Ontario post-election budget - 2014: A repeat of the May 1 pre-election budget
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Ontario post-election budget 2014: A repeat of the May 1 pre- election budget July 14, 2014 On July 14, 2014, Ontario Finance Minister Charles Sousa tabled the province’s fiscal 2014–2015 budget. The budget is almost the same as the pre-election budget tabled on May 1, subject to a few small changes. As announced on May 1, the budget forecasts a deficit of $11.3 billion for 2013–2014 and is projecting deficits of $12.5 billion in 2014–15, $8.9 billion in 2015–16 and $5.3 billion in 2016–17. Plans are to balance the budget by 2017-18. The government plans to invest over $130 billion in public infrastructure over the next 10 years, including $29 billion for transportation infrastructure. To assist with funding these improvements, the budget proposes to increase taxes on high income earners, tobacco and aviation fuel. Other revenue generating measures are proposed as well. There are no proposed hikes in gasoline tax or the HST. One of the more publicized items in the budget is the proposal to introduce an Ontario Retirement Pension Plan for employees residing in Ontario who do not participate in a workplace pension plan. Following is a summary of the tax measures in the budget, as well as some details on the proposed Ontario Retirement Pension Plan. Ontario Retirement Pension Plan The government proposes to introduce a new mandatory provincial pension plan commencing in 2017—the Ontario Retirement Pension Plan (ORPP). The objective of the ORPP is to enhance pension coverage for Ontario employees without workplace pension plans. Employees who already participate in a comparable workplace pension plan will not be required to enrol in the ORPP. Key design features will include • the requirement for equal contributions, shared between employers and employees, not exceeding 1.9% each (3.8% combined) on earnings up to a maximum annual threshold Audit • Tax • Advisory © Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved.
of $90,000 (to be increased each year consistent with increases to the CPP maximum earnings threshold), resulting in a replacement rate of 15% of an individual’s earnings; • the pooling of longevity and investment risk and indexing of benefits to inflation, similar to the CPP; • the exemption from contributions for earnings below a certain threshold will be similar to the CPP, although the government has not yet decided whether the exemption amount will mirror the $3,500 CPP exemption. The budget provided several illustrative examples, including one of an employee with steady career earnings averaging $90,000 per year, in 2014 dollars. With a contribution rate of 1.9%, this employee would contribute about $1,643 annually to the ORPP, matched by the employer. This would result in a maximum ORPP benefit of $12,815 annually 1. Combined ORPP and CPP benefits would be about $25,275 (in 2014 dollars). The ORPP will be publicly administered. Enrolment of employers and employees into the ORPP will occur in stages, beginning with the largest employers. Contribution rates will be phased in over two years. The government will consult with Ontario employers, labour, and the federal government in order to facilitate the implementation of the ORPP. Further technical details will be released later this year prior to introducing legislation. Additional consultations will be held regarding the possible development of a retirement planning program for the self- employed. Business tax measures Corporate tax rates No changes were announced to the general corporate income tax rates. Ontario’s current corporate tax rates are summarized below: Table A Date Small business tax General corporate Manufacturing and rate tax rate processing income tax rate 2014 4.5% 11.5% 10.0% Small business deduction Canadian controlled private corporations (CCPCs) can apply the small business deduction (SBD) to reduce their corporate tax rate to 4.5% on the first $500,000 of Ontario active business income. All CCPCs with Ontario active business income are eligible, regardless of how large they are. 1 Assuming 40 years of contributions are made over the course of the employee’s career. Audit • Tax • Advisory © Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved.
The government proposes to limit access to the SBD to smaller CCPCs by paralleling the federal SBD phase-out, effective for tax years ending after May 1, 2014 and pro-rated for tax years which straddle May 1, 2014. The SBD will begin to be phased out for large CCPCs with more than $10 million in taxable capital employed in Canada in the previous year (on an associated group basis), and will be fully eliminated once the taxable capital employed in Canada in the previous year exceeds $15 million. Corporate tax avoidance The government is proposing to introduce legislation which would require corporations in Ontario to disclose aggressive tax avoidance transactions to the Canada Revenue Agency (which administers Ontario corporate taxes). The approach will parallel the existing federal and Quebec reportable transaction measures. Ontario is also proposing to automatically parallel the federal initiatives 2 announced in the 2014 federal budget addressing aggressive international tax planning in respect to captive insurance and offshore regulated banks. Training tax incentives Currently, Ontario provides refundable tax credits to businesses on the salaries and wages paid to Ontario apprentices and co-op students (the Apprenticeship Training Tax Credit (ATTC) and Co-operative Education Tax Credit (CETC)). Since these tax credits are refundable, businesses can receive tax support even if no income tax is payable in a year. The government announced that it plans to review training tax credits for large businesses with the intention of limiting these tax credits to the amount a business pays in income tax. Consultation on R&D incremental tax incentives The government is reviewing options to restructure its tax support for Ontario research and development (R&D) activities and is considering introducing incremental tax incentives which would reward increased expenditures on R&D. One possible approach: • companies that increase R&D investments 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 support, and; • companies that significantly decrease R&D investment would have existing provincial tax credit rates reduced. The government intends to consult with businesses and research organizations on this approach. 2 Subject to federal implementation. Audit • Tax • Advisory © Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved.
