Feigenbaum Law

Ontario’s 2018 Budget: Tax Credits, but no Corporate Tax Cut

Corporate Tax Planning
March 29, 2018

Earlier this week, Ontario’s Finance Minister Charles Sousa delivered the provincial Liberal’s final budget prior to June’s pending election. The budget calls for $20.3 billion in spending over the next three years, including more than $900 million for businesses and jobs training under a “Good Jobs and Growth Plan”.

The budget projects 2.2% provincial GDP growth in 2018, 1.8% in 2019, and 1.9% in 2020 (growth was an estimated 2.7% in 2017).

Potential Impact of Ongoing NAFTA Discussions

The budget was released as Ontario awaits the outcome of the ongoing NAFTA renegotiations– the outcome of which will only affect the province (which relies heavily on exports), but also Canada as a whole as well as our NAFTA trading partners.

Sousa notes that the current uncertainty around the NAFTA talks had given the Ontario government “pause”, since Ontario’s economy is so closely linked to the states. However, Sousa also noted that the provincial Liberal’s high spending on health (healthcare spending accounts for the largest portion of the full budget- almost 40%) and education would be an attraction to foreign investors. Sousa also noted the Wynne government’s recent introduction of measures designed to retaliate against the U.S.’ “Buy American” policies.

The budget notes that, in addition to NAFTA, other factors continue to also affect the province:

Despite Ontario’s solid economic underpinnings, there are a number of risks and challenges that could adversely affect the province’s competitiveness and economic growth, including recent tax reform in the United States, trade negotiations and other protectionist measures; high household debt; and the housing market.

Corporate Tax Rates

While the budget recognizes that recent U.S. tax reform “may lessen Ontario’s competitiveness and weaken business investment”, there was no cut to the province’s corporate tax rate. It remains at 26.5% (the lowest in Canada since the previous Liberal government decreased Ontario’s general corporate tax rate). Sousa did note that the U.S.’ recent tax cuts “tried to basically catch up to what we’re doing in Ontario”.

The Jobs and Prosperity Fund

As part of the government’s overall “Good Jobs and Growth” plan the budget proposes to “renew, enhance and extend” the Jobs and Prosperity Fund with a potential $900 million in support of businesses over the next ten years. This Fund has been used, in the past, to provide tens of millions of dollars in loans and other grants for automakers and others looking to invest in Ontario.

Research and Development

The budget proposes the expansion of two research and development tax credits for businesses in recognition of the general decrease in corporate spending on R & D over recent years. Ontario currently lags behind its major competitors in this respect.

The Ontario Research and Development Tax Credit (ORDTC) is a 3.5% non-refundable tax credit on eligible R & D spending. As of March 28, 2018, companies that qualify for the ORDTC will be eligible for an enhanced tax rate of 5.5% on expenditures over $1 million per taxation year.

The Ontario Innovation Tax Credit (OITC) is intended for small to medium-sized companies. The budget makes improvements to this credit, allowing a company that is eligible for an enhanced OITC rate based on their ratio of R & D expenditures to gross revenue.

These tax credit changes are projected to cost Ontario just over $230 million over three years.

Planned Deficit

The Ontario Liberals followed through on their previous promises to run a budget deficit, projecting a $6.7 billion shortfall for 2018/2019 (following 2017/2018’s estimated $642-million surplus). Under the current plan, there will not be a return to a balanced budget until 2024/2025.

Other Notable Tax Changes

Some of the tax changes in the 2018 budget include:

  • A provincial parallel of the federal income sprinkling rules. Ontario will extend the tax on split income rules to adult family members who are not active in a business (with some exceptions) beginning in the 2018 tax year.
  • A provincial mirroring of the federal measures on passive income;
  • The elimination of the provincial surtax. This has been replaced with new tax rates and brackets. Ontarians earning more than $71,500 in taxable income may see a small tax increase;
  • The Ontario Charitable Donations Tax Credit (ODCTC) will increase to 17.5% for all taxpayers for any eligible donations over $200;

We will continue to follow developments in this regard and will blog updates when more information becomes available. In the meantime, if you have questions about how the measures in the new provincial budget will affect your current tax plan contact Feigenbaum Law.  We are leaders in the field of tax law, and offer services to clients in the US, Canada and around the world. Contact us to learn more about how we can help or call us at (905) 695-1269 or toll-free at (877) 275-4792.


Tagged: corporate tax, corporate tax planning, income sprinkling, Ontario Budget 2018