Ontario Budget Report 2018 | FBC, Canada's Farm & Small Business Tax Specialist

Ontario Budget Report 2018

Ontario Budget Report 2018

Ontario Budget Report 2018

“A Plan for Care and Opportunity”

On March 28, 2018, the Honourable Charles Sousa presented his seventh budget as Minister of Finance.

The budget contains several tax measures affecting individuals and corporations, including the elimination of the high-income surtax from the calculation of total Ontario personal income tax.

Highlights

  • Surplus of $642 million now forecast for 2017‑18
  • Projected deficits of $6.7 billion, $6.6 billion, and 6.5 billion in the next three fiscal years (from 2018-19 to 2020-21).
  • No changes are proposed to the corporate tax rates or the $500,000 small-business limit
  • Elimination of the surtax and consequential adjustments to personal tax rates and brackets, effective 1 January 2018

One year ago, the minister projected a return to a balanced budget beginning in 2017-18. However, in this budget, the minister is projecting deficits for each of the next 3 years.

Measured in relation to the size of the economy, the Ontario accumulated deficit is expected to decline to 22.7% of gross domestic product (GDP) by 2020-21.

The government indicated they are making new investments of $20.3 billion over 3 years in health care, home care, mental health, child care and more to deliver the care and services people depend on.

The government plans a return to a balanced budget in 2024–25.

    Personal Tax Measures

    Person Income Tax Rates

    The minister proposes to eliminate the surtax and make consequential adjustments to personal tax rates and brackets, effective 1 January 2018.

    Ontario’s surtax is calculated on Ontario basic income tax and is, effectively, a tax on a tax.

    For 2018, a 20% surtax rate would apply to Ontario income tax between $4,638 and $5,936, and a 56% surtax rate would apply to Ontario income tax in excess of $5,936.

    Although the proposal to eliminate the surtax will simplify the personal income tax system, the proposed statutory rates will still approximate the existing marginal tax rates (that incorporate the surtax) as below:

    Pre-budget
    bracket

    Pre-budget
    rate

    Pre-budget rate
    with surtax

    Proposed bracket

    Proposed
    Rate

    $0 to $42,960

    5.05%

    5.05%

    $0 to $42,960

    5.05%

    $42,961 to $85,923

    9.15%

    9.15% or 10.98% or 14.27%

    $42,961 to $71,500
    $71,501 to $82,000
    $82,001 to 92,000

    9.15%
    11.00%
    13.50%

    $85,924 to $150,000

    11.16%

    17.41%

    $92,001 to $150,000

    17.50%

    $150,001 to $220,000

    12.16%

    18.97%

    $150,001 to $220,000

    19.00%

    Above $220,001

    13.16

    20.53%

    Above $220,001

    20.53%

    For taxable income in excess of $150,000, the 2018 combined federal–Ontario personal income tax rates are outlined below.

    Bracket

    Ordinary income*

    Eligible dividends

    Non-eligible dividends

     

    Current

    Proposed

    Current

    Proposed

    Current

    Proposed

    $150,001 to $205,842

    47.97%

    48.00%

    31.67%

    31.71%

    40.39%

    40.42%

    $205,843 to $220,000

    51.97%

    52.00%

    37.19%

    37.23%

    45.03%

    45.06%

    Above $220,000

    53.53%

    53.53%

    39.34%

    39.34%

    46.84%

    46.84%

    * The rate on capital gains is one-half the ordinary income tax rate

    Ontario Charitable Donation Tax Credit

    The current Ontario charitable donation tax credit (OCDTC) rate is 5.05% on the first $200 in eligible donations and 11.16% for eligible donations in excess of $200.  

    However, the impact of the surtax calculation effectively increases the OCDTC rate up to a maximum of 17.41% for surtax payers. 

    The budget proposes to increase the OCDTC rate to 17.5% for all taxpayers for eligible donations in excess of $200, effective 1 January 2018.

    Income Sprinkling Rules

    The federal government recently introduced measures to extend the tax on split income rules (which applies the top marginal federal personal income tax rate of 33%) to include certain adult family members receiving income or realizing taxable capital gains directly from family businesses carried on by private corporations, or indirectly through trusts or partnerships (the so-called income sprinkling rules).

