Tax reductions aimed at making innovative Ontario firms more competitive

The Ontario government's decision to reduce corporate taxes and lessen the tax burden of certain technology workers could arguably have the most impact on increasing Ontario's innovative capacity. The series of measures directly target many of the high-tech sector's complaints of high taxation rates and loss of skilled personnel to more competitive jurisdictions, and they represent a hefty price tag in terms of foregone tax revenue.

Leading the pack is an immediate 1% cut to the Corporate Income Tax rate of 15.5% for large firms, to be followed by five years of reductions until the rate reaches 8%. The Manufacturing and Processing Tax rate of 13.5% will also be brought down to 8% by 2005, starting with an immediate 1% cut. The initial reductions to the two rates are expected to cost $770 million over a full year, which includes the effect of an additional 0.5% cut to both rates on January 1/01.

The Ontario Research Employee Stock Option Deduction is the largest of the tax initiatives targeting the high-technology sector, and is calculated to put $70 million annually into the pockets of eligible employees who exercise stock options granted by their employers. To qualify, employees must spend at least 30% of their time directly undertaking, supervising or supporting the performance of research as defined by the federal Income Tax Act. The employees would be able to deduct a maximum of $100,000 a year in tax payable, arising from capital gains realized from the exercise of stock option benefits granted by the employer.

Eligible firms must have a permanent establishment in the province and conduct at least $25 million annually in R&D, or 10% of the aggregate total revenue. Eligible expenditures must qualify for the Ontario R&D Super Allowance, while eligible stock options must be those granted after the enabling legislation receives Royal assent. The new stock option deduction is the culmination of a year-long process of consultation that followed the announcement in last year's Budget that the government would be creating a framework for the new tax measure (R$, May 12/99).

A similar process was announced in this year's Budget regarding community-based investment funds and labour-sponsored investment funds with a view to ensuring stability and a growing pool of available venture capital. Changes to both programs are anticipated following consultation and an examination of various options.

Also accompanying the stock option deduction legislation is the decision to exclude stock option benefits from the Employer Health Tax base.

Budget documents also show a $4 million cost attributed to the Ontario R&D Super Allowance, which was the focus of a change to federal legislation concerning R&D investment tax credits (R$, April 7/00), in essence treating provincial deductions that exceed the amount of R&D expenditure as government assistance. A Finance ministry official says the decision not to follow the federal change means the provincial investment tax credit (ITC) upon which the super deduction is based will be higher, resulting in a higher cost to the treasury.

"We needed to make it clear that we would not consider these deductions to be government assistance," says the official, adding that discussions are currently underway to resolve the matter since the federal change is still in the proposal stage.

The Budget also introduces an Education Technology Tax Incentive to firms designed to increase the level of collaboration between the business and academic sectors. The incentive is offered to companies providing price discounts or donations of new teaching equipment and learning technologies to universities and colleges, at an estimated full year cost of $6 million.

In the area of new media, the Budget enhances the 20% refundable Interactive Digital Media Tax Credit, to include up to $100,000 of qualifying marketing and distribution expenses, covering trade show attendance, product preparation for display and promotion, distribution and even advertising. Qualifying expenses must be incurred 24 months prior to and 12 months following completion of the eligible product.

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