2013 Ontario Economic Outlook and Fiscal Review

Chapter VI: Taxation

Highlights

  • The government is working with the other Members of Provincial Parliament on a non-refundable tax credit to encourage the donation of surplus fresh food to those in need.
  • The 2013 Budget announced that the three contact centre apprenticeship trades will no longer qualify for the Apprenticeship Training Tax Credit, effective April 1, 2014. To help apprentices hired before the 2013 Budget announcement complete their programs, the government will provide a transitional support program. Employers will also be able to access regional economic development programs and the Youth Employment Fund.
  • The government will be consulting with municipalities, taxpayers and other northern stakeholders on reforms to the Provincial Land Tax (PLT) and bringing forward solutions in 2014 that address tax fairness in northern Ontario. While the review is underway, PLT rates will be frozen for 2014 at the 2013 rates.
  • To seek broad input for stakeholders, the government will delay the implementation of the raw leaf tobacco oversight system until January 1, 2015.
  • Ontario is proposing to improve the fairness of the taxation of dividends through changes to its dividend tax credits so that they have the same value for taxpayers at all income levels.
  • The government has introduced legislation to provide greater tax relief to smaller private-sector employers by increasing the Employer Health Tax exemption.

Introduction

Overview

A competitive and fair tax system delivers relief to people and provides incentives for business to invest and create jobs in Ontario. The Ontario government has taken important steps in recent years to foster a competitive and fair tax environment for people and business.

For people, the Ontario government has:

  • introduced the Healthy Homes Renovation Tax Credit to make it easier for seniors to stay safely in their homes for longer;
  • enhanced sales and property tax credits; and
  • lowered the Personal Income Tax rate on income in the first bracket from 6.05 to 5.05 per cent.

For business, the Ontario government has:

  • reduced Ontario’s Corporate Income Tax (CIT) rates and eliminated the Capital Tax;
  • replaced the Retail Sales Tax with the Harmonized Sales Tax (HST), a more modern value-added tax;
  • cut high Business Education Tax (BET) rates significantly, resulting in savings of over $200 million per year for Ontario businesses; and
  • streamlined CIT and sales tax administration, saving businesses over $635 million per year in compliance costs.

In addition, Ontario is paralleling the 2013 federal budget measure to extend the accelerated Capital Cost Allowance for manufacturing and processing machinery and equipment acquired in 2014 or 2015, which will help Ontario manufacturers expand and hire more people.

The government is working with the other Members of Provincial Parliament on a non-refundable tax credit to encourage the donation of surplus fresh food to those in need.

Ontario also proposes changes to the calculation of its dividend tax credits starting in 2014 to improve the fairness of the tax system.

Support for People

Ontario Trillium Benefit

The Ontario Trillium Benefit (OTB) combines the payments of the Ontario Sales Tax Credit, the Ontario Energy and Property Tax Credit, and the Northern Ontario Energy Credit into one monthly payment for low- to moderate-income Ontarians. The 2013 OTB will provide an estimated $2.5 billion in assistance.

After listening to Ontarians, the government made changes to the OTB so that, beginning in 2014, each recipient will have the choice of receiving their benefit in monthly instalments or as a single payment at the end of the benefit period. The OTB monthly payments are delivered from July of one year to June of the next.

Starting in 2014, recipients will be able to indicate whether they want to receive their OTB in a single payment by checking a box on their tax returns. For the 2014 OTB, recipients who do not check the box on their 2013 tax return will receive their monthly payments from July 2014 to June 2015. Those who do check the box will receive a single payment in June 2015.

Providing a single payment at the end of the benefit period ensures that each recipient will receive the same total benefit, whether they choose single or monthly payments. In either case, payments will continue to take into account events during the year, such as the birth of a child, death, or moving out of Ontario, that can affect a recipient’s total benefit.

Fresh Food Donation Tax Credit

Each year, Ontario farmers dispose of or plow back into their fields over 11 million kilograms of fresh food, according to the Ontario Association of Food Banks. The government is working with the other Members of Provincial Parliament on a non-refundable tax credit to encourage the donation of this surplus fresh food to those in need.

Dividend Tax Credits

Individual investors pay Personal Income Tax (PIT) on dividends, which are paid from corporate earnings that have already been taxed. To avoid this “double taxation,” federal and provincial dividend tax credits are intended to compensate individual shareholders for income tax paid by Canadian companies in which they have invested.

