Canada: Pennies from Heaven: The 2005 Ontario Budget

Better schools, better heath care, smart investment in infrastructure and strong financial management were the key phrases repeatedly used by Ontario Finance Minister Greg Sorbara to describe the initiatives contained in the 2005 Ontario provincial budget, which was presented on May 11, 2005 by Finance Minister Sorbara to the Ontario Legislature (the "Budget").

As anticipated, the Budget focused on enhancing post-secondary education, health care and provincial infrastructure. Although Ontario’s deficit for 2004-05 stands at $3.0 billion, Finance Minister Sorbara announced a $6.2-billion commitment to post-secondary education by 2010, an $1.8-billion increase in health care spending this year with subsequent increases of $1.5-billion for each of the next two years, and a five-year, $30 billion program of investment in infrastructure.

Corporate Regulatory Highlights

The Budget was also used as the occasion to announce some non-fiscal business law reform initiatives. Specifically, the Minister of Consumer and Business Services (MCBS) will introduce securities transfer legislation later this year. Commonly known as the USTA, such a law forms a crucial underpinning for Canada’s otherwise sophisticated securities settlement system, which handles daily transactions averaging around C$100-150 billion and which has vital links to the much larger US market. In addition, the MCBS will lead "the implementation of a multi-year plan to update Ontario’s commercial law framework" and, after implementation of the USTA, will develop "comprehensive legislation to modernize Ontario’s corporate laws to improve governance and accountability".

Apart from the USTA, the Budget understandably did not provide specific details or timelines for the other pending business law reforms. However, the explicit recognition of the need for corporate law reform is a significant breakthrough and comes as welcome news.

Tax Highlights

From a tax perspective, the Budget contained few surprises. The Ontario Government kept its promise not to introduce any new taxes or tax increases and, as anticipated, did not announce any tax cuts.

For the most part, the tax proposals introduced by the Budget are limited to specific measures intended to parallel the tax changes that were announced on February 23, 2005 in this year’s federal budget, including enhancements to amounts that can be claimed for dependents through the Medical Expenses Tax Credit and the non-refundable tax credit for eligible adoption expenses. The implementation of these measures is expressly made conditional on the passage of the federal budget legislation. The Budget also proposes to automatically adopt the federal government proposals relating to: (i) the ability of taxpayers to claim a charitable donation tax credit in their 2004 tax return for Tsunami relief donations made before January 12, 2005; and (ii) enhancements to the Disability Tax Credit and Medical Expenses Tax Credit, once legislative and regulatory changes to the federal proposals have been approved.

The details of the Budget reveal two initiatives that are of general significance to businesses operating in Ontario.

Corporate Tax Avoidance

Buried within the Budget, the Ontario Government announced that it is actively reviewing arrangements that are designed to avoid Ontario corporate taxes by taking advantage of lower corporate tax rates in other provinces. The Budget proposes to develop common rules with the federal government and the governments of each of the provinces relating to inter-provincial tax planning arrangements.

Currently, a corporation’s liability for corporate taxes under the Corporations Tax Act (Ontario) is based in part on whether the corporation is incorporated in Canada. Effective for taxation years ending after May 11, 2005, the Budget proposes an amendment so that a non-Canadian corporation will be liable for Ontario corporate taxes if it is a resident of Canada. The impact of this change will depend upon the precise language of the amendments to the law. We will monitor developments in this area for our clients with offshore corporate entities.

Remissions Process

The current process to obtain repayment of tax through a tax remission order, which may be granted in special circumstances of public interest, requires a recommendation of the Minister of Finance to be considered and approved by Cabinet. To increase the efficiency of the approval process for tax remissions, the Budget proposes to grant the Minister of Finance the authority to remit amounts under $10,000 where such remissions would be in the public interest. The Budget also proposes that the Minister of Finance delegate the ability to grant remissions of personal income tax to the federal Minister of National Revenue.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2005 McMillan Binch LLP

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