Ontario is turning to the business community for help in trimming its deficit, but the move to suspend scheduled cuts to corporate income taxes could cast a shadow over investment in the province.
In a budget rife with cuts and restraint, the corporate community is being asked to make a sacrifice, along with government employees who face pension cuts, well-off seniors who will see drug benefits reduced, and parents who won't see expected child benefit increases.
"We are asking business to do its part to help Ontario balance its budget," Finance Minister Dwight Duncan said in his speech to the provincial legislature.
The move in Ontario comes as governments in Canada and around the world look for ways to raise cash to trim their budget deficits. In B.C.s' recent budget, the province said may raise its corporate tax rate to 11 per cent from 10 per cent if its fiscal situation worsens. Only B.C., Alberta and New Brunswick currently have a tax rate at 10 per cent.
Federal Finance Minister Jim Flaherty has for years been trying to convince the provinces to reduce their tax rates to make Canada more competitive. Ontario was particularly resistant, but then in 2009 the McGuinty government announced its rates would decline over time.
The province's corporate tax rate has fallen in two stages from 14 per cent in 2010 to the current level of 11.5 per cent. It was scheduled to fall to 11 per cent in July, and to 10 on July 1, 2013.
But now it will be frozen at 11.5 per cent until the government balances its books – a goal it says it will reach in 2017-18. The delay will save the government $1.5-billion over the next three years, aiding its efforts to reduce a massive deficit during a period of modest economic growth.
"That's a big mistake," said David MacDonald, CEO of Toronto-based technology services firm Softchoice Corp., insisting it will discourage investment in the province. His company has some flexibility to generate profits in Ontario or in the U.S., he said, and it would prefer to keep them in Canada if the tax rates make that attractive.
Tax expert Jack Mintz suggested that the long-term growth that results from corporate tax cuts can outweigh any short-term gains, particularly if companies shift profits out of Ontario as a result of the higher rates.
Mr. Mintz, chair of the School of Public Policy at the University of Calgary, also noted that some companies will actually experience the freeze as a tax increase, if they have already accounted for lower expected rates in their financial statements.
Still, Mr. Duncan insisted the already-reduced tax levels have made the province a preferred location for business, and that he has broad support for the freeze. "The thoughtful business people that I have dealt with in preparation for this budget ... think it is a wise choice," he said.
Allan O'Dette, president of the Ontario Chamber of Commerce, said he thinks many members of the business community are prepared to accept the freeze on tax rates as long as the government follows through with its moves to cut the deficit.
"Frankly we understand the need for everyone in the province, including business, to make some sacrifices," Mr. O'Dette said. "But we are going hold the government accountable to executing against their plan."
Erin Weir, an economist at the United Steelworkers Union, said there was once a "sense of inevitability" that all provinces would continue to reduce their rates, but "the tide has turned against corporate tax cuts."
The business tax freeze is not the only pain that will be inflicted on many businesses in Ontario. The province will also temporarily freeze its plans to cut the business education tax, a property tax levy that businesses pay at varying rates across the province. Suspending those reductions will possibly save the province about $300-million a year by 2014-2015.
Dan Kelly, senior vice-president of legislative affairs at the Canadian Federation of Independent Business, said dropping the planned cut in business education taxes is even more worrisome for small business. "The [tax]is a profit-insensitive form of capital tax and is a big deal for smaller businesses across Ontario."
Another $500-million will be saved over the next four years by capping the province's clean energy benefit, the electricity subsidy to power users that was put in place at the beginning of 2011 to temper concerns about high-cost renewables pushing up power prices.
By limiting the 10-per-cent rebate to the first 3,000 kilowatt-hours of power used each month, most individual consumers and small businesses will continue to get the full benefit, but bigger power users will see their electricity costs rise.
The province has also embraced one of the key recommendations from economist Don Drummond, and will radically revamp its wide range of support programs for business – although it will first take time for major consultations.
The Drummond report said the $1.3-billion in direct supports for business and $2.3-billion in tax support needed to be re-evaluated, because they were fragmented and lacked coherent objectives. All of those programs will be rolled into a single Jobs and Prosperity Fund, where the deciding factor on who gets support will be whether jobs are created and productivity is enhanced.
Robert Berger, president of MW Canada Ltd., a Cambridge, Ont.-based textile manufacturer, says every time the government changes its mind about taxes, it forces companies to change their business plans.
"It is all about planning ... every time you've got to change course, it costs you money," said Mr. Berger. "Besides the non-reduction of tax, it becomes an additional cost that you didn't plan on – that you didn't budget for."
For some in Alberta, the Ontario tax hike comes as a warning that the West is not spreading enough of its enormous workload – and wealth.
Oak Point Energy Ltd. is a Calgary company that has devised a new system of assembling oil sands plants from smaller modules, which it hopes to build in Ontario and ship across the country. For co-CEO Ken James, a higher tax rate amounts to a cost of "pennies" relative to the advantages of building in Ontario, where labour costs are 30 to 40 per cent lower, and productivity is far higher than Alberta.
But, he said, if Alberta's oil boom has caused damage to Ontario's manufacturing industry, then those benefitting from the boom have some responsibility to Ontario as well.
The Ontario "tax rate has go to go if we don't give them any benefit," he said. "One way or another, we have to give them some rent."
With files from reporters Tim Kiladze, Rita Trichur, Nathan VanderKlippe and Sean Silcoff