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Tax Advantages

The City of Toronto ranked first of 51 major cities surveyed in KPMG's Competitive Alternatives 2014 Special Report: Focus on Tax, which compares the total tax cost of major international cities with metro area populations of at least two million.

The report captures the total tax costs facing businesses, including income tax, capital tax, sales tax, property tax, miscellaneous local business taxes and statutory labour costs.

The tax rates used in this study are those in effect as at January 1, 2014.

Key Findings of KPMG's Focus on Tax Special Report:

  • Toronto is the most tax competitive city in the world, ranking 1st overall on the total tax index across all operations and sectors.
  • Canada is the most tax competitive country in the world, ranking 1st of 10 countries surveyed and scoring 53.6. When compared to the United States, which ranked 5th with a score of 100, Canada's total tax costs are 46.4% lower.
  • Canada ranks 1st across digital services and R&D industry sectors, and 2nd in the manufacturing and corporate services industry sectors.
  • Toronto ranks 2nd in the digital services industry sector and 3rd in the R&D and corporate services industry sectors.
  • Toronto ranks 5th in the manufacturing industry sector.

Download KPMG Competitive Alternatives 2014 Tax Report

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Changing Tax Structure for Business Growth

Both the federal and Ontario governments have taken steps to reduce Corporate Income Taxes (CIT), directly benefiting companies in Toronto. This significant initiative builds on existing corporate tax relief, such as the elimination of the capital tax for manufacturers retroactive to 2007 and complete capital tax elimination as of July 1, 2010.

Summary of Tax Changes

  • General and manufacturing CIT rates lowered
  • Small business CIT rate cut from 5.5% to 4.5%
  • Small business deduction surtax eliminated
  • Capital tax eliminated for manufacturing and resource activities
  • Capital Cost Allowance (CCA) rate for computers, machinery and equipment accelerated
  • Modern, value-added single sales tax implemented
  • Ontario's Marginal Effective Tax Rate (METR) on new investment to be reduced by half, from 32.8% to 16.8%
  • One-time transition support for small businesses provided
  • Business costs on inputs taxable under the current system reduced

Effective July 1, 2010, the Retail Sales Tax (RST) was replaced by a modern value-added tax to be combined with the federal Goods and Services Tax (GST) to create a federally administered Harmonized Sales Tax (HST).

Implementation of the HST will reduce business costs in 2 ways:

  1. Businesses can now claim an Input Tax Credit (sales tax refund) on the full value of the sales tax rather than on the federal portion only, as was the case previously. This means businesses will no longer pay sales tax on the majority of their inputs.

     
  2. With the total sales tax now harmonized and collected by one source (the federal government), administrative and reporting costs for businesses will be significantly reduced. It has been shown that these cost savings are typically passed on to consumers.

Marginal Effective Tax Rate (METR)

The METR is the effective tax rate that a business could expect to pay on any new business investments. It is calculated as the share of the gross rate of return on capital,(Chen 2000). The declining METR in Ontario helps support corporate investment while also helping the Ontario and Canadian governments counteract income shifts that erode the tax base. Income shifts are caused by the reallocation of profits from high to low tax areas of the world by multinational corporations.

Figure 1

Cutting Ontario's METR on New Business Investment in Half
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As shown in Figure 1, the implementation of a modern HST (value-added tax) and the elimination of the Capital Tax result in a 50% reduction of Ontario's Marginal Effective Tax Rate (METR) from 32.8% to 16.2%. This makes Ontario one of the most competitive jurisdictions in the industrialized world for new investment. In addition, when the proposed tax rate cuts are fully implemented, the combined federal-provincial CIT rate of 25% will be lower than the current average corporate combined federal-state CIT rate in the US Great Lake states.

Ontario's position as one of the best and safest places in the world to invest is reinforced by other public policy decisions that help to improve competitiveness, such as investments in infrastructure, skills training and innovation.

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Tax Structure

Federal Corporate Taxes

Canadian resident corporations that pay federal taxes can be generally divided into two types:

  1. Canadian Controlled Private Corporations (CCPC) which are eligible for the Small Business Deduction (SBD) on income below $500,000. For Canadian-controlled private corporations claiming the SBD, the net tax rate is 11%.

     
  2. Corporations that are not CCPC's, and which are not eligible for the SBD. The net tax rate for these companies is 15% (Canada Revenue Agency Website, 2012).

Provincial Corporate Taxes

Basic rate

The Ontario Small Business Deduction tax rate has been reduced to 4.5% effective July 1, 2010.

The Ontario basic income tax rate is currently 11.5%.

Municipal Property Taxes (Residential & Commercial)

On October 22, 2007, Toronto City Council approved the Update to Enhancing Toronto's Business Climate status report that highlights 12 new initiatives to enhance the City's competitiveness over the long term.

As part of its overall strategy to enhance Toronto's business climate, the City continues to reduce its tax rates for commercial, industrial and multi-residential properties to an approved target of 2.5 times that of the residential tax rate. The City expects to reach this targeted tax ratio for small business two years earlier than expected, (by 2013 instead of 2015), and three years earlier than expected for all other non-residential properties, (by 2017 instead of 2020).

Property Type Total Tax Rate
Commercial General* 3.18%
Residual Commercial Band 1** 3.01%
Residual Commercial Band 2** 3.18%
Industrial 3.19%
Residential 0.77%

Source: City of Toronto http://www.toronto.ca/taxes/property_tax/tax_rates.htm

* Commercial General Tax Class
This tax class includes shopping centres, large office buildings, parking lots, vacant land and large sports facilities based on the property's classification as determined by the Municipal Property Assessment Corporation (MPAC).

** Residual Commercial Tax Class
This tax class includes all other commercial property types that are not specifically included in the "Commercial General" tax class as noted above.

For properties in the “Residual Commercial” tax class, a lower tax rate applies to the first million dollars of a property's assessment (Band 1). The portion of the assessment above one million dollars is taxed at the "Commercial General" tax class rate (Band 2).

Canada already has the lowest payroll taxes among G7 countries, and by 2012 Canada's federal corporate income tax rate will fall from 18% in 2010 to 15%, less than half of the top US federal marginal rate.  Canada is on track to have the lowest corporate income tax rate in the G7.

For a company earning $100 million in profit, total taxes payable in Canada will amount to $27.2 million, compared to $39.2 million in the US.

Net Debt-to-GDP G7 Countries & Ontario, 2009
/Competitive-Advantages/Incentives-and-Tax-Advantages/Tax-Advantages/Net-Debt-to-GDP-G7-Countries---Ontario,-2009.aspx

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Revenue Agencies

Canada Revenue Agency This page provides information, services and applications that help promote compliance with Canada's tax and regulations.

Ontario Ministry of Revenue The Ontario Ministry of Revenue administers the province's major tax statutes, tax credit and benefit programs. The tax revenues collected provide the fiscal foundation upon which many of the province's programs are based.

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Graph explains how Ontario's marginal effective tax rate will fall between 2009 and 2018 to below the OECD average.
Ontario and Canada's Net Debt-to-GDP compared to G7 countries.
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