2014 Ontario Budget
Chapter II: Ontario's Economic Outlook and Fiscal Plan

Section D: Ontario's Revenue Outlook

The Province’s revenues tend to grow roughly in line with the Ontario economy (that is, nominal gross domestic product [GDP]), since it is economic activity that generates the majority of revenues. For example, taxes are collected on the incomes and spending of Ontarians and on the profits generated by Ontario corporations.

However, there are important qualifications to this general rule.

Growth in several tax revenue sources, such as volume-based fuel and gasoline taxes, is more closely aligned to the real economy (that is, real GDP) than the nominal economy. In other words, these revenue resources are less influenced by changes in prices. Similarly, some non-tax revenues, such as vehicle and driver registration fees, tend to more closely track the real economy and demographic factors such as growth in the driving-age population.

Growth in other revenue sources, such as Corporations Tax and Mining Tax, can differ significantly from growth in nominal GDP in any given year, due to the inherent volatility of business profits as well as the use of tax provisions, such as loss carrying.

The Ontario revenue forecast also often includes significant one-time adjustments, usually due to lags between the period in which revenues are earned and when the actual amounts are finally known.

For example, the Ministry of Finance will use the latest available information on Personal Income Tax (PIT) revenue earned by the Province for the 2013 tax year as the basis for the 2013–14 PIT revenue estimate to be published later this year in the Public Accounts of Ontario 2013–2014. Actual PIT revenue earned for 2013 and 2014, however, will not be known until the end of 2014 and 2015, respectively, after the majority of PIT returns have been assessed by the Canada Revenue Agency.

Moreover, additional tax information continues to arrive for years following the actual tax year due to late tax filings and reassessments. The result is that even after the Ontario Public Accounts 2013–2014 are released, new, updated tax assessment information will lead to revisions of the estimate for 2013–14 PIT revenues. Under Public Sector Accounting Board standards, revenue estimates already published in the Ontario Public Accounts are not restated for updated information. Instead, these revisions are reported as “prior-year” adjustments in the current year’s Public Accounts.

For the 2014 Budget, the Ministry of Finance retained Don Drummond, one of Canada’s top economists, to review the revenue forecast and provide an opinion on its reasonableness. His review employed three methodologies. First, an independent “macro” projection was developed and compared to the Ministry’s forecast. This “macro” projection was based on the historical relationship between growth in the Ontario economy and provincial revenues. Second, the methodologies and forecasts of each revenue source were examined individually. Finally, changes since recent budgets were examined to understand the nature of past variances and whether there may still be biases in the current forecast.

From all three perspectives addressed in the review, Drummond concluded that “the Ontario Ministry of Finance revenue forecast is a sound basis for budget planning.”

Medium-Term Revenue Outlook

The Province’s revenues are projected to increase over the forecast period, largely reflecting the current outlook for Ontario economic growth.

TABLE 2.11 Summary of Medium-Term Outlook
($ Billions)
  Interim 2013–14 Plan 2014–15 Outlook
Revenue 2015–16 2016–17
Personal Income Tax 27.5 29.2 30.9 32.6
Sales Tax 20.4 21.9 23.0 23.9
Corporations Tax 11.4 10.3 11.4 12.0
Ontario Health Premium 3.2 3.3 3.5 3.7
Education Property Tax 5.5 5.7 5.7 5.8
All Other Taxes 12.5 13.0 13.7 14.1
Total Taxation Revenue 80.5 83.4 88.1 92.0
Government of Canada 22.2 21.9 22.7 24.0
Income from Government Business Enterprises 4.8 5.0 5.0 5.5
Other Non-Tax Revenue 8.2 8.6 8.6 7.9
Total Revenue 115.7 118.9 124.5 129.4
Note: Numbers may not add due to rounding.

Revenues are projected to increase at an average annual rate of 3.8 per cent over the 2013–14 to 2016–17 period. The revenue forecast is based on the Ministry of Finance’s economic outlook (detailed in Section C: Ontario’s Economic Outlook in this chapter).

