Media Releases

Institute for Competitiveness & Prosperity delivers a blueprint for smart taxation in Ontario

October 31, 2013

Ontario needs to tax smarter by amending personal income tax credits and adjusting current business support measures

TORONTO, ON – Ontario has improved its tax sys­tem marked­ly in recent years by intro­duc­ing the har­mo­nized sales tax, phas­ing out the cap­i­tal tax and low­er­ing cor­po­rate tax rates. How­ev­er, many changes can still be made that would ben­e­fit indi­vid­u­als, busi­ness­es and gov­ern­ment. In Tax­ing for growth: A close look at tax pol­i­cy in Ontario, the Insti­tute for Com­pet­i­tive­ness & Pros­per­i­ty picks up on its pre­vi­ous rec­om­men­da­tions for tax reform in Ontario and exam­ines cur­rent pol­i­cy to iden­ti­fy ways Ontario can cre­ate a tax sys­tem that spurs growth, invest­ment, and com­pet­i­tive­ness.

The Insti­tute defines three goals for smart tax­a­tion: equi­ty, effi­cien­cy and effec­tive­ness. A smart tax sys­tem ensures that tax­es are pro­por­tion­al to one’s abil­i­ty to pay and min­i­mizes eco­nom­ic dis­tor­tions. A smart tax sys­tem also rewards actions that ben­e­fit soci­ety, such as invest­ments in R&D or edu­ca­tion, and dis­cour­ages actions that have a hid­den social cost, like smok­ing or pol­lu­tion.

“Tax expen­di­tures,” which include cred­its, deduc­tions, and oth­er forms of spe­cial treat­ment that rep­re­sent for­gone gov­ern­ment rev­enue, play a major role in Ontario’s tax sys­tem. Recent years have seen an expan­sion in the avail­abil­i­ty of tax cred­its for indi­vid­u­als and busi­ness­es in Ontario. But many of them are inequitable, inef­fi­cient, and inef­fec­tive. More­over, they often fail to accom­plish their intend­ed ben­e­fits and cost the gov­ern­ment bil­lions of dol­lars in lost rev­enue every year. The Insti­tute sug­gests oth­er ways gov­ern­ment can moti­vate Ontar­i­ans with­out the use of dis­tor­tionary tax poli­cies.

On the per­son­al income tax side, gov­ern­ment should review the Basic Per­son­al Allowance and con­sid­er an alter­na­tive way of pro­vid­ing income sup­port for the poor. Tax cred­its for post-sec­ondary edu­ca­tion should be con­vert­ed into grants, which would be more effec­tive in encour­ag­ing enroll­ment. The Ontario Clean Ener­gy ben­e­fit should also be elim­i­nat­ed imme­di­ate­ly.

On the cor­po­rate side, the Insti­tute rec­om­mends a re-eval­u­a­tion of exist­ing busi­ness sup­ports to reduce the pref­er­en­tial tax treat­ment for small busi­ness­es and cer­tain indus­tries. Busi­ness sup­ports in Ontario increased sub­stan­tial­ly in the last six years despite over­all cor­po­rate tax reduc­tions that have made busi­ness­es more com­pet­i­tive. These sup­ports put oth­er com­pa­nies that don’t receive the same sup­port at a dis­ad­van­tage. In addi­tion, cur­rent tax breaks for small busi­ness­es encour­age com­pa­nies to stay small, even though sig­nif­i­cant eco­nom­ic gains can be made from expan­sion.

Tax pol­i­cy is one of the most pow­er­ful tools in the pub­lic pol­i­cy arse­nal. With greater con­sid­er­a­tion of the broad­er effects of cur­rent tax mea­sures, Ontario can ensure it rewards the right actions and puts more mon­ey back into the pock­ets of peo­ple who need it. By fol­low­ing the Institute’s rec­om­mend­ed changes to tax pol­i­cy, the fed­er­al and provin­cial gov­ern­ment can save bil­lions of dol­lars a year, which can be re-allo­cat­ed toward more pro­duc­tive uses.

