2014 Ontario budget: Higher taxes for higher earners and some corporations

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Ontario's July 14, 2014 budget reintroduces the tax measures in its May 1, 2014 budget.

However, a change announced on July 14, 2014, increases the tax rate on aviation fuel to 3.7 cents per litre on September 1, 2014, rather than on royal assent, as had been announced on May 1, 2014.


In brief

 On May 1, 2014, Ontario’s Minister of Finance, Charles Sousa, presented the province’s budget. The budget:

  • increases taxes for individuals with taxable incomes over $150,000 and for large Canadian-controlled private corporations (CCPCs)
  • will require employers and employees that do not already participate in a comparable pension plan to each contribute up to about $1,700 annually to the Ontario Retirement Pension Plan (ORPP), starting in 2017

This Tax Insights discusses these and other tax initiatives proposed in the budget.

In detail

Personal tax measures

Taxable incomes over $150,000

The budget increases taxes for individuals with taxable incomes over $150,000.

Ontario’s tax rate on taxable incomes between $150,000 and $514,090 is currently 11.16%. Retroactive to January 1, 2014, Ontario’s:

  • top rate of 13.16% will apply when taxable income exceeds $220,000 (down from $514,090)
  • tax rate will be 12.16% on taxable income between $150,000 and $220,000

The $150,000 and $220,000 brackets will not be indexed annually, unlike Ontario’s other brackets.

After Ontario’s existing 56% surtax, the rate increase in 2014 will be:

  • 3.12% (not 2%) for taxable income between $220,000 and $514,090
  • 1.56% (not 1%) for taxable income between $150,000 and $220,000

The bottom line

The following table shows how much additional tax you will pay, at selected income levels, assuming all your income is interest or ordinary income (such as salary).

Taxable income

Additional tax

2014

$1,000,000 $10,268
$800,000
$600,000
$400,000 $6,708
$200,000 $780
  1. The additional tax is equal to the tax resulting from this budget proposal over the tax you would pay at current rates.

 

Combined federal/Ontario personal income tax rates
    Taxable income Ordinary 
income
Capital gains Canadian dividends
Eligible Non-eligible
Top bracket 2014 > $220,000 49.53% 24.76% 33.82% 40.13%
2013 > $509,000 33.85% 36.47%
Next bracket 2014 > $150,000 47.97% 23.98% 31.67% 38.29%
2013 > $135,054 46.41% 23.20% 29.54% 32.57%

 

Charitable donations

The charitable donations tax credit rate for individuals who contribute more than $200 annually to charities will remain 11.16%.

Dividends

The budget states that legislation will be introduced to implement the following measures, which were announced in Ontario’s November 7, 2013 fall economic statement:

  • starting 2014, Ontario’s dividend tax rates will be determined by calculating the Ontario surtax before deducting dividend tax credits from Ontario tax
  • starting 2014, Ontario’s eligible dividend tax credit rate will increase from 6.4% to 10%
  • Ontario’s 2013 non-eligible dividend tax credit rate of 4.5% will continue to apply after 2013

See our Tax Insights ‘Ontario increases personal taxes on some dividends and studies corporate tax incentives’ at www.pwc.com/ca/taxinsights.

Combined federal/Ontario rates

The table at the top of this page takes into account all the changes discussed above, as well as an increase in the top federal rate on non-eligible dividends.

Tax credit for farmers

Regulations will be brought forward to implement the non-refundable tax credit for farmers that donate to community food programs. The credit received royal assent on November 6, 2013.

 Business tax measures

Corporate income tax rates

Ontario’s corporate income tax rates will remain as follows: 

Income Rate
General1 11.5%
Manufacturing and processing (M&P) 10%
Small business2 4.5%

 

Combined federal/Ontario rates 2013-2014
General income 26.5%
M&P income 25%
Canadian-controlled private corporations (CCPCs) active business income to $500,0002 15.5%
investment income 46.17%
  1. Planned decreases (to 11% on July 1, 2012, and to 10% on July 1, 2013) were rescinded until Ontario’s budget is balanced.
  2. The small business threshold remains $500,000. However, see ‘Large Canadian-controlled private corporations (CCPCs)’ below for a change in the application of the small business rate.

 

Large Canadian-controlled private corporations (CCPCs)

The $500,000 federal small business threshold is reduced on a straight-line basis for large CCPCs (i.e. CCPCs that, in the preceding year, had taxable capital employed in Canada (on an associated basis) between $10 million and $15 million). Currently, this clawback also applies to all provincial and territorial small business deductions except Ontario’s.

The budget extends the clawback to Ontario for taxation years ending after May 1, 2014 (pro-rated for taxation years straddling this date). As a result, Ontario CCPCs that will be subject to the clawback will pay up to $35,000 more tax on their first $500,000 of active business income earned in Canada.

Business support programs review

A Technical Panel is reviewing Ontario’s business support programs, including tax credits, grants and other direct support programs. Its final report is expected this spring.

In particular, Ontario is reviewing options to restructure:

  • Research and Development (R&D) incentives – These options include:
    • an enhanced tax credit on incremental investment
    • reduced tax credit rates if R&D investment is significantly decreased

See our Tax Insights ‘Ontario increases personal taxes on some dividends and studies corporate tax incentives’ at www.pwc.com/ca/taxinsights.

