Ontario budget 2012: An indication of things to come 

publication 

March 2012

Tax Bulletin

The Ontario government presented its 2012 Budget (the "Budget") in the Ontario Legislature earlier this week.  While largely focusing on austerity measures and spending restraint, the Budget also raised the possibility of a number of material tax changes that, if implemented, will directly affect those that carry on business in Ontario. 

tax rate reductions suspended

As has been widely reported in the popular press, the most significant tax announcement contained in the Budget was the Government's decision to freeze the implementation of certain planned tax rate reductions. 

  • Ontario's current general corporate income tax rate of 11.5% (26.5% when combined with the general federal corporate income tax rate) was scheduled to decline to 11% on July 1, 2012 and 10% on July 1, 2013.  The Budget proposes to delay these scheduled tax rate reductions until the province's budget is balanced, which is currently projected by the Government to occur in 2017-2018.
     
  • The Budget also proposes to freeze scheduled reductions to Business Education Tax rates.  (The Government again expressed an intention to resume the scheduled Business Education Tax rate reductions once the province's budget is balanced.)

further tax changes on the horizon

In addition to the announced tax rate freezes, the Budget also contained further tax proposals that were less widely reported by the media.  In particular, the Government indicated that it will:

  • Review the manner in which the province receives compensation for its non-renewable resources (e.g., through the tax on mining profits levied under the Mining Tax Act).  The Government indicated a desire to receive "fair compensation" for its non-renewable resources and that it will consult with stakeholders to review the current tax system in this regard.
     
  • Review business tax expenditures with a particular emphasis on research and development tax credits currently available in Ontario.  The federal government is similarly examining its Scientific Research and Experimental Development (SR&ED) tax credit and the province has expressed a desire to cooperate with the federal government to simplify compliance and administration of these programs.
     
  • Focus greater resources on examining how taxpayers are characterizing employee and independent contractor relationships for the purposes of the Ontario Employer Health Tax ("EHT").  Although the Government acknowledged that federal rulings will still be of assistance in determining whether an employer-employee relationship exists in a particular case, the Government has advised that it will not necessarily be bound by these rulings for EHT purposes.  This change in administrative practice will apply to EHT assessments issued after March 27, 2012.
     
  • Explore measures to counteract tax leakage from the underground economy, including measures to (i) mitigate the use of point-of-sale software to electronically conceal sales, and (ii) identify and penalize those who facilitate or participate in tax evasion schemes.
     
  • Consider implementing various measures used by the Province of Quebec to "fight aggressive tax planning in the province".  In recent years, Quebec has introduced a reporting regime that requires taxpayers to report certain "aggressive" transactions.  Failure to satisfy such reporting requirements can subject a taxpayer to a variety of sanctions, including monetary penalties and the suspension of certain limitation periods.
     
  • Take steps to address the Government's concern with the ability of corporate groups to undertake transactions that effectively permit losses to be transferred between related entities in a manner that ultimately results in a loss of revenue to the Ontario treasury.
     
  • Implement measures that would require (i) recipients of Government grants/assistance, and (ii) businesses that bid on projects where provincial funding is involved, to be compliant with their tax obligations.
     
  • Amend the province's retail sales tax legislation to shorten the period in which taxpayers may apply for certain retail sales tax refunds/rebates.

The Government has acknowledged that stakeholder input will be sought in formulating the legislation required to implement a number of its tax proposals.  Taxpayers that may be affected by such changes may wish to consider making submissions to the Government during any such consultation periods.


by Michael Friedman and Andrew Stirling

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2012