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Issue:
Capital taxes are applied to the amount of money invested in a company for the purchase of machinery and equipment and buildings required to operate the business. This tax unfairly targets the capital intense real property sector and increases landlord costs, particularly for multi-residential properties.
Position:
Although the Ontario government has committed to eliminating the Capital Tax, we believe this should be expedited for the following reasons:
(i) Real estate assets are particularly vulnerable to capital tax because the assets are not mobile and the sector is very capital intense.
(ii) Capital tax increases the carrying costs of landlords with vacant and unproductive commercial and multi-family apartment space, providing a disincentive to new construction.
(iii) Capital tax is particularly punitive for owners of multi-residential properties, because they cannot pass the tax through to their tenants, as can be done in the commercial context.
We should not return to a tax that unfairly targets the capital intense real property sector and increases landlord costs, particularly for multi-residential properties.
Background:
There is no dispute amongst academics, the business community and governments themselves that capital taxes are a bad form of tax. Capital taxes are applied to the amount of money invested in a company for the purchase of machinery and equipment and buildings required to operate the business. This is unfair to the capital-intensive sectors, such as real property.
Another bad feature of capital taxes is that they are profit insensitive. During cyclical downturns and periods of low or negative profitability, while other taxes decrease, capital taxes remain.
The Ontario government revised its decision to eliminate Capital tax in Ontario in the 2004 budget. The new schedule aims to gradually eliminate the capital tax by 2012. Specifically, the following was proposed:
Starting January 1, 2005, the current $5 million deduction from taxable paid-up capital would be increased by $2.5 million each year until the deduction reaches $15 million on January 1, 2008. By that time, in addition to small businesses that do not pay capital tax, more than 13,000 medium-sized corporations would no longer pay capital tax.
Starting January 1, 2009, capital tax rates would be reduced each year until the capital tax is fully eliminated on January 1, 2012.
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