On May 1, 2014, Ontario Finance Minister Charles Sousa tabled the province's 2014 Budget. This year's budget proposes additional personal income taxes on income over $150,000, a new pension plan and the phase out/elimination of the Small Business Deduction for larger Canadian-controlled private corporations.
Ontario's deficit for 2013-14 is estimated to be $11.3 billion, a $0.4 billion improvement compared with the 2013 Budget forecast. The government is projecting budget deficits of $12.5 billion for the 2014-15 year, $8.9 bllion for the 2015-16 year, $5.3 billion for the 2016-17 year and a return to a balanced budget by 2017-18.
The million-dollar question – will this budget pass, or are we headed into a provincial election?
Here we summarize the major tax measures announced in today's budget.
PERSONAL TAX MEASURES
Personal income tax rate changes
- The budget proposes to lower:
- The taxable income threshold for the 13.16 per cent tax rate from $514,090 to $220,000; and
- Add a new tax rate of 12.16 per cent on taxable income between $150,000 and $220,000.
- These new income thresholds would not be adjusted for inflation each year, unlike the current taxable income thresholds.
- The donation credit would continue to be computed as 5.05 per cent on the first $200 of donations each year, and 11.16 per cent on donations over that amount.
- These changes would apply to taxation years ending after December 31, 2013.
As a result, Ontario's combined top personal marginal tax rates for 2014 are as follows:
There are no changes to the top marginal tax rates for 2014, which remain as follows:
As a result of these proposed changes, individuals who earn interest and regular income of $514,090 or more will pay an additional $10,268 in Ontario tax annually.
Tax credit for farmers who donate to community food programs
The Ontario government will bring forward legislation to implement a 25 per cent credit applicable to farmers who donate food to community food programs, including food banks. The credit will be computed on the value of the agricultural goods donated and can be claimed for donations made beginning January 1, 2014.
PENSION PLAN MEASURES
Proposed Ontario Retirement Pension Plan (ORPP)
Given the federal government's decision to shut down discussions on an enhancement to the Canada Pension Plan (CPP), Ontario is proposing to move forward with a new mandatory provincial pension plan – the Ontario Retirement Pension Plan (ORPP).
The ORPP would build on the key features of the CPP, and could later be integrated with the CPP should negotiations on an enhancement with the federal government be successful in the future.
- Key design features would include:
- Pool longevity and investment risk, as well as index benefits to inflation, similar to the CPP's retirement benefit.
- Require equal contributions to be shared between employers and employees, not exceeding 1.9 per cent each (3.8 per cent combined) on earnings up to a maximum annual threshold of $90,000. The ORPP maximum earnings threshold would increase each year, consistent with increases to the CPP maximum earnings threshold.
- Aim to replace 15 per cent of an individual's earnings, up to a maximum annual earnings threshold of $90,000.
Other features of the ORPP include:
- The ORPP would be publicly administered at arm's length from the provincial government.
- Benefits would be earned as contributions are made.
- Individuals already participating in a comparable workplace pension plan would not be required to enroll in the ORPP.
- Earnings below a certain threshold would be exempt from contributions, similar to the CPP. The government will consult on whether the ORPP's lower-income threshold would mirror that of the CPP.
- The ORPP would be introduced in 2017.
- The government will consult with Ontario employers and labour. Further technical details will be released later this year prior to introducing legislation.
Pooled Registered Pension Plans (PRPPs)
Pooled Registered Pension Plans (PRPPs) are a new form of tax-assisted individual retirement savings plans. They are intended to make it easier to save for retirement by offering employees and the self-employed an additional low-cost savings vehicle.
PRPPs are professionally managed, portable from one workplace to another, and have a more favourable tax treatment than group RRSPs.
- Key design features would include:
- Voluntary participation and contributions by employers
- Automatic enrolment of employees. Where an employer elects to offer a PRPP, an employee would be automatically enrolled unless he/she chooses to opt out within a specified period.
- Low cost – administrators would be required to provide PRPPs at a low cost to plan members.
The government intends to introduce PRPP legislation in the fall of 2014.