TABLE 2.12 Personal Income Tax Revenue Outlook
($ Billions)
  Interim 2013–14 Plan
2014–15
Outlook
Revenue 2015–16 2016–17
Total Projected Revenue 27.5 29.2 30.9 32.6
Measures Included in Total1 0.5 0.5 0.6
Adjustments for Prior Years 0.3
Base Revenue2 27.2 28.7 30.4 32.0
Base Revenue Growth (Per Cent) 5.4 5.7 5.6
Compensation of Employees3
(Per Cent Change)
3.5 4.6 4.6
1 Represents the incremental revenue impact of all tax measures, announced previously or proposed in this Budget, relative to their impact on revenue in 2013–14.
2 Total Projected Revenue less the impact of tax measures or other one-time factors such as prior-year adjustments. Base Revenue reflects the impact of underlying macroeconomic factors.
3 Formerly referred to as "Wages and Salaries."
Note: Numbers may not add due to rounding.

The primary economic driver of the forecast for Personal Income Tax revenue is the outlook for growth in compensation of employees. Total projected revenue includes impacts of measures and adjustments for prior years. Measures include impacts of changes to the taxation of high-income earners proposed in this Budget (see Chapter V: A Fair and Efficient Tax System). Adjustments for Prior Years of $0.3 billion in 2013–14 reflect the underestimation of PIT revenues in the Ontario Public Accounts 2012–2013. After accounting for the impacts of measures and prior-year adjustments, the PIT revenue base is projected to grow at an average annual rate of 5.5 per cent over the forecast period. This compares to average annual growth of 4.2 per cent in compensation of employees over this period. Personal Income Tax revenue tends to grow at a faster rate than incomes due to the progressive structure of the PIT system.

TABLE 2.13 Sales Tax Revenue Outlook
($ Billions)
  Interim 2013–14 Plan 2014–15 Outlook
Revenue 2015–16 2016–17
Total Projected Sales Tax Revenue1 20.4 21.9 23.0 23.9
Measures Included in Total2 0.2 0.2 0.1
Adjustments for Prior Years (0.6)
Base Revenue3 21.0 21.8 22.8 23.8
Base Revenue Growth (Per Cent) 3.7 4.5 4.6
Nominal Consumption Growth (Per Cent) 3.6 4.1 4.5
1 Beginning July 1, 2010, most of the Retail Sales Tax was replaced with a value-added tax and combined with the federal Goods and Services Tax to create a federally administered Harmonized Sales Tax. Sales Tax Revenue is reported net of both the Ontario Sales Tax Credit and the energy component of the Ontario Energy and Property Tax Credit.
2 Represents the incremental revenue impact of all tax measures, announced previously or proposed in this Budget, relative to their impact on revenue in 2013–14.
3 Total Projected Revenue less the impact of tax measures or other one-time factors such as prior-year adjustments. Base revenue reflects the impact of underlying macroeconomic factors.
Note: Numbers may not add due to rounding.

Sales Tax revenue is projected to rise based primarily on growth in consumer spending after adjustments for measures and prior-year amounts. Measures include those announced in this and previous Budgets, and primarily reflect the impact of transition measures, such as restricted input tax credits, as well as measures to address the underground economy. There is a one-time adjustment for prior years of –$0.6 billion in 2013–14, mainly reflecting overestimation of Sales Tax revenue in the Ontario Public Accounts 2012–2013. After accounting for the impacts of measures and adjustments, the Sales Tax revenue base is projected to grow at an average annual rate of 4.3 per cent over the forecast period, roughly consistent with the average annual growth in nominal consumption of 4.0 per cent over this period.

TABLE 2.14 Corporations Tax Revenue Outlook
($ Billions)
  Interim 2013–14 Plan 2014–15 Outlook
Revenue 2015–16 2016–17
Total Projected Revenue 11.4 10.3 11.4 12.0
Measures Included in Total1 0.2 0.2 0.2
Other Adjustments2 0.8 (0.8)
Base Revenue3 10.6 10.9 11.3 11.8
Base Revenue Growth (Per Cent) 3.3 3.3 4.4
Net Operating Surplus – Corporations Growth (Per Cent) 4.4 4.2 5.0
1 Represents the incremental revenue impact of all tax measures, announced previously or proposed in this Budget, relative to their impact on revenue in 2013–14.
2 Other Adjustments include net timing of payments adjustments due to the difference between projected Corporations Tax (CT) revenue entitlements and projected federal CT remittances.
3 Total Projected Revenue less the impact of tax measures or other one-time factors such as prior-year adjustments. Base Revenue reflects the impact of underlying macroeconomic factors.
Note: Numbers may not add due to rounding.