    The proposed rules are designed to limit income splitting among family members. Prior to the introduction of these measures, the tax on split income applied only to minor children.

    The Ontario budget announced that it will automatically parallel these measures once the federal proposals are enacted.

    Therefore, the top Ontario rate of 20.53% will apply to split income received by an adult family member.

    Personal Tax Credits For 2018

    The maximum tax credit amounts and actual Ontario tax credits for 2017 and 2018 are set out below.

    Ontario Non-Refundable Tax Credits

     

    2017

    2018

    Maximum Amount

    Ontario Tax
    Credit

    Maximum Amount

    Ontario Tax Credit

    Basic Personal Amount

    $10,171

    $514

    $10,354

    $523

    Spousal Amount

    8,636

    436

    8,792

    444

    Eligible dependent amount

    8,636

    436

    8,792

    444

    Age amount

    4,966

    251

    5,055

    255

    Canada Caregiver Amount

    4,794

    242

    4,881

    246

    CPP Contributions

    2,564

    129

    2,594

    131

    EI Contributions

    836

    42

    858

    43

    Pension income amount

    1,406

    71

    1,432

    72

    Disability amount

    8,217

    415

    8,365

    422

    Disability supplement

    4,792

    242

    4,879

    246

    Tuition and education amounts

    Variable

    Variable

    Variable

    Variable

    Adoption expenses (max)

    12,409

    627

    12,632

    638

    Medical expenses

    N/A

    Variable

    N/A

    Variable

    Medical expenses (other dependents)

    12,409

    Variable

    12,632

    Variable

    Interest on student loans

    Variable

    Variable

    Variable

    Variable

    Donations & Gifts
    -first $200
    - over $200


    200
    75% of income


    10.10
    Variable


    200
    75% of income


    10.10
    Variable

    In general, credits are multiplied by 5.05% to arrive at the deduction from Ontario Tax.  In the case of donations and gifts over $200, the credit is 11.16% in 2017 and proposed to increase to 17.50%

    Corporate Tax Measures

    Corporate Tax Rates – No changes

    Ontario’s 2018 budget has not changed the province’s corporate tax rates. The combined federal and Ontario corporate income tax rates will be as follows:

     

    2018

    2019

    Ontario

    Federal and
    Ontario Combined

    Federal and
    Ontario Combined

    Small business rate *, **

    3.50%

    13.50%

    12.50%

    Manufacturing & Processing

    10.00%

    25.00%

    25.00%

    General Corporate rate

    11.50%

    26.50%

    26.50%

    * On the first $500,000 of active business income.  The small-business rate is prorated based on a 31 December year-end.
    ** On 24 October 2017, the federal government tabled a notice of ways and means motion to implement reductions in the small-business corporate income tax rate, which were announced on 16 October 2017. The federal small-business rate is reduced from 10.5% to 10.0% effective 1 January 2018 and will be further reduced to 9.0% effective 1 January 2019.

    Ontario Small Business Deduction Grind:

    Currently, the Ontario $500,000 small-business limit on active business income is phased out on a straight-line basis for Canadian-controlled private corporations (CCPCs) and associated corporations that have between $10 million and $15 million of taxable capital employed in Canada.

    Ontario intends to parallel a 2018 federal budget proposal that provides an additional phase-out, or grind, of the $500,000 small-business limit.

    For taxation years beginning after 2018, the small-business limit will be phased out on a straight-line basis for CCPCs (and associated corporations) earning between $50,000 and $150,000 of passive investment income in the taxation year (a small-business limit reduction of $5 for every $1 of passive investment income in excess of $50,000).

    The effective CCPC small-business limit will be the lower of the limit determined on the basis of taxable capital and the limit determined on the basis of passive investment income.

    Ontario Research and Development Tax Credit (ORDTC):

    The government proposes to enhance the non-refundable ORDTC by increasing the credit rate from 3.5% to 5.5%, applicable to eligible research and development (R&D) expenditures exceeding $1 million in a taxation year and incurred on or after 28 March 2018.

    The enhanced tax credit rate will be prorated for taxation years straddling 28 March 2018.  The $1 million threshold will be pro-rated for short taxation years.

    The 5.5% credit rate will not be available for businesses where eligible R&D expenditures in the current taxation year are less than 90% of eligible R&D expenditures in the prior year.

