2018 Ontario budget: Tax highlights

March 28, 2018

In brief

On March 28, 2018, Ontario’s Minister of Finance, Charles Sousa, presented the Liberal government’s final budget prior to the upcoming June 2018 provincial election. The budget:

  • simplifies Ontario’s personal tax system by eliminating surtaxes and introducing new tax brackets and tax rates
  • increases the charitable donations tax credit rate on donations exceeding $200 
  • enhances the Ontario Innovation Tax Credit and the Ontario Research and Development Tax Credit
  • parallels several 2018 federal budget measures to close tax loopholes

This Tax Insights discusses the tax initiatives proposed in the budget.

In detail

Personal tax measures

Personal income tax system

Starting 2018 taxation years, Ontario proposes to simplify the province’s personal income tax calculation by:

  • eliminating the province’s 20% and 56% surtaxes, and
  • replacing the surtaxes with new tax rates and brackets

See the table below for current and proposed 2018 personal income tax rates and brackets.
 

Current  (2018)

Proposed (2018)

Brackets1

Rates

Brackets

Rates

$0 to 42,960

5.05%

$0 to $42,960

5.05%

$42,960 to $85,923

9.15% or 10.98%2

$42,960 to $71,500

9.15%

$71,500 to $82,000

11.00%

$85,923 to $150,000

11.16% or 13.392%2 or 17.4096%3

$82,000 to $92,000

13.50%

$92,000 to $150,000

17.50%

$150,000 to $220,000

18.9696%3

$150,000 to $220,000

19.00%

> $220,000

20.5296%3

> $220,000

20.53%

1.  The bracket amounts assume that only the basic personal tax credit is claimed.

2.  The tax rate includes a 20% Ontario surtax that applies when Ontario income tax exceeds $4,638.

3.  The tax rate includes a 56% Ontario surtax that applies when Ontario income tax exceeds $5,936.

Top combined federal/Ontario personal income tax rates 

The top two combined federal/Ontario personal income tax rates for the current and proposed tax rates (see above) in 2017 to 2019, 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%

(current and proposed)

26.76% (current) 26.77% (proposed)

39.34% (current and proposed)

47.78%1, 2
(current and proposed)

2018

46.84%1, 2

(current and proposed)

2017

26.76%

45.30%

2019





2nd from top bracket

$205,8423 to $220,000

51.97% (current)

52.00% (proposed)

25.98% (current) 26.00% (proposed)

37.19% (current)

37.23% (proposed)

45.99%1, 2 (current)

46.02%1, 2 (proposed)

2018

$205,842 to $220,000

45.03%1, 2 (current)

45.06%1, 2 (proposed)

2017

$202,800 to $220,000

51.97%

25.98%

37.19%

43.48%

1.  Combined non-eligible dividend tax rates increase in 2018 and 2019, because of decreases to both the federal and Ontario non-eligible dividend tax credit rates (which results from decreases to both the federal and Ontario small business corporate tax rates, as noted below).

2.  The 2018 and 2019 non-eligible dividend tax rates are based on Ontario Bill 177, Stronger, Fairer Ontario Act (Budget Measures Act), 2017, (royal assent: December 14, 2017). Bill 177 results 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 November 14, 2017 Ontario Economic Outlook and Fiscal Review. If it does, Ontario's top non-eligible dividend tax rates will be 46.65% (current and proposed) for 2018 and 47.40% (current and proposed) for 2019 and its second from top non-eligible dividend tax rates will be 44.84% (current) and 44.87% (proposed) for 2018 and 45.60% (current) and 45.64% (proposed) for 2019.

3.  The $205,842 threshold will be indexed for 2019.
 

Value of non-refundable personal tax credits

The elimination of the surtaxes will increase the overall taxes payable on higher-income Ontario taxpayers, by reducing the value of most non-refundable tax credits. For example, the Ontario basic personal amount for 2018 of $10,354, provides tax relief, as follows:

 

Current

Proposed

Increase in taxes payable

Non-surtax payer

$523

$523

Nil

Surtax payer subject to 20% surtax

$627

$104

Surtax payer subject to 56% surtax

$816

$293

 

Charitable donations tax credit

Ontario proposes to increase the charitable donations tax credit rate that applies to donations above $200, to 17.5% (from 11.16% plus surtaxes, or a maximum of 17.41% for taxpayers that were subject to the 56% surtax), effective for the 2018 taxation year. The top tax credit rate of 17.5% continues to be lower than the top two Ontario marginal tax rates of 19% and 20.53%, limiting the resulting tax relief for taxpayers with taxable income above $150,000.

