Do the right things: innovate, educate, improve

By David Mason

Finance Minister Charles Sousa brought down his first Ontario budget on May 2, 2013. Clearly, it is not an easy time to be the Finance Minister in Ontario. The economy of Ontario is still limping along with estimated growth last year of only 1.4%, below the Canadian average and well below the western provinces. Unemployment rates in the province continue to be relatively high at 7.7% (March 2013) and the estimated deficit is roughly $12.8 billion.

The Ontario budget dilemma

To top it off, the Ontario government is in a precarious position:

• One of the opposition parties already indicated they will not support the budget
• The other party with the balance of power threatened to not support the budget — if there is not enough to satisfy them and their supporters.

What is the Ontario Finance Minister to do? Some provinces have raised taxes (personal or corporate) to reduce the deficit but given the sluggish economic recovery in Ontario, this scenario seems unlikely. The Finance Minister could raise the high income surtax rate or reduce the level of income at which this tax kicks in. This would likely be popular with some members of the legislature but raising taxes in any way could negatively impact the economy. Similarly, raising payroll taxes such as the employer health tax (EHT) would seem to be counter-productive.

Ontario’s productivity gap

Canada in general and Ontario, in particular, have challenges around productivity. Simply said we, in Ontario, are not as productive as our competitors south of the border. This relatively poor productivity level reduces our incomes and reduces the money the government collects in taxes. This is an area where the Finance Minister can make a difference.

In the 2012 report, Clear choices for a competitive Canada, Deloitte identified the causes of the productivity short-fall in Canada and recommended solutions. While some of those solutions must come from the private sector, we encourage Mr. Sousa to take steps so the Ontario government helps improve productivity.

A focus on entrepreneurship and innovation

First, Ontario needs to improve support for innovation. Currently, Ontario offers a 10% refundable innovation tax credit for some companies on their first $3,000,000 of scientific research and experimental development (SR&ED) expenditures as well as a 4.5% non-refundable tax credit for all companies. Increasing the 4.5% credit rate would help Ontario businesses. More importantly, making the 4.5% tax credit refundable would help those companies who cannot benefit from the existing tax credit to support their innovation. In addition, access to angel investing and start-up capital is difficult in Ontario. Support in this area could include a tax credit for angel investors — similar to BC’s Equity Capital program — to help the development of more innovative companies.

Secondly, Ontario also needs to ensure that its education system fosters entrepreneurship and innovation — at all levels. Education is clearly a provincial responsibility and it is within the purview of the Ontario government to ensure that the education system in Ontario is world-class and focuses on entrepreneurship and innovation. Focusing our education spending on these areas will improve the overall economy of Ontario.

While government support is not the only solution, it can go a long way to getting us where we need to be.

Finally, Ontario needs to encourage investment in machinery and equipment. While this is something that each company needs to look at, there is a role for the Ontario government to play in encouraging such investment. For example, a limited time tax credit for investment in machinery and equipment that improves productivity could give business owners the incentive they need to replace aging machinery and equipment with new technologies that will help them compete on the world stage.

The Finance Minister is in a tough place but it is never wrong to do the right thing. The right thing is to focus on making Ontario competitive by improving its productivity.

David Mason is a partner at Deloitte Canada and the leader of the Ontario Private company services tax team.