  • The Apprenticeship Training Tax Credit and Co-operative Education Tax Credit – The government is considering:
    • making these credits non-refundable for large businesses
    • ways to make these credits more effective

Tax avoidance

The budget proposes to combat tax avoidance in several ways:

  • Revenue integrity – Ontario will target schemes and practices that avoid the payment of provincial taxes.
  • Underground economy – The government is:
    • working to develop an action plan focused on addressing illegal activities in high-risk sectors
    • working with the Canada Revenue Agency (CRA) to enhance compliance activities that address the underground economy
    • calling on the federal government to release its national strategy to raise awareness of this issue and to coordinate efforts with all provinces
  • Corporate tax avoidance – Ontario:
    • will introduce legislation requiring Ontario corporations to disclose aggressive tax avoidance transactions
    • supports federal government initiatives, including those mentioned in the 2014 federal budget, to address aggressive international tax planning (see our Tax Insights ‘2014 Federal budget: More tightening, few tax breaks’ at www.pwc.com/ca/budget
    • urges the federal government to address interprovincial profit and loss shifting
  • Enhanced audit activity – The government will direct additional resources to its Flexible and Integrated Risk System (FAIRS) program to identify high-risk audit cases across several tax statutes.

 Other tax measures

Land Transfer Tax

Ontario will introduce a general anti-avoidance rule in the Land Transfer Tax Act, applicable to transactions completed after May 1, 2014, and transactions that are part of a series of transactions that is completed after May 1, 2014. It is also considering other legislative options to ensure the integrity of the land transfer tax system.

In particular, the government is concerned that some structures attempt to inappropriately use Ontario Regulation 70/91, made under the Land Transfer Tax Act. The regulation provides a ‘de minimis’ partnership exemption that is intended to apply to small changes in partnerships that own land.

Provincial Land Tax (PLT) review

Ontario had pledged to review the PLT, with respect to concerns of northern municipalities. See our Tax Insights ‘Ontario increases personal taxes on some dividends and studies corporate tax incentives’ at www.pwc.com/ca/taxinsights.

Consultations will be completed in 2014 and solutions will be brought forward for the 2015 tax year.

Tax on aviation fuel

The tax rate on aviation fuel will increase from 2.7¢ per litre to 6.7¢ per litre over four years. The rate will increase:

  • to 3.7¢ per litre for 2014, effective the day after the amendment receives royal assent
  • by an additional 1¢, effective April 1 in each of 2015, 2016 and 2017

Tobacco tax

The tobacco tax rate will increase from 12.350¢ to 13.975¢ per cigarette (i.e. from $24.70 to $27.95 per carton of 200 cigarettes) and per gram of tobacco products other than cigarettes and cigars, effective 12:01 a.m. on May 2, 2014. (The tax rate for cigars will not change.)

In addition, Ontario will undertake various measures to enhance tobacco enforcement.

Road-building machines

Ontario will amend the Highway Traffic Act to modernize, by 2016, the treatment of unregistered road-building machines (e.g. mobile cranes, concrete pumpers) that use public roads and highways. The intention is to:

  • ensure that owners and operators of these vehicles contribute their fair share of tax
  • maintain the integrity of related regulatory and legislative requirements, such as fuel tax and registration fees
  • help level the playing field between these vehicles and other commercial vehicles that use public roads and highways

Amendments will include imposing registration and licensing requirements on these machines so that they will not be permitted to use tax-exempt fuel.

Pension reform

Ontario intends to focus on the following programs to improve its retirement income system.

Ontario Retirement Pension Plan (ORPP)

Although the proposed ORPP (expected to be introduced in 2017) will be mandatory, individuals that already participate in a comparable workplace pension plan will not be required to enroll.

The ORPP will:

  • provide a predictable stream of income in retirement by pooling longevity and investment risk, and indexing benefits to inflation
  • require equal contributions from both employers and employees (up to 1.9% each on a maximum annual earnings of $90,000; indexed thereafter)
  • aim to provide an annual pension of 15% of an individual’s earnings up to a maximum annual earnings of $90,000, resulting in a maximum annual pension of $13,500

Employers and employees will enroll in stages, starting with the largest employers, and contribution rates will be phased in over two years.

Ontario will continue to consult with employers and employees. Further technical details will be released later this year before legislation is introduced.

Pooled Registered Pension Plans (PRPPs)

Ontario intends to introduce PRPP legislation in the fall of 2014 that will be broadly consistent with the federal model and will include:

  • voluntary participation and contributions by employers
  • automatic enrolment of employees when an employer elects to offer a PRPP (however, employees can opt out within a specified period)
  • a low cost to plan members

Target Benefit Pension Plans (TBPPs)

Ontario will consult on multi-employer TBPPs so that it can introduce a framework that sets out eligibility conditions, funding rules and governance requirements. A framework for single-employer TBPPs will also be developed.

Defined Benefit Pension Plans

Ontario will work to strengthen defined benefit pension plans by reforming pension funding rules and enabling the conversion of employer-sponsored, single-employer pension plans to jointly sponsored pension plans.

Federal harmonization

Measures in the 2014 federal budget that Ontario will automatically adopt, once the relevant federal legislative changes are enacted, include changes affecting:

  • captive insurance arrangements
  • offshore regulated banks
  • medical expenses
  • farmers and fishers
  • amateur athlete trusts
  • estate donations
  • non-resident trusts
  • pension transfer limits
  • limitations on shifting income to a minor child
  • donations of ecologically sensitive land and certified cultural property
  • clean energy generation equipment

Ontario will also adopt changes that provide a Harmonized Sales Tax (HST) exemption for certain health-related services and medical devices.

The budget also states that Ontario is reviewing the 2014 federal budget measure to eliminate graduated rates for certain trusts and estates.

For more information, see our Tax Insights ‘2014 Federal budget: More tightening, few tax breaks’ at www.pwc.com/ca/budget.

Technical amendments

Ontario will amend its provincial statutes to:      

  • improve effectiveness and enforcement
  • maintain the integrity and equity of its tax and revenue collection system
  • enhance legislative clarity and flexibility to preserve policy intent