. Budget 2012 projects a deficit of $15.3 billion in 2011-12 (a $1 billion improvement from the deficit forecast in Budget 2011), $15.2 billion in 2012-13, $13.3 billion in 2013-14, $10.7 billion in 2014-15 and a balanced budget by 2017-18.

The Ontario government's proposed tax measures, set out in Chapter IV of Budget 2012, focus on enhancing and protecting provincial revenues, mainly through rate freezes and increased scrutiny of business tax incentives and potential avenues for provincial tax leakage.

From a business tax perspective, the most significant announcement is that the general corporate income tax rate will be frozen at 11.5% until the Ontario budget is balanced, instead of decreasing to 11% on July 1, 2012 and to 10% on July 1, 2013 as announced in previous budgets. Budget 2012 indicates that the corporate income tax rate reductions will resume in 2017-2018 when Ontario has balanced its budget. As a result, the combined federal-Ontario corporate income tax rate will remain at 26.5%, 1.5% higher than the rate target set by the federal government. This measure is not a huge surprise considering Ontario's current economic climate and is estimated by the budget plan to save Ontario almost $1.5 billion over the next three years.

Other business tax measures proposed in Budget 2012 include:

  • A temporary freeze of the government's business education tax rate reduction plan, beginning in 2013, until Ontario's deficit is eliminated in 2017-18;
  • A review of the current system of mining tax incentives to ensure Ontario receives fair compensation for its non-renewable resources;
  • A review of business tax expenditures to make them more effective, administratively efficient and better aligned with other direct and indirect business support programs;
  • A continued evaluation of the effectiveness of R&D tax credits and the overall framework of provincial/federal direct and indirect business supports, with a view to increasing R&D expenditures in Ontario and simplifying compliance and administration under the tax system; in that regard, Budget 2012 notes that Ontario business R&D as a percentage of GDP is well below the OECD average, despite tax incentives for R&D available to all Ontario businesses that are among the most generous in the world;
  • The introduction of measures, similar to those adopted in Quebec, to curtail activities in the underground economy through improved enforcement, enhanced information sharing and increased disclosure by Ontario businesses;
  • The potential implementation of aggressive tax planning rules to combat tax avoidance similar to those already introduced in Quebec and in the federal Income Tax Act; Budget 2012 notes that the Ontario government will work with the federal government and with Ontario businesses and stakeholder groups on this initiative;
  • A strengthening of the government's administrative practice in determining whether an employer-employee relationship exists for purposes of assessing Employer Health Tax (EHT); in that regard, the government states that while it will continue to use federal rulings to assist in that determination, it will no longer be necessarily bound by those rulings for EHT purposes; and
  • A shortening of the time limit for applying for retail sales tax (RST) refunds and rebates on the wind-down of the RST, to December 31, 2012 (from the earlier of the expiry of the time limit for claiming the refund/rebate or June 30, 2014).

On the inter-provincial tax front, the Ontario government states that it will work with the federal government to ensure that it has the information and processes it needs to evaluate and address inappropriate provincial income allocation adjustments and interprovincial profit and loss shifting involving Ontario corporations. Furthermore, in regard to the federal government's administrative practice of facilitating an informal loss transfer system within a corporate group, which can have a permanent impact on a province's revenue when losses are transferred across provincial borders, the Ontario government will continue to work with the federal government and other provinces to strengthen the integrity of the tax system by ensuring that corporations apply losses in a manner that is fair and reasonable and upholds the long-standing principles underlying the interprovincial allocation of income.

To view the tax measures in Ontario Budget 2012, please click here.

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