News Article

Ontario budget restraints will be felt across Canada

Posted: March 28, 2012

The repercussions of Ontario's March 27 budget will be felt across Canada ó especially among the corporations that bear the brunt of the changes. Consumers and employees, too, will feel the squeeze as, thanks to the "trickle downî effect, corporations pass on the additional cash drains through cost-cutting, reduced employment and price increases.

Ontario is no longer the manufacturing giant it once was; it is now a service-based economy. At the head of the pack is the financial services industry. Toronto is one of the 10 largest financial centres in the world and handles 70% of Canada's financial services. As a result of Ontario's budget, this large corporate segment will pay 13% more taxes ó affecting consumers and employees nation-wide.

Ontario's public service will also feel the impact of what can only be termed an "austerityî budget, as the Ontario government attempts to balance its budget by 2017-2018 "by finding savings and curtailing planned spending.î To reduce wage costs, Ontario plans to impose a two-year wage freeze on 1.2 million government employees. It intends to do this through negotiation and the collective-bargaining process. But the provincial government has indicated it will introduce legislation to force the freeze if the public-service unions disagree.

This is all going to happen without the government increasing taxes. Apparently "not increasing taxesî does not include eliminating previously announced tax cuts and increasing fees.

ï Taxation

Corporations expecting to take advantage of long-promised reductions in the general corporate tax rate will have to wait a little longer, at least until there is a balanced budget. The general tax rate for corporations ó which was scheduled to drop by 0.5% on July 1, 2012, and an additional 1% on July 1, 2013 ó is frozen at 11.5%.

This 1.5% cut to the corporate tax rate represents a 13% increase in funds no longer available for investment. This will ultimately filter through, increasing costs and pricing as well as decreasing employment.

The removal of the tax reduction, however, does not affect manufacturing and processing or small business which currently have provincial tax rates of 10% and 4.5%, respectively.

Also frozen at its current level is the Business Education Tax (BET), a component of commercial property taxes. Ontario's phased-in cuts to BET, which started in 2007, will halt until Ontario reaches a balanced budget.

Neither of these freezes sound like a big deal on the surface, but for a province that is in financial difficulty to hobble the commercial engine that drives employment and the economy sounds a little counterproductive.

The proposed Healthy Homes Renovation Tax Credit designed to provide a 15% non-refundable tax credit on expenditures "that improve accessibility or help seniors with their mobility at homeî will remain. Even though this legislation has not yet been passed, the qualifying period began October 1, 2011, and expires December 31, 2012, to be claimed on the 2012 personal tax return.

Although this program is currently in place and active, it is important to note that this legislation has not been passed and it does form part of the budget. It may ultimately be defeated.

In another move, as of March 27, the Ontario government has taken back the determination process regarding employee-employer relationships for the purpose of assessing taxes under the Employer Health Tax from the Canada Revenue Agency (CRA). While CRA rulings will remain, Ontario is no longer bound by the rulings for the purpose of the Employer Health Tax.

Retail Sales Tax (RST) was harmonized with the GST/HST on July 1, 2010. Ontario taxpayers have had the ability to apply for RST rebates and refunds until June 30, 2014. This period has been shortened; the deadline is now Dec. 31, 2012.

Administratively, the Ontario government plans to amend various statutes to enhance its ability to collect tax revenue, including the garnishment of monies to be loaned or advanced to taxpayers.

Research & Development tax credits, the Apprenticeship Training Tax Credit and Tobacco Tax Enforcement are also under review but the budget gave no details on what changes, if any, will be implemented.

Collectively, the tax measures proposed in Tuesday's budget should increase Ontario's revenue by $325 million in 2012-2013, $1.04 billion in 2013-2014 and $1.675 billion in 2014-2015.

ï Pension Systems

Public-sector defined-benefit pension plans also came under the gun as the Ontario government targeted unfunded liabilities. Ontario is proposing legislative changes within the following parameters:

  • In case of a deficit, a plan will be required to reduce future benefits or ancillary benefits before increasing employer contributions.
  • In exceptional circumstances, a limit will be set on the amount or value of benefit reductions before additional contribution increases can be considered.
  • Any benefit reductions will involve future benefits only, not those already accrued. Current retirees will not be affected.
  • If employee contributions are currently less than employer contributions, increased employee contributions can be employed to reduce pension deficits.
  • When plan sponsors cannot agree on benefit reductions through negotiation, a new third-party dispute resolution process will be invoked; the framework will be reviewed after the budget is balanced.
Alan Rowell, Distinguished Financial AdvisorñTax Services Specialist, is president of The Accounting Place in Stoney Creek, Ont.