CORPORATE INCOME TAX MEASURES

Tax Rate Reductions
In the previous Budget, the government announced its intention to reduce both the general and manufacturing and processing (M&P) rates to 8% by 2005. At that time, however, only the first two stages were announced (and sub-sequently enacted into law). These reductions resulted in a lowering of the general rate from 15.5% to 14% and the M&P rate from 13.5% to 12%. There were no further details of the timing of future cuts.
However, in today's competitive economy, it is important that companies which operate in an inter-jurisdictional environment have certainty of tax rates prior to making a decision on investment options. It was understood that businesses would not factor tax promises into these decisions. In response to such concerns, the Budget outlines the government's plan to legislate a firm schedule to deliver the corporate tax cuts.

The following table outlines the government's proposed schedule for implementing the remaining cuts.

All rate reductions will be prorated for taxation years straddling the effective dates.

Reduction in Capital Tax Base
The Budget proposes to replace the current capital tax exemption with a $5 million deduction from taxable capital, effective January 1, 2002. This exemption is an increase from the previous $2 million and also replaces the small business rate reductions applicable to taxable capital between $2 million and $4 million.

It is also proposed that, effective January 1, 2002, the $2 million capital deduction applied in determining paid-up capital for financial institutions would be increased to $5 million.

Ontario Research & Development (R&D) Super Allowance
As a consequence of the 2000 federal Budget proposals to treat the Ontario R&D Super Allowance as taxable government assistance, the 2000 Ontario Budget proposed to not follow the proposed federal provisions, recognizing the concern of Ontario's R&D industry.

In order to alleviate the adverse effect of the federal proposals on R&D investment, Ontario is proposing to suspend the R&D Super Allowance for a 24-month period. In its place Ontario will allow corporations to exclude from taxable income the portion of the federal investment tax credit that relates to qualifying Ontario Scientific Research and Experimental Development (SR&ED) expenditures.

The net effect of this change should be to place those companies utilizing the Super Allowance in approximately the same tax position as they were prior to the 2000 federal proposals.

This measure will begin with the first taxation year to which the federal Budget provision applies. To qualify for these proposals, the investment tax credit must be included in federal taxable income during the 24-month period and be in respect of qualifying Ontario SR&ED expenditures incurred during the 24-month period, or in the taxation year immediately preceding the 24-month period. This does not appear to be the final volley in the battle between Ontario and Ottawa over the R&D Super Allowance. In the Budget, Ontario calls upon the federal government to revisit its 2000 Budget proposal to ensure that federal legislation does not target Ontario's R&D Super Allowance.

Professional Corporations
The 2000 Budget provided for the incorporation, with certain restrictions, of businesses operating in regulated professions. The 2001 Budget proposes amendments to the Business Corporations Act to clarify that a shareholder's liability for professional negligence is not affected by the existence of the corporation. Amend-ments will also be made to the statutes governing regulated professions to ensure they equally apply to professional corporations.