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No. 92 Tax, Budget & Accounting International Taxes OTTAWA--Proposed business tax reductions will give Ontario the most competitive corporate taxation system in North America, provincial Finance Minister Jim Flaherty said May 9. The Ontario government will legislate a full schedule of corporate income tax cuts from 2001 through 2005, giving the business community greater certainty and permitting the lower taxes to be factored into their future business plans, Flaherty said in delivering the provincial government's 2001 budget. "By 2005, Ontario would have a lower combined corporate income tax rate than any of the 50 U.S. states. No Canadian province would have a lower general corporate income tax rate," he said. The general corporate income tax rate and the manufacturing and processing tax rate will be reduced to 12.5 percent and 11 percent, respectively, effective Jan. 1, 2002, from the current 14 percent and 12 percent, respectively. The taxes would then decline annually, the general rate at 1.5 percent per year and the manufacturing and processing rate at 1.0 percent per year, until they reach 8.0 percent by 2005, he said. In addition, the province will start to phase out its tax on capital, he said. The first step in eliminating the tax on capital, effective Jan. 1, 2002, will exempt the first C$5 million ($3.2 million) of taxable capital, eliminating the need to pay the tax for more than 11,000 businesses in the province, he said. Capital Tax Costs Jobs "Thousands of businesses across Ontario, in every sector, must pay capital tax whether they make money or not. That means capital tax claws back money that should be used to keep employees on the payroll," he said. "It is a cost of doing business that almost no other country imposes," he said. Eliminating the capital tax is important for Ontario because capital is highly mobile internationally and goes to countries where it earns the highest after-tax rate of return, said an Ontario Ministry of Finance background document. Countries with above-average corporate tax rates have a lower rate of investment, and the citizens of those countries are ultimately losers as they have access to jobs at a lower technological level and with lower incomes, it said. "The capital tax discourages investment in capital, when more capital per worker is what is needed to boost productivity and standards of living. The capital tax is unrelated to profits, making it a fixed cost on businesses. In periods of economic slowdown when businesses are forced to cut costs, the capital tax forces them to cut in the areas where they have flexibility, which is chiefly wages. Therefore, the capital tax is a potential job killer," the background document said. The capital tax exemption for small businesses was raised in 1999 to C$2 million ($1.3 million) of taxable capital, with reduced rates for taxable capital between C$2 million ($1.3 million) and C$4 million ($2.6 million), and the full C$4 million ($2.6 million) was to be phased in by Jan. 1, 2003, the background document said. In addition to the new C$5 million ($3.2 million) exemption, the C$2 million ($1.3 million) capital deduction applied to determine adjusted taxable paid-up capital for financial institutions will also be increased to C$5 million ($3.2 million) as of Jan. 1, 2002, it said. Other Measures in Budget Other tax measures in the Ontario government's 2001 budget included: initiation of a comprehensive review of all tax incentives to the business community to ensure that the incentives remain effective, useful, and relevant; extension of the existing retail sales tax rebate for alternative fuel vehicles to electric hybrids; exemption from retail sales tax of audio books purchased by individuals who are legally blind; further reductions in personal income tax rates--from 6.2 percent to 6.05 percent for taxable income up to C$30,814 ($19,968) and from 9.24 percent to 9.15 percent for taxable income between C$30,814 ($19,968) and C$61,629 ($39,937), effective Jan. 1, 2002, and a further reduction Jan. 1, 2003, to 5.65 percent for the lowest income bracket and to 8.85 percent for the next bracket; elimination of the first tier of the province's personal income tax surtax by calculating, effective Jan. 1, 2003, the surtax as 56 percent of Ontario income tax in excess of C$4,491 ($2,910); and provision of a new refundable tax credit, effective for 2002 and subsequent tax years, on the first C$7,000 ($4,536) per year of tuition paid to private kindergarten, elementary, and secondary schools, at a rate of 10 percent in 2002, then increasing by 10 percentage points per year to a maximum of 50 percent for the 2006 and subsequent taxation years. The Ministry of Finance background document stressed that despite the province's best efforts to make its taxation system more attractive and in turn make Ontario businesses more competitive, it is still handcuffed by the need for further federal corporate and personal income tax cuts. Despite reductions announced in the 2000 federal budget, Canada's federal corporate income tax rates remain high compared to competing jurisdictions, it said. "The federal government needs to cut corporate rates deeper to improve our international competitiveness. If the federal government met the challenge in the 2000 Ontario budget to match our corporate rate cuts, the combined federal-provincial rate, at 23 percent, would be among the lowest in the world," he said. Likewise, only one-third of the current personal income taxes paid by Ontario residents are collected by the provincial government, it said. If the income tax burden on Ontario citizens is to be reduced significantly, then the federal government must make further cuts in its personal income taxes, it said. The 2001 Ontario budget documents are available on the World Wide Web at http://www.ontfinance1.com/bud01e/document_centre.htm. By Peter Menyas Copyright © 2001 by The Bureau of National Affairs, Inc., Washington D.C.
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