On March 27, the Honourable Dwight Duncan, Minister of Finance, tabled the Ontario Liberal government’s first budget since it was re-elected as a minority government in October 2011 (Budget). Entitled Strong Action for Ontario, the Budget proposes to restrain spending and increase revenues with the aim of eliminating the provincial deficit by 2017-18.

The Budget is lean on tax measures and replete with promises to re-evaluate various aspects of Ontario’s tax system. The most significant tax announcements relevant to businesses are highlighted in this release. For a discussion of the pension reforms proposed by the Budget, see the link at the end of this release.

Corporate Income Tax Rate Freeze

The most noteworthy business tax measure announced in the Budget is the proposed freeze of the general corporate income tax (CIT) rate. In the 2009 Ontario's Tax Plan for Jobs and Growth, the McGuinty government vowed to incrementally reduce Ontario’s general CIT from 14% in 2009 to 10% by July 1, 2013. Budget 2012 proposes to postpone the rate reductions scheduled for July, 1, 2012 and 2013 and to maintain the general CIT at its current rate of 11.5% until such time as the province’s budget is balanced.

The Ontario government has committed to resuming the general CIT rate reductions on its anticipated return to a balanced budget in 2017-18.

Interprovincial Income Allocation and Tax Avoidance

In order to combat inappropriate interprovincial profit and loss shifting by Ontario-based corporations, the Ontario government proposes to work with stakeholders and the federal government to consider the implementation of measures similar to those currently used in Québec to combat aggressive interprovincial tax planning and corporate tax avoidance. The Ontario government also proposes to work with the federal government to explore the extent to which the Canada Revenue Agency (CRA) can address the proper allocation of income to the provinces under the tax collection agreement, and to implement any required supplementary measures.

Ontario also proposes to adopt measures similar to those used in Québec to combat the loss of tax revenues due to businesses operating in the underground economy. These may include introducing fines, penalties, disclosure requirements and other measures aimed at mitigating the use of sales-concealing point-of-sale software, enhancing information sharing between ministries, municipalities and the CRA, and identifying participants in or facilitators of tax evasion schemes.

Mining Tax Review

The Budget notes that Ontario’s current mining tax regime was implemented at a time when CIT rates were high, and that the mining industry has since benefited from changes to the provincial CIT regime. The Ontario government proposes to meet with stakeholders and to review mining tax incentives with a view to ensuring that "Ontario receives fair compensation for its non-renewable resources."

Research and Development Review

The Ontario government has indicated its agreement with the recent findings of a federal panel on the scientific research and experimental development tax credit system, which called for increased collaboration between the federal and provincial governments in this area. It has undertaken to "review the effectiveness of tax credits for [research and development (R&D)] in supporting innovation and the overall framework of provincial and federal direct and indirect business supports." Additionally, the Ontario government will seek advice from the Jobs and Prosperity Council to improve the current R&D tax support system so as to increase R&D expenditures in Ontario and simplify compliance and administration.

Tax Collection Procedures

Amendments are proposed to various tax statutes in order to improve the Ontario government’s ability to collect tax revenues.

Recipients of Government Funding or Contracts

The Budget announces the Ontario government’s intention to work with other levels of government and key stakeholders to introduce measures that will make tax compliance a prerequisite to bidding on government contracts and receiving government funding.

Employer Health Tax

Ontario announced its intention to strengthen its administrative practice for determining whether an employer-employee relationship exists for purposes of the Employer Health Tax (EHT). Effective for assessments issued after March 27, 2012, the province will no longer be bound by federal rulings on this issue for purposes of the EHT.

Retail Sales Tax Refunds and Rebates

The government is proposing to shorten the Retail Sales Tax (RST) refund and rebate periods. Under the current rules, a person is entitled to apply for a rebate or a refund of RST until the time limits for claiming them have expired (e.g., a refund for RST paid in error must be made within four years of the payment), or June 30, 2014, whichever is earlier. The proposed amendment would require applications for rebates or refunds of RST to be made on or before December 31, 2012.

The current rebate and refund periods would continue for RST paid on insurance premiums or private transfers of used vehicles.

Business Education Tax Rate Freeze

The 2007 Ontario Budget announced a seven-year plan to reduce Business Education Tax (BET) rates in order to ease the property tax burden on Ontario businesses and to reduce the disparity in BET rates across the province. Budget 2012 proposes to temporarily freeze the BET rate reduction plan, effective 2013. The proposed amendments will not affect rate reductions that have already been implemented. BET rate reductions will resume once Ontario returns to a balanced budget in 2017-18.

Questions?

If you have any questions about the Budget or how it may affect you, please contact any member of the Tax Group at McCarthy Tétrault or your regular McCarthy Tétrault lawyer.

Pension Reforms

For a summary of the reforms proposed in the Budget that will impact public and private sector pension plans, see 2012 Ontario Budget — More on Pension Plans and PRPPs, prepared by members of our Pensions, Benefits & Executive Compensation Group.