All about business

Ontario’s government is vowing to slash business taxes by $4.5 billion over three years as part of its larger financial plan to jumpstart the province’s flagging economy.

The provincial budget provides that tax relief through a slew of measures including the widely-publicized creation of a new provincial-federal sales tax and a largely unexpected plan to cut Ontario’s much-maligned general corporate income tax rate over the coming years.

Stressing the need to boost Ontario’s global competitiveness and the desire to save jobs, the budget is also sprinkled with proposals to drive innovation in hard-hit sectors such as manufacturing.

At first blush, Ontario’s financial blueprint appears to be a business-friendly budget.

But experts note much of the promised tax relief doesn’t kick in until mid 2010, while big businesses will see some of their savings muted for the first five years.

Nonetheless, Finance Minister Dwight Duncan vowed the budget would help Ontario weather the global "financial storm" and hasten the healing of its economy.

"All told, this unprecedented business tax reform will make our businesses better able to compete. This is the right thing to do and now is absolutely the right time to do it," Duncan told journalists prior to his address in the legislature.

"…Reform of our tax system will improve this province’s competitiveness and set the stage for growth and economic recovery."

The budget’s centrepiece is the implementation of harmonized sales tax of 13 per cent commencing July 1, 2010. That single sales tax is expected to slash "paperwork costs" for businesses by more than $500 million a year, Duncan said.

While the single value-added sales tax is expected to reduce input costs for businesses like manufacturers, it also has the potential to increase the overall cost base for other companies such as those in the financial service sector.

Perhaps the most surprising move, according to experts, is the province’s pledge to cut Ontario’s general corporate income tax rate over the coming years. Starting July 1, 2010, the general rate will fall from its current level of 14 per cent to 12 per cent. That rate would be further reduced to 10 per cent in 2013.

The rate paid by manufacturers and processors, currently 12 per cent, is schedule to fall to 10 per cent on July 1, 2010.

The business community has long agitated for corporate tax cuts, arguing that Ontario’s current level of 14 per cent for the general rate is amongst the highest in Canada. The only two provinces, Nova Scotia and Prince Edward Island, charge higher corporate taxes at 16 per cent.

For his part, Liberal Premier Dalton McGuinty has long-resisted calls to cut corporate taxes. Last December, he ruled out such a move when the Canadian Bankers Association suggested the province lower its corporate tax rate to 10 per cent in order to boost the province’s lagging productivity.

Opposition leader Bob Runciman said that while business taxes in Ontario are "too high" but suggested that Premier McGuinty was at fault for keeping them elevated over the past five years pay day loans.

"We could have a more competitive economy and better prepared for this rainy day," he said. "… You’ve heard of someone locking the barn door after the horse was stolen. Well the horse is gone, the barn burned down and we’ve eaten all of our chickens. It is rather late in the day for Dalton to see the light."

Observers also noted the bulk of the corporate tax relief doesn’t kick in until July, 2010 even though businesses are already suffering in the deepening recession. Mary Webb, an economist with Scotia Capital, surmised that mid-2010 is likely the earliest the government could provide that relief.

"The timing of tax change is always tough," she said. "In past, it has been thought that if you promise general corporate tax relief that just the promise that it is going down is also helpful."

For big businesses, however, some of the benefit from the new single sales tax is offset for the first five years by a measure to temporarily prohibit input tax credits on energy, telecommunications services, road vehicles weighing less than 3,000 kilograms, along with food, beverages and entertainment.

After the first five years of a single sales tax, full input tax credits would be phased in over three years, the budget says.

"It manages the cost of the harmonization," observed Paul Hickey, national tax partner with KPMG LLP.

The budget also promises tax savings for small businesses, which Duncan characterized as "the backbone" of the economy.

Among the key measures, the government will cut the corporate tax rate for small businesses from 5.5 per cent to 4.5 per cent, effective July 1, 2010. It will also eliminate the small business deduction surtax.

"This claw back is a barrier to growth. Ontario would be the only jurisdiction in Canada to end this barrier to growing businesses," Duncan said.

The province will also exempt more small and medium-size businesses from the corporate minimum tax and cut the CMT rate from 4 per cent to 2.7 per cent.

"Once fully implemented, the comprehensive tax reform package would cut Ontario’s marginal effective tax rate on new business investment in half, making Ontario one of the most competitive jurisdictions in the industrialized world for new investments," the budget says.

There were also more goodies for Ontario’s struggling manufacturers. The province said it would parallel federal measures affecting the capital cost allowance for machinery and equipment, along with computers and software.

Businesses would also reap the benefits of the province’s plan to earmark $32.5 billion for infrastructure spending and nearly $700 million for skills training over the next two years.

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