Commission on the Reform of Ontario's Public Services

Chapter 11: Business Support
Tax expenditures should provide only the degree of support necessary to achieve the intended
results. For example, the Ontario small business deduction (SBD) provides a reduced CIT rate
of 4.5 per cent (versus the general CIT rate of 11.5 per cent) on the first $500,000 of Ontario
active business income of Canadian-controlled private corporations (CCPCs). The SBD is
intended to provide tax relief to small CCPCs that have historically had difficulty raising capital,
a process generally achieved through the use of loans and/or equity contributions. Small firms’
access to these sources of funding is often limited by the inherent risks associated with
investments in small or start-up businesses; small business owners tend to rely on their
personal savings as a source of capital. Federally, and in all other provinces, the benefit of
the SBD is generally phased out for CCPCs with levels of capital between $10 million and
$15 million. Ontario is alone in extending the benefit of the SBD to all CCPCs without regard to
the size of the company. Given the considerable capital requirements of larger companies
compared to the relatively small tax benefit provided by the SBD, this tax measure is unlikely
to generate efficient or effective investment decisions by larger companies.
Recommendation 11-9: Restrict the Ontario small business deduction (SBD) for large
Canadian-controlled private corporations by paralleling the federal business limit reduction,
and include the Ontario SBD in the review of tax expenditures for effectiveness and
administrative efficiency.
Ontario’s corporate tax base parallels the federal tax system and, as such, federal tax
expenditures can have a significant impact on Ontario’s revenue and support to business.
With a few exceptions, tax expenditures should be restricted to promote business activity that
generates taxable income. For example, the deduction of expenditures related to investment
in, or operations of, a foreign business should not be deductible against Canadian income
where the foreign income is exempt or not otherwise taxed in Canada. Also, tax expenditures
that provide personal benefits must be captured in the income of the recipient or denied as
a deduction. Currently, businesses may deduct 50 per cent of expenditures for meals and
entertainment. However, the individuals who benefit from these expenditures do not have to
include those benefits when calculating their own income for tax purposes. A practical way to
correct the failure to include the personal benefit in the income of the recipient would be to
deny businesses the deduction for meals and entertainment.
Recommendation 11-10: Work with the federal government to ensure that tax expenditures
outside of Ontario’s control maximize value for money and directly support economic growth
in Ontario.
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