Tax Insights: 2017 Ontario fall economic statement – Tax highlights

November 14, 2017

In brief

On November 14, 2017, Ontario’s Minister of Finance, Charles Sousa, presented the 2017 Ontario Economic Outlook and Fiscal Review (economic statement). The economic statement: 

  • reduces the corporate small business income tax rate from 4.5% to 3.5% on January 1, 2018
  • replaces the Apprenticeship Training Tax Credit with a Graduated Apprenticeship Grant
  • decreases the personal dividend tax credit rate for non-eligible dividends on January 1, 2018

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

In detail

Business tax measures

General and manufacturing and processing (M&P) income tax rates

Ontario’s general and M&P income tax rates will not change. As a result, the following rates will apply:
 

General and M&P income tax rates Ontario Combined federal/Ontario
  2017-2019
General income 11.5% 26.5%
M&P income 10% 25%


Small business income tax rate

Ontario’s small business income tax rate (which applies to the first $500,000 of active business income) will decline from 4.5% to 3.5% on January 1, 2018. As a result, the following rates will apply:
 

Small business income tax rates Ontario Combined federal/Ontario
Taxaxtion year ending December 31, 2017 4.5% 15%
December 31, 2018 3.5% 13.5%1
December 31, 2019 12.5%1

[1.]  Combined 2018 and 2019 rates reflect federal tax reductions implemented by a Notice of Ways and Means Motion released on October 24, 2017. See our Tax InsightsPrivate company tax changes: Taxes on non-eligible dividends to rise.”

The federal and Ontario rate reductions will result in a maximum annual tax saving of $7,500 in 2018 and $12,500 thereafter for eligible corporations.

Graduated Apprenticeship Grant for Employers (GAGE)

A new Graduated Apprenticeship Grant for Employers (GAGE) will replace Ontario’s Apprenticeship Training Tax Credit (ATTC). Employers with eligible apprentices who have registered their apprenticeship program with the Ontario College of Trade after November 14, 2017, will be eligible for the GAGE, as shown in the table below.
 

  Apprentices in underrepresented groups1 Other apprentices
Apprentice completes: level one $3,000 $2,500
level two
level three $4,000 $3,500
level four
Apprentice attains a certificate of apprenticeship or certifcate of qualification $5,200 $4,700

[1.]  Underrepresented groups include women, Indigenous peoples, francophones, people with disabilities, newcomers and visible minorities.

The GAGE will be available for all 125 trades that are currently eligible for the ATTC, plus five additional Red Seal services sector trades: hairstylist, cook, horticultural/landscape technician, baker/patissier and appliance service technician.

Ontario will allow multiple employers to pool together and form consortia to hire, register and train their apprentices for skilled trades.

Apprenticeship Training Tax Credit (ATTC)

With the announcement of the new GAGE (see above), the ATTC will be eliminated for employers with apprentices who register in an apprenticeship program after November 14, 2017. 

Employers with apprentices already registered in an eligible apprenticeship program before November 15, 2017, will continue to be eligible to receive the ATTC for up to 36 months.

Personal tax measures 

Personal income tax rates 

The economic statement does not change personal income tax rates, except for non-eligible dividend tax rates, as discussed below. The top two personal income tax rates are shown in the next table.
 

Combined federal/Ontario rates Taxable income Ordinary income Capital gains Canadian dividends
Eligible Non-eligible
2019 Top bracket >$220,000 53.53% 26.76% 39.34% 47.78%1
2018 46.84%1
2017 45.30%
2019 2nd from top bracket $202,8002 to
$220,000
51.97% 25.98% 37.19% 45.99%1
2018 45.03%1
2017 43.48%

[1.]  2018 and 2019 non-eligible dividend rates reflect federal tax increases to these rates implemented by a Notice of Ways and Means Motion released on October 24, 2017. See our Tax InsightsPrivate company tax changes: Taxes on non-eligible dividends to rise.” These rates also reflect the reduction to Ontario’s dividend tax credit rate; see “Personal taxes on non-eligible dividends” below.
[2.]  The $202,800 threshold will be indexed for 2018 and 2019.

Personal taxes on non-eligible dividends

Due to the reduction to Ontario’s small business income tax rate (see above), Ontario’s dividend tax credit rate for non eligible dividends will decrease from 4.2863% in 2017. The 2018 and 2019 non-eligible dividend tax rates in the table under "Personal income tax rates" above are based on Ontario Bill 177, Stronger, Fairer Ontario Act (Budget Measures Act), 2017, (first reading: November 14, 2017). Bill 177 is expected to result in a non-eligible dividend tax credit rate of 3.1197% for 2018 and 2.9501% for 2019, based on proposed changes to the federal dividend gross-up amounts.

It is unclear if Ontario will make additional legislative changes, once the federal gross-up changes become law, so that its non-eligible dividend tax credit rate for 2018 and 2019 will be 3.2863%, which is the rate stated in the economic statement. If it does, Ontario's top non-eligible dividend tax rates will be 46.65% for 2018 and 47.40% for 2019 and its second from top non-eligible dividend tax rates will be 44.84% for 2018 and 45.60% for 2019.

Integration

The increase to Ontario’s non-eligible dividend rate for distributions of small business income makes sense, to ensure that the combined corporate and personal tax paid on this income approximates the tax that would be paid by an individual who earns this income directly. This is referred to as the concept of “integration” for corporate and personal tax rates.

However, the change increases the combined corporate and personal tax rate on investment income (other than eligible dividends) earned through a Canadian-controlled private corporation (CCPC). This results in greater “under integration” for that investment income because the effective federal and provincial/territorial corporate tax rate on this income exceeds the small business income tax rate.

There is already under integration in Ontario on investment income (other than dividends) earned in a CCPC. For example, in Ontario, the top tax rate on interest income earned directly by an individual is 53.53%. If instead, the interest income is earned in a CCPC and distributed to the shareholder as a non-eligible dividend, the combined federal/Ontario tax liability is 55.97% in 2017.  

The federal and Ontario changes to the non-eligible dividend tax rate will increase the combined federal/Ontario tax liability to 57.21% in 2018 and 57.96% in 2019. (These rates are halved for capital gains.)  

Other tax measures

Land transfer tax on unregistered dispositions

A proposed amendment to the Land Transfer Tax Act will authorize regulations prescribing rules with greater flexibility than the current requirement to pay tax within 30 days of the date of an unregistered disposition of land. For example, qualifying taxpayers could be allowed to file returns quarterly without being liable for interest. Details are forthcoming. 

Other issues raised in the recent consultation with stakeholders, on matters regarding unregistered dispositions of a beneficial interest in land, remain under review.

Underground economy

To further combat the underground economy, Ontario is proposing amendments to the Ministry of Revenue Act to:

  • enable information sharing with entities that administer legislation or regulations on behalf of government, and 
  • publish convictions under tax statutes to raise awareness and encourage compliance

Also, Ontario will target high-risk sectors to directly address the underground economy through a new, enhanced services agreement with the Canada Revenue Agency (CRA).

Unregulated tobacco

Ontario will undertake several new measures to reduce the availability of unregulated tobacco and ensure compliance with its tobacco laws. It will also continue to work with communities and enforcement agencies to address this issue.

Property tax and assessment system

To enhance the fairness and effectiveness of Ontario’s property tax and assessment system, Ontario will:

  • review approaches related to the education property tax component of its business vacancy rebate and reduction programs
  • take further action to address inequities in taxation for northerners and in how services are paid for in the north
  • provide municipalities flexibility to reduce property tax rates for on-farm processing and commercial facilities that are assessed below $1 million  

 

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