Personal tax Personal income tax rates The budget proposes tax increases for taxable income over $150,000. Significantly, the taxable income threshold above which the highest Ontario marginal income tax rate of 13.16% applies, will be lowered from $514,090 to $220,000. A new tax rate of 12.16% will apply on taxable income between $150,000 and $220,000. Currently, a rate of 11.16% applies to taxable income between $80,242 and $514,090. The proposed tax increases will be effective for the 2014 tax year. In addition, the new income thresholds will not be adjusted for inflation each year, unlike the current thresholds. Ontario will continue to provide a charitable donation tax credit rate of 5.05% on the first $200 of donations each year, and 11.16% on donations over that amount. Table B illustrates the 2014 current and proposed marginal rate of tax on various types of income for taxable income between $150,000 and $220,000. Table C shows the same percentages for taxable income over $220,000. Table B – Taxable income from $150,000 to Rate Rate $220,000 Type of Income 2014 current 2014 proposed Interest 46.4% 48.0% Capital gains 23.2% 24.0% Eligible dividends 29.5% 31.7% Regular dividends 36.5% 38.3% Table C – Taxable income from $220,001 to Rate Rate $514,090 (current) and over $220,000 (proposed) Type of Income 2014 current 2014 proposed** Interest 46.4% 49.5% Capital gains 23.2% 24.8% Eligible dividends 29.5% 33.8% Regular dividends 36.5% 40.1% ** These rates currently only apply to taxable income over $514,090. Tax credit for farmers The Local Food Act, 2013, which received Royal Assent on November 6, 2013, introduced a new non-refundable income tax credit for farmers who donate food to community food programs, including food banks. The credit is worth 25% of the value of the agricultural goods donated and can be claimed for donations made beginning January 1, 2014. The government will bring forward regulations to implement the credit. Audit • Tax • Advisory © Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved.
Other measures Tax on aviation fuel The government proposes to increase the tax on aviation fuel from 2.7¢ per litre (the rate in effect since 1992) to 6.7¢ per litre over a four year period, with increases of 1¢ per litre per year. The 2014 increase to 3.7¢ per litre will be effective September 1, 2014. Subsequent increases will be effective on April 1 each year until 2017. Fuel tax exemption Currently, tax-exempt diesel fuel can be used in unlicensed commercial vehicles such as road-building machines. The government proposes to effectively eliminate this fuel tax exemption by amending the Highway Traffic Act by 2016 to impose registration and licensing requirements on road-building machines (for example, mobile cranes, concrete pumpers, and hyrdovacs) that use public roads and highways. Tobacco taxes Ontario is proposing to increase the tobacco tax rate from 12.35¢ to 13.975¢ per cigarette (from $24.70 to $27.95 per carton of 200 cigarettes) and per gram of tobacco products other than cigarettes and cigars, effective May 2, 2014. The tax rate for cigars remains unchanged at 56.6% of the taxable price. Wholesalers of tobacco products that are not collectors of tobacco tax are required to take an inventory of all tobacco products (except cigars) they hold at the end of May 1, 2014 and remit the additional tax on the inventory to the Ministry of Finance. Land transfer tax The Ministry of Finance has been reviewing aggressive tax avoidance structures and is particularly concerned that some of these structures attempt to use Ontario Regulation 70/91, made under the Land Transfer Tax Act, in a manner inconsistent with its intent. The regulation provides a “de minimis” partnership exemption that is intended to apply to small changes in partnerships that own land. The exemption is not to be used as a vehicle to acquire land without payment of tax. The province proposes to introduce a general anti-avoidance rule into the Land Transfer Tax Act, applicable to transactions that are completed after May 1, 2014 and transactions that are part of a series of transactions that are completed after May 1, 2014. Pooled Registered Pension Plans The government intends to proceed with a legislative framework for Pooled Registered Pension Plans (PRPP) in the fall of 2014 that will be consistent with the model introduced by the federal government. An Ontario PRPP will include voluntary participation and contributions by employers, automatic enrolment of employees (where an employer elects to offer a PRPP), and low cost. Audit • Tax • Advisory © Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved.
About Grant Thornton in Canada Grant Thornton LLP is a leading Canadian accounting and advisory Paralleling federal tax measures firm providing audit, tax The government announced that it would adopt a number of 2014 federal budget and advisory services to private and public proposals, once federal legislative and regulatory changes have been approved. These organizations. We help dynamic organizations measures include unlock their potential for growth by providing meaningful, actionable • medical expenses; advice through a broad • HST exemption for certain health-related services and medical devices; range of services. Together with the • tax changes for farmers and fishers; Quebec firm Raymond Chabot Grant Thornton • amateur athlete trusts; LLP, Grant Thornton in • estate donations; Canada has approximately 4,000 • non-resident trusts; people in offices across • pension transfer limits; Canada. Grant Thornton LLP is a Canadian • new limitations on shifting income to a minor child; member of Grant Thornton International • donations of ecologically sensitive land and certified cultural property; Ltd, whose member and • clean energy generation equipment; and correspondent firms operate in over 100 • tax on insurance swaps and offshore regulated foreign financial institutions. countries worldwide. The government also proposes to review the 2014 federal budget proposals to change the The information contained herein is taxation of certain trusts and estates that pay income tax at graduated rates. prepared by Grant Thornton LLP for information only and is Please contact your Grant Thornton LLP adviser if you have any questions about any of not intended to be either the measures included in this release. a complete description of any tax issue or the opinion of our firm. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein. You should consult your Grant Thornton LLP adviser to obtain additional details and to discuss whether the information in this article applies to your specific situation. A listing of Grant Thornton offices and contact information can be found on our Web site at: www.GrantThornton.ca Audit • Tax • Advisory © Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved.
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