Breaking News: Ontario 2018 Budget ReleasedPosted: April 03, 2018 By : Knowledge Bureau Staff
Posted in: Strategic Thinking, tax credits, knowledge bureau, income tax act, Evelyn Jacks, income tax, charitable donation credit, Ontario budget, small business tax, provincial budget, tax loopholes, research and development credit, personal tax bracket, employer health tax exemption
On March 28, 2018 Ontario released what has been widely considered to be a “Pre-Election Budget”. Aside from large spending increases, it features changes to Ontario’s tax rate structure, which so far have received little fanfare. Seven tax brackets result in personal tax increases for almost two million people; in addition, 20,000 private businesses will pay at least $2,400 more in health taxes.
Spending measures and announcements in last weeks’ Knowledge Bureau Report were confirmed, resulting in Ontario returning to a large deficit position of $6.7 Billion for the 2018 – 2019 fiscal year and deficit budgets are forecast to continue until the 2024 – 2025 fiscal year. This will place Ontario’s net debt at $400 Billion up from the current $325 billion. The following tax changes will help pay for that debt level.
Changes to Personal Tax Brackets. Ontario has restructured its personal income tax brackets, resulting in an elimination of its surtaxes and the creation of seven Ontario tax rates effective July 1, 2018. These changes will increase taxes for about 1.8 million taxpayers by about $200. That is, budget documents show that an Ontario taxpayer with a taxable income of $95,000 will pay an additional $168 in personal income taxes. Here’s how the new tax rate structure looks with the surtax incorporated into the various brackets:
|Current and Proposed 2018 PIT Rates and Brackets|
|Current (including Impact of Surtax)||Proposed (No Surtax)|
|Until June 30, 2018||Effective July 1, 2018|
|$42,960 - $85,923||9.15% (no surtax) 10.98 (includes 20% surtax) 14.27% (includes 56% surtax)||$42,960 - $71,500||9.15%|
|$85,923 - $150,000||17.41% (includes 56% surtax)||$71,500 - $82,000||11.00%|
|$150,000 - $220,000||18.97% (includes 56% surtax)||$82,000 - $92,000||13.50%|
|Greater than $220,000||20.53% (includes 56% surtax)||$92,000 - $150,000||17.50%|
|$150,000 - $220,000||19.00%|
|Greater than $220,000||20.53%|
|Note: Surtax is calculated based on Ontario Basic Tax after non-refundable tax credits. A 20% surtax rate applies to Ontario Basic Tax between $4,638 and $5,936 and a surtax rate of 56% applies to Ontario Tax greater than $5,936. For an individual claiming only the Basic Personal Exemption, this equates to a 20% surtax on taxable income of $75,653 and the 56% surtax begins to apply at $89,134.|
|Impact of Proposed Tax Bracket Changes - 2018|
|Taxable Income ($95,000)||Current||Proposed||Changes in PIT|
|PIT (excluding surtax)||$6,417||$7,114||Plus $697|
|Plus Surtax||$529||$0||Less $529|
|Ontario PIT||$6,946||$7,114||Net Impact = $168|
Since Ontario’s surtax was previously calculated after applying the non-refundable credits, the bracket re-structuring results in a reduced credit impact for higher income earners.
|Tax Relief from Basic Personal Amount - 2018|
|Surtax Payer at first rate (20%)||$627||$523|
|Surtax Payer at second rate (56%)||$816||$523|
Changes to Charitable Donation Credit. Ontario currently allows a non-refundable credit on charitable donations of 5.05 percent of the first $200 and 11.16 percent on the balance. Effective July 1, 2018 the second bracket will increase from 11.16 percent to 17.5 percent. This will result in the non-refundable tax credit having the same effect for all taxpayers due to the elimination of the surtax calculation, effective July 1, 2018.
|Tax Relief from a $2,000 Charitable Donation - 2018|
|Surtax Payer at first rate (20%)||$253||$325|
|Surtax Payer at second rate (56%)||$329||$325|
For the purposes of calculating social assistance, there have been a number of changes. Currently applicants will be denied social assistance if their assets exceed the following limits:
|Benefit Unit Size||Maximum Asset Limit|
|Single applicant or recipient (no spouse and no dependents)||$10,000|
|Applicant or recipient with a spouse (no other dependents)||$15,000|
|Applicant or recipient with a spouse and one other dependent||$15,500|
|Applicant or recipient with a spouse and one dependent, plus additional dependents||$15,500 + $500 for each additional dependent|
|Applicant or recipient with one dependent (no spouse)||$10,500|
|Applicant or recipient with one dependent, plus additional dependents (no spouse)||$10,500 + $500 for each additional dependent|
|Child in temporary care or a dependent of a dependent||$500|
Starting in 2018, the asset limits that reduce social assistance have been eliminated when there are savings in Tax-Free Savings Accounts or Registered Retirement Savings Plans (RRSPs). Limits on cash and other liquid assets will increase to $15,000 for singles and $20,000 for couples receiving Ontario Works and will be fully eliminated for those receiving Ontario Disability Support Program Benefits, effective during the 2019–20 fiscal year.
