Evelyn Jacks: ìTax on the Richî hits Ontario families July 1

High net-worth (HNW) families in Ontario and their advisors will want to review the province's new tax rate that takes effect July 1. Anyone whose taxable income exceeds $500,000 ó 25,000 high-income earners or 0.4% of Ontario taxpayers ó will see his or her tax rate go up by 2%. But concerns are mounting that the new tax, which was meant to boost Ontario's lagging tax revenues and reduce the deficit, may have unintended consequences.

The top 1% of Ontario taxpayers already provides 27% of Ontario's income tax revenues. (The bottom 75% provides only 12% of Ontario's tax revenues.) Yet, as of July 1, high-income earners will pay more. Once the 56% provincial surtax is applied to that 2%, the increase comes to 3.1 percentage points, boosting the combined federal/provincial tax rate to 49.5% from 46.4%. Half those amounts will apply in 2012, as the tax takes effect July 1.

But a June 13 report by the C.D. Howe Institute, entitled Ontario's Tax on the Rich: Grasping at Straw Men notes the tax may have unintended longer-term results. Although only a small percentage of Ontario taxpayers, writes the report's author Alexandre Laurin, associate director of research, the targeted HNW families are very important to the personal tax system. If they were lost to other tax jurisdictions, all Ontario residents would feel the impact.

And this is a definite possibility. Economic studies citied in the report note that taxes have a significant effect on behaviour. Given that skilled, high-income individuals are highly mobile, they can respond to higher taxation by moving to lower-taxed jurisdictions (provincial or international).

Source: Knowledge Bureau, Inc. All rights reserved.

The numbers tell the story: effective tax planning can preserve wealth from this new tax. The C.D. Howe report estimates that, with proper planning, high-income earners will probably reduce their taxable income by about 2% in the short term and by more than 10% in the long run, as planning kicks in. These responses may affect federal tax revenues as well. Most significant, the report concludes, if high-income earners respond by reducing their labour supply and earning less over the longer term, this tax will be ineffective, putting our fragile economic recovery at risk and robbing tax treasuries rather than supplementing them.

It's Your Money. Your Life. Arranging your financial affairs within the framework of the law to pay the least taxes possible is your legal right and duty under the Income Tax Act. Astute tax and wealth advisors will want to work closely with their HNW clients to determine the right response to this new tax and thwart its eroding effect on their incomes and capital. The more effective the planning, the more wealth will be created and preserved, adding to future tax revenues and fighting the eroding effects of inflation and other unforeseen economic events.