BUSINESS TAX MEASURES
Ontario Small Business Deduction (SBD)
- The Ontario Small business deduction (SBD) is intended to provide tax relief to Canadian-controlled private corporations (CCPCs) in Ontario. The current SBD threshold is $500,000 at which a favourable Ontario tax rate applies (i.e., 4.5 per cent).
- Currently, all CCPCs, small or large, are eligible for the Ontario SBD. The budget proposes to ensure only small CCPCs can qualify for the deduction, which would be consistent with other provinces and the federal government.
- The budget proposes to phase out the SBD for large CCPCs (and associated groups of CCPCs) with more than $10 million in taxable capital employed in Canada in the previous year and would be fully eliminated for large CCPCs (and associated groups of CCPCs) with taxable capital in the previous year of more than $15 million.
- The change could cost a CCPC with more than $15 million of taxable capital up to $35,000 of additional tax per annum.
- The proposed change would apply to CCPC taxation years ending after May 1, 2014 (pro-rated for taxation years that straddle May 1, 2014.
*On first $500,000 of active business income, subject to the phase-out discussed below.
Corporate tax avoidance
- The budget indicates that Ontario supports the various initiatives undertaken by the federal government, including those in the 2014 federal budget, to address aggressive international tax planning.
- To this end, Ontario will introduce legislative amendments that would require corporations in Ontario to disclose aggressive tax avoidance transactions to the federal Minister of National Revenue, who administers Ontario's corporate taxes.
- Through the Tender Contract Tax Compliance initiative launched in February 2014, businesses that are engaged in procurement activity with the Ontario government must demonstrate (via certification of tax compliance) that they are compliant with their provincial tax obligation prior to being awarded government contracts.
Research and Development (R&D) Incentives
- As noted in the 2013 Ontario Economic Outlook and Fiscal Review, the government is reviewing options to restructure tax support for research and development (R&D), including an incentive for incremental R&D, with the goal of increasing R&D investment in Ontario.
- The government will explore the following approach:
- Companies that increase R&D investment would qualify for an enhanced tax credit on incremental investment in addition to their existing credits;
- Companies that maintain consistent R&D investment would receive the existing level of tax support; and
- Companies that significantly decrease R&D investment would have existing provincial tax credit rates reduced.
- The government will consult with businesses and research organizations on this approach.
Training tax incentives
- Ontario provides refundable tax credits, namely the Apprenticeship Training Tax Credit (ATTC) and Co-operative Education Tax Credit (CETC), to businesses on the salaries and wages paid to Ontario apprentices and co-op students.
- These credits are refundable so businesses can receive tax support even if no income tax is payable in the year.
- The government will review training tax credits with the intention of limiting these tax credits by making them non-refundable for large businesses.
- These credits would continue to be refundable for smaller businesses.
Enhanced audit activity
- The Ministry will direct additional resources to its Flexible and Integrated Risk System (FAIRS) program to identify high-risk audit cases across several tax statutes (including Employer Health Tax) administered by the Ontario Ministry of Finance.
As previously announced, the budget proposes to increase the tobacco tax rate from 12.35 cents to 13.975 cents per cigarette (or from $24.70 to $27.95 per carton) and per gram of tobacco products (other than cigarettes and cigars) effective 12:01 a.m. Friday, May 2, 2014. Wholesalers of tobacco products that are not collectors of tobacco tax are expected to take an inventory of all tobacco products with the exception of cigars held at end of May 1, 2014 and remit additional tax on this inventory.
Land Transfer Tax (LTT)
- The Ministry of Finance is reviewing aggressive tax avoidance structures that result in the acquisition of land without payment of LTT and issuing assessments as appropriate.
- The budget also proposes to introduce a general anti-avoidance rule into the LTT Act, applicable to transactions that are completed after May 1, 2014 and transactions that are part of a series of transactions to be completed after May 1, 2014.
ADOPTION OF FEDERAL TAX MEASURES
The 2014 federal budget proposed several personal and corporate income tax measures, including proposals related to:
- 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;
- Donations of ecologically sensitive land and certified cultural property;
- Clean energy generation equipment; and
- Tax on insurance swaps and offshore regulated foreign financial institutions.
Under the terms of the Canada-Ontario Tax Collection Agreement, Ontario will adopt these measures and their effective dates once federal legislative and regulatory changes have been approved.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.