The forecast for Corporations Tax (CT) revenue is based largely on projected annual growth in the net operating surplus of corporations. Total projected revenue includes the impact of measures and prior-year and other adjustments. Measures include those announced in this and previous Budgets such as proposed changes to the Ontario Small Business Deduction and measures to enhance CT compliance. After accounting for tax measures and other adjustments, the CT revenue base is projected to grow at an average annual rate of 3.7 per cent over the medium term, compared to average annual growth in net operating surplus of corporations of 4.6 per cent. Corporations Tax revenue tends to grow more slowly than corporate profits due to tax provisions, including the carry-forward of losses for up to 20 years.

The Ontario Health Premium revenue is based on the outlook for employment and household income growth. Ontario Health Premium revenue is projected to increase at an average annual rate of 4.8 per cent over the forecast period.

Education Property Tax revenue is projected to increase at an average annual rate of 1.5 per cent over the forecast period, largely due to growth in the property assessment base as a result of new construction. The forecast also reflects the ongoing impacts of measures announced in the 2012 Budget to freeze the Business Education Tax reduction plan.

Revenues from All Other Taxes are projected to increase at an average annual rate of 4.1 per cent over the forecast period. This includes revenues from volume-based taxes such as Gasoline Tax, Fuel Tax, Tobacco Tax, and Beer and Wine Tax, as well as other taxes such as Electricity Payments-In-Lieu of Taxes and Mining Tax.

The forecast for Government of Canada transfers, including Canada Health Transfers, Canada Social Transfers and Equalization, is based on existing federal–provincial funding arrangements. Government of Canada transfers are projected to increase at an average annual rate of 2.6 per cent over the forecast period.

The forecast for Income from Government Business Enterprises is based on information provided by the individual enterprises. Overall revenue from government enterprises is projected to increase by $0.7 billion between 2013–14 and 2016–17, or at an average annual rate of 4.8 per cent.

The forecast for Other Non-Tax Revenue is based on information provided by government ministries and provincial agencies. Between 2013–14 and 2016–17, other non-tax revenues are projected to decrease by $0.3 billion, largely reflecting the one-time gain in 2013–14 on the sale of the Province’s interest in 10 million shares of General Motors Company, and lower electricity sector-related revenues, over the forecast period, including fiscally neutral power supply contract recoveries.

Key Changes in the Medium-Term Revenue Outlook since the 2013 Budget

Revenues are lower than projected in the 2013 Budget due to slower economic growth, a lower tax base and lower Government of Canada transfers.

TABLE 2.15 Summary of Medium-Term Revenue Changes since the 2013 Budget
($ Billions)
  2013–14 2014–15 2015–16
Slower Economic Growth (0.6) (0.7) (0.3)
Lower Tax Revenue Base (0.6) (0.6) (0.5)
One-Time Impacts (0.5) (1.0)
Government of Canada transfers (0.2) (1.3) (1.3)
Income from Government Business Enterprises 0.3 0.1 (0.5)
Other Non-Tax Revenue 0.3 (0.1) 0.2
Subtotal Revenue Changes (1.3) (3.5) (2.4)
2014 Budget Measures 0.2 1.9 1.9
Total Revenue Changes (1.2) (1.6) (0.5)
Note: Numbers may not add due to rounding.

Slower economic growth in 2013 and 2014 lowered the taxation revenue outlook. The outlook for nominal gross domestic product (GDP) growth is 0.3 percentage points lower in 2013 and 0.6 percentage points lower in 2014 compared to the 2013 Budget outlook.

Tax assessment and tax receipts data received during 2013 lowered the tax revenue base upon which growth is projected. In particular, PIT and Sales Tax bases were both lower than projected in the 2013 Budget.

One-time impacts include:

  • Lower 2013–14 Sales Tax revenues due to revised Harmonized Sales Tax entitlement estimates for prior years; and
  • A repayment to the federal government in 2014–15 due to a projected overpayment of Corporate Income Tax to the Province by the Canada Revenue Agency for the 2013 tax year.

Government of Canada transfers are lower over the medium term due to a number of factors.

  • Downward revisions by Statistics Canada to historical population estimates lowered Ontario’s projected entitlements under each of the Canada Health Transfer, Canada Social Transfer and Equalization programs.
  • The closure of Hydro-Quebec’s Gentilly-2 nuclear power plant temporarily lowers Quebec’s fiscal capacity, as measured under the Equalization program, which in turn lowers Ontario’s Equalization entitlement over a three-year period.
  • Other changes include updated fiscal capacity and economic data, particularly for 2012–13, which increased Ontario’s relative fiscal capacity compared to the 2013 Budget projection, thereby lowering Ontario’s Equalization entitlement outlook.