    Eligible expenditures in short taxation years will be increased to the full-year equivalent.

    For the purpose of determining a prior taxation year’s eligible expenditures, where a corporation amalgamates with or is wound up into another corporation, each predecessor corporation’s eligible expenditures will be deemed to be transferred to the successor.

    Ontario Innovation Tax Credit (OITC):

    Ontario is proposing to enhance the 8% refundable OITC for eligible expenditures incurred on or after 28 March 2018.  Specifically, if a corporation qualifies for the OITC and has a ratio of R&D expenditures to gross revenues that is:

    • 10% or less, the corporation may continue to claim the OITC at the current credit rate of 8%.
    • Between 10% and 20%, the corporation will be able to claim an enhanced OITC rate that will increase from 8% to 12% on a straight-line basis.
    • 20% or greater, the corporation will to able to claim the OITC at a rate of 12%.

    For the purpose of determining this ratio, both R&D expenditures and gross revenues must be attributable to Ontario operations.  

    Amounts attributable to Ontario operations of associated corporations will be aggregated.

    The enhanced rates will be pro-rated for taxation years straddling 28 March 2018.

    Ontario Interactive Digital Media Tax Credit (OIDMTC)

    Ontario will extend OIDMTC eligibility to film and television websites purchased or licensed by a broadcaster and embedded in the broadcaster’s website.

    This amendment will apply to websites that host content relating to film, television or internet productions that have not received a certificate of eligibility or letter of ineligibility before 1 November 2017.

    Commercialization of intellectual property

    Ontario is reviewing various tax incentives implemented in other jurisdictions for the purpose of encouraging the commercialization of intellectual property. 

    These include measures such as preferential corporate income tax rates (i.e., patent boxes), tax refunds, tax deductions and exemptions.

    Ontario intends to develop a provincial incentive after reviewing these options for effectiveness and feasibility.

    Currently, the Ontario tax exemption for commercialization provides a 10-year corporate income “tax holiday” for corporations that:

    • Were incorporated between 24 March 2008 and 25 March 2012.
    • Are in the business of commercializing intellectual property developed by qualifying Canadian universities, colleges and research institutes.

    Microbrewers and Small Beer Manufacturers

    Ontario proposes to amend the small beer manufacturer’s tax credit and the definition of microbrewer in the Alcohol and Gaming Regulation and Public Protection Act, 1996 to encourage the growth of small beer manufacturers and microbrewers.

    These changes will be made retroactive to 1 March 2018.

    Paralleling Federal Corporate Tax Measures

    The budget states that Ontario will parallel federal tax measures affecting:

    • Income sprinkling by private companies
    • Passive investment income of private companies
    • “Synthetic equity arrangement” and “securities lending arrangement” rules and a stop-loss rule applicable to share repurchase transactions.

    Other Measures

    (Not related to income tax)

    Taxation of Cannabis Products

    Ontario confirmed it will enter into an agreement with the federal government regarding the collection and sharing of cannabis duties.  

    Under this agreement, it will receive 75% of the federal excise tax collected on cannabis intended for sale in the province.

    Ontario also indicated that the full 13% HST will apply to off-reserve purchases of recreational cannabis by status Indians when it is legalized.

    This is consistent with the current practice for off-reserve purchases of alcohol and tobacco.

    However, a status Indian who is registered to obtain medical cannabis from a licensed producer will remain eligible for a rebate of the 8% provincial portion of the HST for purchases that are delivered off-reserve.

    Land Transfer Tax

    To ease land transfer tax compliance, Ontario plans to draft a new regulation that will allow land transfer tax arising from certain unregistered dispositions of a beneficial interest in land through certain partnerships and trusts to be payable 30 days after the end of the calendar quarter in which the disposition occurred, rather than within 30 days of the disposition.

    Railway Right-of-Way Property Taxation

    Municipalities will have the option to increase property tax rates per acre on high-tonnage

    rail lines based on a new adjusted tax rate schedule.

    The budget states that details of the

    tax rate schedule will be communicated to municipalities and the rail industry in the spring.