Income sprinkling

Ontario will parallel the federal measures that limit income sprinkling using private corporations, effective for 2018 and future taxation years, so that Ontario personal tax at the top rate of 20.53% will apply to “split income” of an adult family member. For more information, see our Tax Insights “Income sprinkling rules announced as Senate comments on private company tax proposals” at www.pwc.com/ca/taxinsights.

Business tax measures

Corporate income tax rates

Ontario’s corporate income tax rates will remain as shown in the tables below. The tables also show combined federal/Ontario corporate tax rates. 

General and M&P income tax rates

Ontario

Federal + Ontario

 

2017-2019

General income

11.5%

26.5%

M&P income

10%

25%

Small business income tax rates

Ontario

Federal + Ontario

Taxation year ending

December 31, 2017

4.5%

15%

December 31, 2018


3.5%

13.5%1

December 31, 2019

12.5%1

1.     The combined rates reflect the decline in the federal small business tax rate from 10.5% to 10% on January 1, 2018, and to 9% on January 1, 2019.
 

Small business deduction (SBD) limit

Ontario will parallel the 2018 federal budget measure that phases out the SBD limit for Canadian-controlled private corporations (CCPCs) that earn between $50,000 and $150,000 of passive investment income in a taxation year, for taxation years beginning after 2018. For more information, see our Tax Insights “2018 Federal budget: Liberal mid-term tax measures” at www.pwc.com/ca/budget.

Research and development (R&D)

Ontario Innovation Tax Credit (OITC)

For eligible R&D expenditures incurred after March 27, 2018, the 8% refundable OITC rate increases for companies that qualify for the OITC and have a ratio of R&D expenditures to gross revenues (in both cases, attributable to Ontario operations and determined in aggregate for all associated companies) of:

  • between 10% and 20% – the rate increases from 8% to 12% on a straight‐line basis as the company’s ratio of R&D expenditures to gross revenue increases from 10% to 20%
  • 20% and above – the rate will be 12%

The enhanced rates are prorated for taxation years straddling March 28, 2018.

Ontario Research and Development Tax Credit (ORDTC)

For eligible R&D expenditures incurred after March 27, 2018, the 3.5% non-refundable ORDTC rate increases to 5.5% for companies that qualify for the ORDTC and incur expenditures over $1 million in a taxation year (pro-rated for short-taxation years).

The 5.5% enhanced tax credit rate is not available to businesses if eligible R&D expenditures in the current taxation year are less than 90% of eligible R&D expenditures in the prior taxation year. The 5.5% rate is prorated for taxation years straddling March 28, 2018.

Commercialization of intellectual property

Ontario is reviewing various tax initiatives (e.g. “patent box” regimes that provide preferential corporate income tax rates, refunds of taxes paid, tax deductions and exemptions) to help retain the economic and social benefits of intellectual property developed in Ontario, and intends to develop an incentive that works best for Ontario.  

Ontario Interactive Digital Media Tax Credit (OIDMTC)

Ontario will extend eligibility for the OIDMTC to film and television websites purchased or licensed by a broadcaster and embedded in the broadcaster’s website. The extension applies to websites that host content related to film, television or Internet productions that have not received either a certificate of eligibility or letter of ineligibility before November 1, 2017.

Employer Health Tax (EHT)

To better target the EHT exemption for small employers (currently, an exemption on payroll of up to $450,000 for employers with total associated group payroll less than $5 million), Ontario proposes to:

  • follow the eligibility criteria for the federal SBD for the EHT exemption; as a result, the exemption will only be available to individuals, charities, not‐for‐profit organizations, private trusts and partnerships, and CCPCs
  • incorporate federal anti‐avoidance rules related to the multiplication of the SBD into the Employer Health Tax Act; in implementing these measures, Ontario will determine the EHT rate for associated employers that is consistent with the application of the EHT exemption threshold for these employers

If enacted, the proposed changes will be effective January 1, 2019. The government will seek public comment on the proposed anti-avoidance changes before introducing legislation.

