Ontario mulls tax reform to spur companies to stop hoarding 'dead money'

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Ontario is looking to reform its corporate tax system as a way of pushing companies to stop hoarding capital and pump money into the economy.

The government is considering new tax credits for corporations that invest in research and development, along with an added payroll tax that would punish companies that fail to spend on training, technology or equipment. It is one of the most concrete bids to solve the so-called "dead money" problem that has led many to accuse corporations of stockpiling cash instead of investing it and holding back an already sluggish economy.

The move is also the latest in a flurry of fiscal announcements by Ontario's government, which is pursuing everything from a green bond issue to a reform of the Canada Pension Plan as it grapples with the long-term effects of the economic slowdown.

But there is no guarantee the tax plan Finance Minister Charles Sousa unveiled on Monday will work. Other jurisdictions have tried to stimulate research and development with tax credits, only to see companies use the breaks to write off existing expenses without investing new money. And when former Bank of Canada governor Mark Carney publicly accused companies of sitting on unused piles of cash last year, many in the business community argued they were simply making sure they had strong balance sheets in case the economy weakened.

In a speech to the nation's business elite at the Empire Club in Toronto, Mr. Sousa warned that not investing "limits our competitiveness," and jurisdictions such as the United States are badly outpacing Canada at innovation.

"Many companies are not taking advantage of opportunities to expand, innovate and improve their productivity. Instead, many companies are holding on to high levels of cash balances and holding back on these very investments," he said. "This is a race. We can't fall behind. We can't falter. And we can't be faint of heart."

One measure Mr. Sousa is exploring is an extra payroll tax like that of Quebec. In that model, companies that pay for training get the tax refunded; the money from companies that do not goes into a government training fund. Mr. Sousa and his Quebec counterpart, Nicolas Marceau, discussed the system last week at a provincial finance ministers' conference.

The government is also considering ensuring that companies receive R&D tax credits only for new investments, rather than for spending that would have happened anyway.

This caveat is key: Studies have found R&D tax credits failed to have their desired effect. A report by the Organization for Economic Co-operation and Development last month accused multinational corporations of moving money around to take advantage of the tax credits without necessarily spending it on R&D. Rather than simply cutting taxes, experts argue, governments must tie the breaks to specific outcomes.

"What we've seen is the level of caution of our private industries post-recession has led them to hold on to some of the money that was freed up from the corporate tax cuts," said Jamison Steeve, executive director of the Institute for Competitiveness and Prosperity. "It sounds like the incentives being proposed by the minister are meant to activate that money so the companies can invest themselves and we can all benefit."

Some, meanwhile, contend the central problem may be productivity. "It's not that clear that this lack of R&D and innovation in Canada is our number one problem, given that the productivity level in our private sector is about 70 per cent of the United States," said economist Don Drummond.

Mr. Sousa will consult with the business community over the coming months, with the tax changes likely to be included in next year's budget.

With a report from Richard Blackwell