The change in the Income from Government Business Enterprises outlook reflects higher revenues from most government business enterprises. The slight increase in 2014–15 is largely due to higher combined net income from Ontario Power Generation Inc. and Hydro One Inc., which carries forward to 2015–16. The decline in 2015–16 largely reflects lower net income from the Ontario Lottery and Gaming Corporation (OLG).

The OLG’s cumulative net income between 2013–14 and 2015–16 is projected to be $0.8 billion lower than previously projected in the 2013 Budget. This is largely due to OLG modernization procurement delays, the integration of horse racing and gaming, and municipal decisions regarding gaming sites.

The change in the Other Non-Tax Revenue outlook in 2013–14 largely reflects the one-time gain on the sale of the Province’s interest in 10 million shares of General Motors Company, announced on September 10, 2013. The variance in 2014–15 and 2015–16 reflects small changes in a variety of Other Non-Tax Revenue sources.

In addition to the tax measures outlined in Chapter V: A Fair and Efficient Tax System, the 2014 Budget measures include net revenue gains of asset optimization (discussed in Chapter I, Section E: Making Every Dollar Count) totalling $0.9 billion in 2014–15 and $1.0 billion in 2015–16, and the revenue implications of the proposed removal of the electricity Debt Retirement Charge cost from residential users’ bills (discussed in Chapter I, Section D: Fostering a Fair Society).

Medium-Term Revenue Outlook Has Declined since the 2010 Budget

Since the 2010 Budget, the medium-term outlook for revenues has declined, reflecting, in part, slower economic growth in a challenging global environment.

Before the impact of new revenue measures, the revenue outlook in the 2014 Budget is $2.9 billion below the 2010 Budget projection in 2013–14 and $8.8 billion below by 2016–17.

Risks to the Revenue Outlook

Ontario’s revenue outlook is based on reasonable assumptions about the pace of growth in Ontario’s economy. There are both positive and negative risks to the economic projections underlying the revenue forecast. Some of these risks are discussed in Section C: Ontario’s Economic Outlook in this chapter.

This section highlights some of the key sensitivities and risks to the fiscal plan that could arise from unexpected changes in economic conditions. These estimates are only guidelines and actual results will vary depending on the composition and interaction of the various factors. The risks are those that could have the most material impact on the largest revenue sources. A broader range of additional risks are not included because they are either less material or difficult to quantify. For example, the outlook for Government of Canada transfers is subject to changes in economic variables that affect federal funding as well as changes by the federal government to the funding arrangements themselves.