Closing tax loopholes

Ontario will parallel the 2018 federal budget measures that address the use of sophisticated financial instruments and structured share repurchase transactions by certain Canadian financial institutions to realize artificial tax losses. The federal measures amend the “synthetic equity arrangement” and “securities lending arrangement” rules, as well as a specific stop‐loss rule that applies to share repurchase transactions. For more information, see our Tax Insights “2018 Federal budget: Liberal mid-term tax measures” at www.pwc.com/ca/budget.

Ontario continues to work closely with the federal government, the Canada Revenue Agency and other provinces and territories to combat aggressive tax planning schemes that are eroding the common tax base.

Land transfer tax measures

Ontario plans to make a new regulation that would allow land transfer tax arising from certain unregistered dispositions of a beneficial interest in land through certain types of partnerships and trusts to be payable 30 days after the end of the calendar quarter in which the disposition occurred, instead of within 30 days of the disposition.

In addition, the Ministry of Finance plans to post guidance on the minimum information and documents that an authorized representative of a partnership or trust should provide when submitting a consolidated quarterly filing. The Ministry of Finance continues to review issues raised in previous consultations.

Property tax measures

Railway right-of-way property taxation

The government continues to modernize railway right-of-way property taxation, such as adjusting railway right-of-way tax rates, responding to municipalities’ concerns regarding the property tax revenue they receive in respect of high-tonnage rail lines, and consulting with stakeholders to make further improvements.

Non-profit child care services in schools

To ensure that non‐profit child care services do not alter the tax‐exempt status of community properties, the Assessment Act will be amended to provide a tax exemption to non‐profit child care facilities that lease space in otherwise tax‐exempt properties. This is consistent with the Municipal Property Assessment Corporation’s (MPAC’s) historic treatment of these facilities.

Cultural spaces in Toronto

Ontario will give the City of Toronto the authority to design and administer a new program to provide property tax reductions of up to 50% to qualifying facilities that offer affordable spaces for the arts and culture sector.

Victoria University

Ontario will amend the Victoria University Act to ensure that the municipal tax exemption applies only to lands owned and occupied by the university. This will enable the City of Toronto to treat tenanted portions of land owned by Victoria University fairly and consistently with other public institutions and businesses. Any property tax increases to tenants will be phased in over a number of years.

Airports

Ontario plans to conduct a review of the current approach used to calculate payments in lieu of property tax (PILT). Airport authorities in Ontario make payments in lieu of property tax based on the number of passengers that travel through the airports annually. The passenger rates used to calculate the PILT have not changed since they were introduced in 2001.

Education property taxes

Ontario mirrors any municipal property tax decisions related to vacancy programs for education property taxes, which has resulted in different treatments of education property taxes across the province. As a result, starting 2019, the government will align the education property tax portion of the vacancy programs with changes made by municipalities, ensuring greater consistency across the province.

Ontario will also maintain a technical adjustment (introduced in 2016) to the property tax rate calculation for 2018, to ensure that municipalities and Ontario are able to address any unintended effects of specific in‐year property tax assessment changes, such as assessment appeal losses.

Property value assessments

For the next property value assessment update in the 2021 taxation year, property value assessments will be based on an earlier valuation date of January 1, 2019. The earlier date is intended to facilitate a more effective valuation process and more transparent and accurate property assessments.

Ontario also wants to make it easier for property owners to comply with the MPAC’s requests for information, and ensure that property owners who comply with the requests are not disadvantaged during the valuation or appeal processes. To achieve this, Ontario will:

  • review the format of MPAC’s requests
  • introduce amendments in the fall of 2018 to provide a framework for addressing non‐compliance

Other tax measures

Underground economy

Ontario continues to fight the underground economy, such as addressing the practice of electronic sales suppression. Planned legislation will require prescribed businesses to update their electronic cash register systems to meet legal requirements that will stop the ability to manipulate sales transaction information. The government will work with businesses to make the transition as easy as possible, including a reasonable transition period and providing financial or other support.

Cannabis taxation

Ontario intends to enter into an agreement with the federal government in which Ontario will receive 75% of the federal excise duty collected on cannabis intended for sale in the province.

Tobacco taxes

Effective 12:01 a.m. on March 29, 2018, Ontario’s tobacco tax will increase from 16.475¢ to 18.475¢ per cigarette and per gram of tobacco products other than cigars (equivalent to $4 per carton of cigarettes). A further increase of $4 per carton of cigarettes is planned in 2019.

Technical amendments

Ontario will also 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
     

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Saul Plener

National Private Company Services Leader, PwC Canada

Tel: +1 905 418 3471

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