Future Tax Headaches: More Rising Provincial Deficits

Geoff Currier

There are tax headaches to face down the line. Every province and territory which has delivered a new and projected a large deficit. That trend continued with Ontario, but there are some tax breaks, too. Finance Minister Peter Bethlenfalvy delivered his government's budget on March 26 with  “A Plan to Protect Ontario”.  The size of the deficit for the coming year could affect taxpayers for decades to come.   Here’s why it’s important to review this with your clients in Ontario – and those who plan to move there in 2026.

More Debt: Bethlenfalvy is projecting a deficit of $13.8 billion, up from last year’s $12.3 billion. More significantly, year ago he was forecasting a deficit of $7.8 billion for this year. He has an ambitious plan to reduce that deficit to $6.1 billion in 2027-28 and to produce a surplus by 2028-29.  However, expect tax planning to be required for high wealth individuals before then.

Individual Tax Breaks: Buyers of new homes will be pleased to learn that Ontario has confirmed that it will harmonize with the federal plan and will eliminate the provincial portion of the HST on new homes valued up to $1 million and new residential rental properties for one year. The savings would amount to a maximum of $80,000 and that figure will remain in place for homes valued at between $1 million and $1.5 million. For new homes valued at more than $1.5 million, the reduction will be gradually reduced.

Individuals who receive the Ontario Trillium Benefit (OTB) of $500 or less will now get a lump sum payment while those eligible for the OTB of more than $500 for the benefit year will continue to receive monthly payments unless they chose on their tax return to receive a lump sum payment

Small Business Break: The most significant tax measure in this budget has to do with the small business tax rate. Some 375,000 small businesses will see their tax rate reduced from 3.2% to 2.2% beginning July 1, 2026. That rate will be prorated for the taxation years which overlap July 1, 2026.

To align with the reduction in the small business CIT rate, Ontario’s small business (non-eligible) dividend tax credit rate for individual shareholders will be reduced from 2.9863 per cent to 1.9863 per cent, effective January 1, 2027.

The Regional Opportunities Investment Tax Credit will end January 1, 2027.

Change to Benefit Plans: There’s a change to the Corporations Act. It impacts funded benefit plans to elect to be treated as unfunded benefit plans, effective April 1, 2026. According to the budget document “This amendment will allow planholders of the benefit plans to make an election that would trigger a CT-IP liability once benefits are paid out of the plan, instead of when contributions are paid into the plan.”

Relief on the Highways.   Some measures were re-announced in this budget, including the energy rebate, the reduction of the provincial tax per litre on gas at the pump and the removal of the toll on highway 407 East.

Alcohol Taxes:   Beer, wine and spirits taxes have been simplified and reduced. Beer will be taxed at $1.18 per litre for non-draft and $0.90 for draft beer made by manufacturers. The tax on craft beer will be $0.46 for non-draft beer and $0.36 for draft beer made by microbreweries.

Ontario wines and wine coolers will not be taxed at the provincial level. A rate of 19.1% will be applied to non-Ontario wines and wine coolers. A single rate of 12 per cent will apply on owner wines and wine coolers sold in off-site winery retail stores.

The budget states “The spirits and spirits coolers categories would be replaced with three categories distinguished by alcohol by volume (ABV): (1) 7.1 per cent or below; (2) greater than 7.1 per cent to 18 per cent; and (3) greater than 18 per cent. The government is proposing to combine the basic, volumetric and environmental spirit taxes into a single rate of 20 per cent on the first category, 25 per cent on the second category and 30.75 per cent rate on the third category.”

The government is deferring the requirement for tax filing and reporting from April to July of this year.

The Bottom Line: The word “headwinds” appears in more than one provincial budget so far this year including this one.  The Ford government in Ontario speaks of the challenges brought about by U.S. tariffs and global uncertainty. Nevertheless, this budget has a long-term ambition of returning to surplus within three years.