Doomed Ontario Budget: Retroactive Bracket Creep, High Income Surtaxes Taxes Featured

The May 1 Ontario budget triggered a provincial election and so it died on the vine; but it’s an important one to understand, none-the-less, as some of its parts may be back at some time in the near future, depending on the outcome of the election.

In particular, it planned to increase taxes for the business community and high income earners, with some retroactivity and the introduction of bracket creep. This Special Report, filed by Alan Rowell, MFA, DFA-Tax Services Specialist, overviews several tax changes as well as retirement security were introduced.

New High Income Tax Brackets. In 2012, Ontario introduced a “High Income Tax Bracket” of $500,000 where income in excess of this amount would be taxed at 13.16%. The amount was indexed to the Ontario CPI and for the 2014 year, the bracket began at $514,090.

The Ontario budget proposed to re-arrange this High Income Tax Bracket as follows, retroactively, for tax years ending after December 31, 2013:

• Introduction of an additional tax bracket on incomes between $150,000 and $220,000 at 12.16%.
• Introduction of an additional tax bracket on incomes in excess of $220,000 at 13.16%.
• De-indexing of these two new tax brackets for future years.

Had this change been enacted, it would have resulted in high income earners incurring a shortfall on payroll deductions for 2014, which for many may have triggered a balance due on filing of their 2014 income tax return.

Ontario Child Tax Benefit. In July 2014, the Ontario Child Care Supplement will be phased out and replaced entirely with the Ontario Child Benefit. Effective with the July 2015 Ontario Child Tax Benefit the budget proposed to index the benefit amount and the clawback threshold to the Ontario CPI.

Dividend Tax Credit. The Ontario government reduced the Dividend Tax Credit on eligible dividends from 11.5% to 10% as previously proposed in the 2013 Fall Economic Report. This change would be effective on Royal Assent.

Tax Credit for Farmers. On November 6, 2013, the Ontario government passed into legislation the Local Food Act, 2013 which proposed an introduction of a non-refundable income tax credit for farmer who donate agricultural products to community food programs and food banks. The credit would be 25% of the fair market value of the products donated effective January 1, 2014 when the government implements regulations with legislation.

Small Business Deduction. Ontario offers a small business deduction for Canadian Controlled Private Corporations on the first $500,000 of taxable income by reducing the corporate tax rate form 11.5% to 4.5%. Prior to the May 1, 2014 budget, this deduction was available to all Canadian controlled Private Corporations in Ontario. The 2014 Ontario budget proposed to eliminate the small business deduction for large CCPC’s effective May 1, 2014 by paralleling the Federal Government as follows:

• Phase out of the Small Business Deduction where taxable capital is between $10 million and $15 million.
• CCPC with taxable capital in excess of $15 million will no longer be eligible for the preferential corporate tax rate of 4.5%.

Corporate Tax Avoidance. Legislative amendments to the Taxation Act, 2007 would require corporation in Ontario to disclose aggressive tax avoidance transactions to the Federal Minister of National Revenue paralleling measures implemented by the federal government on reportable transaction rules.

Paralleling Federal Tax Measures. The budget proposed to adopt federal tax measure announced in the 2014 federal budget once legislative and regulatory changes have been approved. The mirrored changes include:

• Medical expenses
• Tax changes for farmers and fishers
• Amateur athlete trusts
• Estate donations
• Non-resident trusts
• Pension transfer limits
• New limitations on shifting income to a minor child
• Donation of ecologically sensitive land and certified cultural property
• Clean energy equipment
• Tax on insurance swaps and off-shore regulated foreign financial institutions

Taxation of Graduated Rate Trusts. These provisions proposed by the federal government remain under review by the Ontario government.

Regulation of Financial Planning Planned in Ontario. The previous Ontario government also intended to investigate the merits of  introducing the regulation of Financial Planning by appointing an expert committee to consider policy alternatives for tailored regulation and to develop recommendations, in response to a private member bill, Financial Advisor Act, currently on the legislative agenda in Ontario. 

This subject and the Registration of Tax Practitioners Program will be discussed in more detail at the Distinguished Advisor Workshops to be held in Winnipeg, Calgary, Vancouver, Toronto, and Halifax later this month.