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 36% 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)

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