“Ontario needs to tax smarter to improve the province’s pros­per­i­ty,” says Roger Mar­tin, Chair of the Insti­tute for Com­pet­i­tive­ness & Pros­per­i­ty. “Rather than focus on high or low tax­es, pol­i­cy­mak­ers need to look at the effects of cur­rent tax pol­i­cy and eval­u­ate their suc­cess in achiev­ing pub­lic pol­i­cy goals. Ontario has great­ly improved its tax sys­tem, but more work must be done to ensure our tax pol­i­cy is equi­table, effi­cient, and effec­tive.”


Smart tax­a­tion

  • Equi­ty: A smart tax­a­tion sys­tem is equi­table, rais­ing rev­enues from those with the great­est abil­i­ty to pay and where it is least like­ly to impose finan­cial hard­ship.
  • Effi­cien­cy: A smart tax­a­tion sys­tem is also effi­cient, lim­it­ing eco­nom­ic dis­tor­tions that accrue from the impo­si­tion of a tax.
  • Effec­tive­ness: A smart tax­a­tion sys­tem is also effec­tive, encour­ag­ing actions that are ben­e­fi­cial for cit­i­zens of a juris­dic­tion and dis­cour­ag­ing those that are not.

Review per­son­al income tax­a­tion cred­its

  • Revise the Basic Per­son­al Allowance. This ben­e­fit is poor­ly tar­get­ed and dis­pro­por­tion­ate­ly ben­e­fits mid­dle and high­er income groups.
  • Con­vert tuition and edu­ca­tion cred­its to grants. These cred­its could be more effec­tive at encour­ag­ing Cana­di­ans to pur­sue high­er edu­ca­tion as stu­dent grants.
  • Review tar­get­ed tax pol­i­cy mea­sures. Review the effec­tive­ness of the Children’s Fit­ness Cred­it and elim­i­nate the Ontario Clean Ener­gy Ben­e­fit.

Re-eval­u­ate busi­ness sup­port mea­sures

  • Pur­sue tax­a­tion neu­tral­i­ty as a guid­ing prin­ci­ple. Indus­try tar­get­ed busi­ness sup­ports reduce the neu­tral­i­ty of cor­po­rate tax­a­tion. Neu­tral­i­ty is an impor­tant objec­tive, because it encour­ages firms to pur­sue invest­ments based on their per­ceived prof­itabil­i­ty rather than the lev­el of busi­ness sup­port.
  • Phase out the small busi­ness deduc­tion. This ben­e­fit cre­ates an eco­nom­ic inef­fi­cien­cy by dis­cour­ag­ing growth beyond the small busi­ness income thresh­old.
  • Imple­ment a cash-flow sys­tem of cor­po­rate tax­a­tion. This would enable the expens­ing of cap­i­tal invest­ments imme­di­ate­ly, which would encour­age cap­i­tal invest­ment.

About the Insti­tute

The Insti­tute for Com­pet­i­tive­ness & Pros­per­i­ty is an inde­pen­dent not-for-prof­it orga­ni­za­tion estab­lished in 2001 to serve as the research arm of Ontario’s Task Force on Com­pet­i­tive­ness, Pro­duc­tiv­i­ty and Eco­nom­ic Progress. The Insti­tute is sup­port­ed by the Ontario Min­istry of Eco­nom­ic Devel­op­ment and Inno­va­tion. Work­ing Papers pub­lished by the Insti­tute are pri­mar­i­ly intend­ed to inform the work of the Task Force. In addi­tion, they are designed to raise pub­lic aware­ness and stim­u­late debate on a range of issues relat­ed to com­pet­i­tive­ness and pros­per­i­ty.


For more infor­ma­tion, con­tact:

Ken McGuf­fin
Man­ag­er, Media Rela­tions
Rot­man School of Man­age­ment
Uni­ver­si­ty of Toron­to
Voice: 416.946.3818