Companies that expected to decide whether to become an income trust after today’s 2006 Ontario budget will be disappointed.

The budget papers say the province can’t make a decision on whether to match the additional federal dividend tax credit until they get the rules under which it will apply.

However, corporations, and particularly financial institutions, did get some good news. Ontario will start decreasing its capital tax rate in 2007, two years ahead of schedule. If fiscally feasible, it will eliminate the tax by 2010, which would also be two years ahead of schedule.

As of Jan. 1, 2007, the capital tax for non-financial corporations goes to 0.285% from 0.3%. For financial institutions, tax on the first $400 million goes to 0.684% from 0.72%, with deposit-takers paying 0.855% instead of 0.9% on the rest and non-deposit-takers paying 0.684% instead of 0.72%. In addition, the level at which capital tax applies is increased to $12.5 million from $10 billion as of 2007 and then to $15 million in 2008.

There were no other major tax changes in the Ontario budget and the province expects to remains in deficit in fiscal 2006-07, ending Mar. 31, to the tune of $1.4 billion excluding the $1 billion reserve for unexpected expenditures or unanticipated revenue shortfalls. That’s the same as the estimated 2005-06 shortfall but higher than the $900 million that was projected in last year’s budget.

Finance Minister Dwight Duncan expects to balance the books in 2007-08 if the annual reserves are not needed and otherwise will do so in 2008-09. That’s the same schedule as in the 2005 budget.

That means the province should be in balance or close to it when the next Ontario election is called. It’s noteworthy that the budget papers say there will be a pre-election fiscal report that will be reviewed by the Auditor General.

Ontario’s net debt is estimated at $143 billion or 26.2% of provincial gross domestic product as of March 31 this year. The percentage of GDP is expected to shrink to 24.3% by Mar. 31, 2009 even though the debt load edges up to $151.2 billion.

The biggest initiative on the spending side is a one-time $1.5 billion for public transportation infrastructure. This comes out of the 2005-06 fiscal year. The government had an unanticipated $2.3 billion increase in revenues and decline in $706 million in debt interest payments, most of which it spent. Other one-time spending booked for fiscal 2006 includes support for sectors and research.

Of particular interest to investors is the $150 million loan being made by the province to Stelco Inc. on March 31 to assist in its restructuring plans. As long as Stelco’s pension liabilities are eliminated in 10 years, the government will forgive a quarter of the loan and the company will only have to pay back $114 million.