TABLE 2.16 Selected Economic and Revenue Risks and Sensitivities
Item/Key Components 2014–15 Assumption 2014–15 Sensitivities
Total Revenues   ­
Nominal GDP 3.5 per cent growth in 2014 $845 million revenue change for each percentage point change in nominal GDP growth. Can vary significantly, depending on composition and source of changes in GDP growth.
Total Taxation Revenues
Revenue Base1 3.7 per cent growth in  
2014–15
Nominal GDP 3.5 per cent growth in 2014 $565 million revenue change for each percentage point change in nominal GDP growth. Can vary significantly, depending on composition and source of changes in GDP growth.
Personal Income Tax (PIT) Revenues
Revenue Base 5.4 per cent growth in  
2014–15
Compensation of Employees 3.5 per cent growth in 2014 $326 million revenue change for each percentage point change in compensation of employees growth.
2013 Tax-Year $25.3 billion $253 million revenue change for each percentage point change in 2013 PIT assessments.2
Assessments2
2012 Tax-Year and $1.4 billion $14 million revenue change for each percentage point change in 2012 and prior PIT assessments.2
Prior Assessments
Sales Tax Revenues
Revenue Base 3.7 per cent growth in 2014–15  
Nominal Household Consumption 3.6 per cent growth in 2014 $185 million revenue change for each percentage point change in nominal household consumption growth.
2012 Gross Revenue Pool3 $22.5 billion $225 million revenue change for each percentage point change in 2012 gross revenue pool.
2013 Gross Revenue Pool3 $23.7 billion $237 million revenue change for each percentage point change in 2013 gross revenue pool.
2014 Gross Revenue Pool3 $24.4 billion $244 million revenue change for each percentage point change in 2014 gross revenue pool.
Corporations Tax Revenues  
Revenue Base 3.3 per cent growth in 2014–15  
Net Operating Surplus — Corporations 4.4 per cent growth in 2014 $90 million change in revenue for each percentage point change in net operating surplus — corporations growth.
2013 Tax Assessments2 $8.4 billion $84 million change in revenue for each percentage point change in 2013 Tax Assessments.
2014 Canada Corporate Taxable Income $269.2 billion $118 million change in revenue for each percentage point change in the federal estimate of 2014 Canada Corporate Taxable Income.
2015 Canada Corporate Taxable Income $285.3 billion $31 million change in revenue for each percentage point change in 2015 Canada Corporate Taxable Income.
Employer Health Tax Revenues
Revenue Base 3.5 per cent growth in 2014–15  
Compensation of Employees 3.5 per cent growth in 2014 $53 million revenue change for each percentage point change in compensation of employees growth.
Ontario Health Premium (OHP) Revenues
Revenue Base 4.2 per cent growth in 2014–15  
Primary Household Income 3.3 per cent growth in 2014 $30 million revenue change for each percentage point change in primary household income growth.
2013 Tax-Year Assessments $3.0 billion $30 million revenue change for each percentage point change in 2013 OHP assessments.
Gasoline Tax Revenues
Revenue Base 0.2 per cent growth in 2014–15  
Gasoline Pump Prices 129 cents per litre in 2014 $3 million revenue decrease (increase) for each cent per litre increase (decrease) in gasoline pump prices.
Fuel Tax Revenues
Revenue Base 1.0 per cent growth in 2014–15  
Real GDP 2.1 per cent growth in 2014 $11 million revenue change for each percentage point change in real GDP growth.
Land Transfer Tax Revenues
Revenue Base Flat growth in 2014–15  
Housing Resales 1.0 per cent increase in 2014 $17 million revenue change for each percentage point change in both the number and prices of housing resales.
Resale Prices 1.5 per cent increase in 2014  
Canada Health Transfer
Ontario Population Share 38.5 per cent in 2014–15 $32 million revenue change for each tenth of a percentage point change in Ontario's population share.
Canada Social Transfer
Ontario Population Share 38.5 per cent in 2014–15 $13 million revenue change for each tenth of a percentage point change in Ontario's population share.
1 Revenue Base is revenue excluding the impact of measures, adjustments for past Public Accounts estimate variances and other one-time factors.
2 Ontario 2013 Personal Income Tax and Corporations Tax are estimates because 2013 tax returns are yet to be assessed by the Canada Revenue Agency.
3 The Gross Revenue Pool is a federal Department of Finance estimate and excludes the impact of Ontario measures.
TABLE 2.17 Ontario's 2015–16 Equalization Entitlement Sensitivities
Item/Key Components 2015–16 Assumption 2015–16 Sensitivities
Three-year Weighted- Average Population 1.0 per cent growth over 1.0 per cent relative increase (decrease) in the three-year weighted-average population for Ontario will result in $0.5 billion higher (lower) Equalization entitlement for Ontario.
2014–15
Three-year Weighted- Average Per Capita Fiscal Capacity 2.5 per cent growth over 1.0 per cent relative increase (decrease) in Ontario's average
2014–15 per capita fiscal capacity will result in $0.5 billion lower (higher) Equalization entitlement for Ontario.

Chart Descriptions

Chart 2.22: Government of Canada Transfers Changes since the 2013 Budget

This chart shows the three broad factors accounting for the decline in the medium-term outlook of Government of Canada Transfers since the 2013 Budget.

Downward revisions by Statistics Canada to historical population estimates lowered Ontario’s projected entitlements under each of the Canada Health Transfer, Canada Social Transfer and Equalization programs.

The closure of Hydro-Quebec’s Gentilly-2 nuclear power plant temporarily lowers Quebec’s fiscal capacity, as measured under the Equalization program, which in turn lowers Ontario’s Equalization entitlement over a three-year period.

Other Changes include updated fiscal capacity and economic data, particularly for 2012–13, which increased Ontario’s relative fiscal capacity compared to the 2013 Budget projection, thereby lowering Ontario’s Equalization entitlement outlook.

Return to Chart 2.22

Chart 2.23: Medium-Term Revenue Outlook Has Declined since the 2010 Budget

This chart shows the decline in the medium-term outlook for Ontario Government revenues since the 2010 Budget projection.

Since the 2010 Budget, the medium-term outlook for revenues has declined, reflecting in part slower economic growth in a challenging global environment.

Before the impact of new revenue measures, the revenue outlook in the 2014 Budget is $2.9 billion below the 2010 Budget projection in 2013–14 and $8.8 billion below by 2016–17.

Return to Chart 2.23