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Last updated: November 14 2017
New Tax Changes: Ontario Economic Statement
The Ontario government released an economic statement on November 14 that reduces the small business tax rate, provides incentives for businesses with under 100 employees to hire 15 to 29 year olds and together with federal tax changes, significantly raises the marginal tax rates on passive income earned within a small business corporation upon distribution to individual shareholders.
This comes in advance of significant cost hikes on the horizon for small business:
- Minimum wage increases 21% from current minimum wages of $11.60 to $14.00 per hour on January 1, 2018, then 29% from current minimums to $15.00 per hour January 1, 2019.
- CPP rates about to increase: The 2017/2018 rate is 4.95% for employer, employee on maximum contributory earnings; rising to 5.1% each in 2019, 5.25% in 2020, 5.45% in 2021, 5.7% in 2022, 5.95% in 2023. Starting in 2024 an upper earnings threshold will be added ($74,900 in 2024 and $72,500 in 2025). An additional 4% premium will be payable by each employer/employee on that enhancement; however, a tax deduction for those additional amounts will be allowed.
SMALL BUSINESS TAX RATE REDUCTIONS
Annual savings of $7500 will be available in 2018, $12,500 thereafter as the tax rates fall on small business income from 4.5% to 3.5%. Together with recently announced federal tax decreases on small business income, here’s how combined rates look:
 |
| Year Ending | Ontario | Fed/Ont. |
|---|---|---|
| 2017 | 4.5% | 15% |
| 2018 | 3.5% | 13.5% |
| 2019 | 3.5% | 12.5% |
However, marginal tax rates on non-eligible dividends will rise, in conjunction with proposed federal tax changes:
COMBINED FEDERAL/PROVINCIAL TAX RATE CHANGES (proposed)
| FED/ONT RATES | TAXABLE INCOME | MTR ORDINARY INCOME | CAPITAL GAINS | ELIGIBLE DIV. | NON-ELIGIBLE |
|---|---|---|---|---|---|
| 2017 | $220,000 | 53.53% | 26.76% | 39.34% | 45.3% |
| 2018 | 46.65% | ||||
| 2019 | 47.40% |
In addition, marginal tax rates on passive income earned in corporate small business portfolios (dividends and capital gains) will increase with these federal/provincial changes.
A significant under-integration between the personal/corporate tax systems will occur on these income sources: the marginal tax rates on non-eligible dividends is currently 55.97%; it will rise to 57.05% in 2018 and 57.65% in 2019, according to tax insights from pwc.com. The capital gains rates will be half those amounts, barring any further changes from the federal government.
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