The duration of living together for the definition of a “spouse” will change from three months to three years, consistent with the Family Law Act. As a result, a social assistance recipient will be able to live with a partner to whom they are not married, for three years before the income and assets of the partner are considered in determining eligibility for social assistance.
For private business owners, some additional changes:
Changes to Private Corporations: Income Sprinkling and Passive Income. The Ontario government will introduce legislation designed to mirror the Federal Income Sprinkling and Small Business Deduction Limit reduction. This will result in an addition to the federal Tax on Split Income (33 percent) of 20.53 percent in Ontario. In addition, increased corporate tax rates in Ontario to 11.5 percent create combined general rate of 44.5 percent when income exceeds the Small Business Deduction. Ontario is also mirroring the reduction of the Small Business Deduction as it applies to passive income inside a private corporation.
Ontario Research and Development Tax Credit. The ORDTC is a non-refundable corporate tax credit designed to encourage and assist businesses in Research and Development costs. Effective March 28, 2018, the Ontario government will increase the non-refundable credit to 5.5 percent for ORDTC expenditures exceeding $1 million in a taxation year. On amounts less than $1 million, the rate of 3.5 percent applies.
Ontario Innovation Tax Credit. The OITC has been enhanced for small to medium sized businesses who invest in Research and Development. The current refundable credit of 8 percent of expenditures remains, however businesses that invest higher ratios of their gross income will benefit form a higher refundable credit. The budget describes the following calculations for eligible R&D expenditures incurred on or after March 28, 2018: if a company qualifies for the OITC, with ratio of R&D expenditures to gross revenues as follows, the following tax credit rates result:
- Ratio of 10% or less: The OITC is calculated at the current 8% rate;
- Between 10% and 20%: an enhanced OITC rate from 8% to 12% on a straight‐line basis is possible as the company’s ratio of R&D expenditures to gross revenue increases from 10% to 20%; and
- 20% and above, the company would be eligible for the OITC at a 12%.
For the purposes of this calculation, both the gross revenues and R&D expenditures must be on account of Ontario operations. Gross revenues and R&D expenditures of associated corporations must be aggregated.
Employer Health Tax Exemption. Ontario levies an Employer Health Tax based on the payroll costs of businesses operating in Ontario. Currently Ontario businesses are exempt on the first $450,000 of payroll. Effective January 1, 2019 the exemption for this payroll tax will be limited to businesses meeting the same eligibility requirements to claim the Small Business Deduction under the Income Tax Act, up to the $450,000 threshold.
In addition, Ontario will incorporate Federal anti-avoidance rules related to the multiplication of the Small Business Deduction when determining exemption eligibility for Employer Health Tax purposes. It is expected that 20,000 Ontario businesses will pay $2,400 or more per year in Employer Health Tax.
Closing Tax Loopholes. The Ontario Government proposed two measures to address loopholes previously announced by the Federal Government. Ontario will mirror Federal legislation concerning “synthetic equity arrangements” and “securities lending arrangements”. In addition, Ontario will implement specific stop-loss rules applicable to share repurchase transactions. These measures will become effective and automatically parallel Federal legislation once approved.
These tax measures will raise a total of $2 Billion by the year 2020-2021, as illustrated below:
|Tax Measures ($ Millions)|
|Improving Fairness and Transparency of Ontario’s Personal Income Tax||275||285||295|
|Improving Economic Competitiveness|
|Ontario Research and Development Tax Credit*||(30)||(35)||(40)|
|Ontario Innovation Tax Credit*||(35)||(45)||(50)|
|Targeting the Employer Health Tax Exemption to Small Employers||10||45||45|
|Paralleling Federal Measures|
|Small Business Limit||45||145||160|
|Closing Tax Loopholes||190||225||230|
|Ontario Portion of Federal Cannabis Excise Duty||35||80||115|
|Notes: Numbers may not add due to rounding|
|* Measures represent an increase in government expenditures|
Additional educational resources: Subscribe to Knowledge Bureau’s Evergreen Explanatory Notes – instructional briefs that act as your resource library for personal and corporate tax, and join us at the Spring CE Summits for workshops focused on post-budget action strategies.
COPYRIGHT OWNED BY KNOWLEDGE BUREAU INC. 2018.
UNAUTHORIZED REPRODUCTION, IN WHOLE OR IN PART, IS PROHIBITED.