On May 1, 2014, Finance Minister Charles Sousa tabled the Ontario minority government’s 2014 Budget (“Budget 2014”). The practical effect of the proposed tax measures in Chapter V of Budget 2014, “A Fair and Efficient Tax System”, is to increase tax revenues for the province. Most notably, the government proposes to lower the taxable income threshold for the highest personal income tax rate (13.16%) from $514,090 to $220,000, and to add a new tax rate of 12.16% on taxable income between $150,000 and $220,000. There will be no change to the personal income tax rates on taxable incomes up to $150,000. This will affect about 220,000 taxpayers in Ontario. The proposed tax rate changes are estimated to increase Ontario tax revenues by $635 million for 2014-15, $685 million for 2015-16, and $745 million for 2016-17. To put these changes in perspective, Alberta has a flat personal income tax rate of 10% regardless of income level.
The Ontario government also intends to adopt a number of the tax measures announced in the 2014 federal budget, including proposals relating to non-resident trusts, pension transfer limits, limitations on shifting income to a minor child, tax on insurance swaps and offshore regulated foreign financial institutions, and aggressive international tax planning (for more on these measures, see our tax law alert). These measures, as well as increases to the provincial taxes on tobacco and aviation fuel are projected to generate additional tax revenues for the province of $225 million in 2014-15, $300 million in 2015-16, and $315 million in 2016-17.
Budget 2014 will also affect larger corporate taxpayers in Ontario. The government proposes to phase out the small business deduction for Canadian controlled-private corporations (“CCPCs”) and associated groups of CCPCs with more than $10 million in taxable capital employed in Canada in the previous year, and to fully eliminate the deduction when taxable capital employed in Canada exceeds $15 million. This change parallels the phase-out for the federal small business deduction, and will be pro-rated for tax years that straddle May 1, 2014. This tax measure is expected to boost Ontario tax revenues by $40 million for 2014-15, and $50 million for each of 2015-16 and 2016-17. The government also noted that it is continuing to review options to restructure tax support for research and development (“R&D”), including introducing an incentive for incremental R&D, with the goal of increasing R&D investment in Ontario. The current refundable Apprenticeship Training and Co-operative Education tax credits will also be reviewed, with a view to making the credits non-refundable for large businesses.
To combat aggressive structures used to avoid land transfer tax on the transfer of land in Ontario, the government is proposing to introduce a general anti-avoidance rule that would apply to transactions (and transactions that are part of a series of transactions) completed after May 1, 2014.
Budget 2014 and related documents can be accessed on the Ontario Ministry of Finance’swebsite.