Planning Required as Taxes Go Up In Ontario

True to their word, on July 14, 2014 the Ontario Government introduced the exact same budget it did 74 days ago – a budget that forced the government to the polls.

This time, they did so with a comfortable majority government, and there are lots of implications for both taxpayers and the economy.

Jobs for lower earners could be at stake, thanks to new premiums to be paid under the proposed Ontario Retirement Pension Plan but also because of higher taxes on small business owners.  Retirement planning for business owners will be affected; so will estate planning with the new lower thresholds for the high income tax brackets. And, if you are running a corporation in Ontario with taxable capital over $10M, your corporate taxes will go up too, thanks to several new provisions in the Ontario provincial budget, first introduced May 1. On the good news side, farmers who give food generously will be rewarded by a tax credit. Here are the details of some of the most important tax changes:

Dividend Tax Credit

The Ontario Government has reduced the Dividend Tax Credit on “eligible” dividends from 11.5% to 10% as previously proposed in the 2013 Fall Economic Report, and also reset “other than eligible” Dividend Tax Credit to 4.5%, which was reduced in 2013 through paralleling of Federal tax measures. This change will be effective on Royal Assent. Additionally, changes in the Ontario tax calculation will result in a more equitable application of the Dividend Tax Credit. 

Essentially this means that most business owners will pay more tax on the dividends they take from business profits. In the past, the Dividend Tax Credit was applied prior to the calculation of the Ontario surtax resulting in a larger tax savings for higher earners. For the 2014 and future years, the Ontario surtax will be calculated prior to the application of the Dividend Tax Credit.

The combination of these changes means the following:

1. Eligible dividends will be taxed at lower rates for taxpayers with income below $83,000 and the rate remains nearly unchanged for higher-income taxpayers
2. Other than eligible dividends will be taxed at higher rates for all taxpayers

High Income Tax Bracket Begins at $150,000

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 was to begin at $514,090.

The Ontario Budget will re-arrange this High Income Tax Bracket as follows:

• An additional tax bracket on incomes between $150,000 and $220,000 will be levied at 12.16%
• Another additional tax bracket will be levied on incomes in excess of $220,000 at 13.16%
• These two new tax brackets will not be indexed in the future, resulting in “bracket creep” on inflation-eroded dollars

This change is retroactive – effective for tax years ending after December 31, 2013. This will result in high income earners incurring a shortfall on payroll deductions for 2014 resulting in a balance due on filing of their 2014 income tax return.

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 from 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 will eliminate the small business deduction for large CCPCs 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

The Ontario Government will introduce legislative amendments to the Taxation Act, 2007  that will require corporations 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.

Tax Credit for Farmers Who Donate Food

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 is 25% of the fair market value of the products donated effective January 1, 2014. The Ontario Government will implement regulations to implement this legislation.

Paralleling Federal Tax Measures

The Ontario Government will 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

Trust Taxation

Changes to graduated tax rates for certain trusts proposed by the federal government and to take effect in 2016 remains under review by the Ontario Government.

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 proposes to index the benefit amount and the clawback threshold to the Ontario CPI. This is in fact a merging of two programs into one cohesive program and will have no net effect of benefit recipients.