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
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

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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.

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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.

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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.

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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.

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