    Tobacco Tax

    In accordance with measures announced in Ontario’s 2017-18 budget to increase the tobacco tax rate by $10 per carton over a period of three years, the province will increase its tobacco tax from 16.475¢ to 18.475¢ per cigarette and per gram of tobacco products other than cigars, effective 12:01 a.m. on 29 March 2018.

    These changes are equivalent to $4 per carton of cigarettes. Ontario intends to further increase the tobacco tax rate by an additional $4 per carton of cigarettes in 2019.

    Ontario also announced it will amend the Tobacco Tax Act to introduce new compliance measures, such as adding penalty and offence provisions for failing to notify the ministry prior to destroying raw leaf tobacco.

    Employer Health (Payroll) Tax

    In order to better target the payroll tax exemption, Ontario is proposing to apply the eligibility criteria for the small-business deduction to the payroll tax exemption.

    Therefore, the exemption will be available only to employers that are individuals, charities, not-for-profit organizations, private trusts and partnerships, or CCPCs.

    Ontario will also amend the Employer Health Tax Act by incorporating federal anti-avoidance rules relating to the multiplication of the small-business deduction.  

    Ontario will also determine the payroll tax rate for associated employers in a way that is consistent with the application of the exemption threshold for such employers.

    The applicable legislative amendments, if enacted, will take effect on 1 January 2019. Ontario will provide a period for public consultation before introducing legislation for the anti-avoidance measures.

    Underground Economy Initiative re Electronic Sales Suppression

    Ontario will enact the Revenue Integrity Act, 2018 to address the practice of electronic sales suppression.  

    This legislation will require every person who carries on a prescribed business in Ontario to record and report sales transaction information using an electronic cash register.

    The minister may use this information in connection with the administration and enforcement of Ontario tax laws and may disclose it to the CRA to assist in the administration and enforcement of certain federal tax laws.

    The legislation also allows the minister to impose administrative penalties against persons who contravene certain provisions or fail to comply with a compliance order.

    The Revenue Integrity Act, 2018 will take effect upon proclamation.

    How Ontario Compares

    The following chart compares top personal and corporate tax rates and sales taxes for all provinces and territories, as announced to March 28, 2018.

     

     

    2018 Corporate Tax Rates

     

     

    Top 2018
    Personal Rates

    General
    %

    M&P
    %

    Small Business
    %

    2018 Prov.
    Sales Tax

    B.C.

    49.80

    27.00

    27.00

    12.00

    7.00

    Alta.

    48.00

    27.00

    27.00

    12.00

    -

    Sask.

    47.50

    27.00

    25.00(1)

    12.00

    6.00

    Man.

    50.40

    27.00

    27.00

    10.00

    8.00

    Ont.

    53.53

    26.50

    25.00

    13.50

    8.00(4)

    Qué.

    53.31

    26.70

    26.70

    17.00(1) 

    9.975(5)

    N.B.

    53.30

    29.00 

    29.00

    13.00(2)

    10.00(4)

    N.S.

    54.00

    31.00

    31.00

    13.00

    10.00(4)

    P.E.I.

    51.37

    31.00

    31.00

    14.50

    10.00(4)

    N.L.

    51.30

    30.00

    30.00

    13.00

    10.00(4)

    Yukon(5)

    48.00

    27.00

    17.50

    12.00(3)

    -

    N.W.T.

    47.05

    26.50

    26.50

    14.00

    -

    Nunavut

    44.50

    27.00

    27.00

    14.00

    -

    • Effective March 28, 2018, the small business rate declined from 18%. Quebec provides a rate reduction from the small business rate eligible manufacturing small and medium-size enterprises (SMEs).  Where certain conditions are met, the maximum reduction available is 3% (4% prior to March 28, 2018), for a combined rate 14%.  Note that a lesser reduction from the small business rate may be available to certain manufacturing SMEs where some, but not all conditions are met.
    • The small business tax rate will decrease to 12.5% effective April 1, 2018.
    • The tax rate for M&P profits eligible for the small business deduction is 11.5%.
    • As part of the HST (combined rates are 15% in New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland & Labrador and 13% in Ontario).
    • The QST system is harmonized with the GST, though two separate tax systems remain – the GST and the amended QST. The combined rate is 14.975%.

    (Source: Ontario Government)

    "If all the economists were laid end to end, they’d never reach a conclusion." — George Bernard Shaw