The 2013 federal budget announced changes to the tax treatment of dividend income from small companies to reflect lower small business tax rates across the country. Under the tax collection agreement with the federal government, Ontario will automatically parallel these changes. Ontario’s surtax would result in these changes having inequitable impacts on taxpayers with different incomes. The government is proposing to take action to improve fairness for investors before the federal changes take effect.

Higher-income people pay the Ontario surtax applied to their basic income tax. Unlike other PIT rates, the surtax is applied after non-refundable credits (like dividend tax credits) have been deducted from basic income tax. As a result, while these tax credits reduce only the basic tax for non-surtax payers, they reduce both the basic tax and the surtax for higher-income people. Thus, Ontario’s dividend tax credits provide a greater benefit for people with higher incomes — up to 56 per cent more — than for non-surtax payers.

For example, a senior with moderate income who receives $1,000 in dividends from a large Canadian company receives an Ontario dividend tax credit of about $88, while a higher-income investor benefits by about $138.

To improve fairness for investors, the government proposes to change the calculation of the Ontario surtax with respect to dividend tax credits. With these proposed changes, Ontario’s dividend tax credits would have the same value for all taxpayers, regardless of their incomes. The government will continue to review the tax system to see whether other changes can be made to enhance fairness.

These changes would take effect January 1, 2014. About 925,000 people with generally low to moderate incomes would pay on average $145 less Ontario PIT, and 110,000 higher-income people would pay on average $1,180 more. These changes would provide net savings to investors of about $4 million per year.

Details of Proposed Dividend Tax Credit Changes

Ontario’s dividend tax credit rates have been set to provide recognition for the tax paid at the corporate level when determining the tax payable by the individual investor. These rates also take into account the Ontario surtax on higher-income people. Because the surtax is calculated as a percentage of basic Ontario tax after dividend tax credits have been deducted, the tax credits reduce both the basic amount of tax and the surtax.

Dividend tax credits have two rates to recognize the different Corporate Income Tax (CIT) rates that apply to corporate income:

  • Canadian-controlled private corporations pay a lower Ontario CIT rate (4.5 per cent) on the first $500,000 of active business income. Dividends paid from this income (“non-eligible dividends”) qualify for a lower dividend tax credit rate to reflect the lower CIT rate; and
  • Other dividends that are paid from income taxed at the 10 or 11.5 per cent Ontario CIT rates (“eligible dividends”) qualify for a higher dividend tax credit.

Non-eligible dividends: Dividends paid from income taxed at the small business rate (4.5 per cent in Ontario) qualify for a 4.5 per cent dividend tax credit. Surtax payers receive up to 56 per cent more tax relief — for a total of about 7 per cent, which is more than the CIT notionally paid. Because Ontario’s dividend tax credits are calculated as percentages of the federal credits, the federal government’s changes would have the unintended effect of reducing Ontario’s 4.5 per cent tax credit rate to 3.7 per cent if Ontario were to make no change.

Eligible dividends: Dividends paid from other corporate income taxed at higher CIT rates (10 or 11.5 per cent in Ontario) qualify for a 6.4 per cent dividend tax credit. Surtax payers receive a total benefit of up to 10 per cent because of the interaction of the credit with the surtax. However, non-surtax payers, who receive a tax credit of only 6.4 per cent, are undercompensated.

To improve fairness for investors, the government proposes to:

Effective Ontario Dividend Tax Credit Rates
Dividends from: Taxpayers 2013 2014
(proposed)
Small Business Income Non-surtax 4.5% bracket4.5%
Surtax 7.0%
Other Corporate Income Non-surtax 6.4%
10 %
Surtax 10%
  • Calculate the Ontario surtax before deducting dividend tax credits from Ontario tax;
  • Reset the tax credit rate for non-eligible dividends to the 2013 rate of 4.5 per cent; and
  • Increase the tax credit rate for eligible dividends from 6.4 per cent to 10 per cent.

 

Support for Business

Accelerated Capital Cost Allowance for Manufacturing and Processing Machinery and Equipment

To increase the incentive for manufacturers in Ontario to invest, the Province is paralleling the 2013 federal budget measure to extend the accelerated Capital Cost Allowance for manufacturing and processing machinery and equipment acquired in 2014 or 2015. This measure will provide about $265 million of support for manufacturing businesses over three years, beginning in 2013–14.

Business Support Programs Review

In the 2013 Budget, the Province announced it would establish a Technical Panel to review and evaluate Ontario’s business support programs according to established criteria, including those recommended by the Jobs and Prosperity Council: innovation, productivity and increasing exports. All forms of business support will be considered. Business supports include tax credits, grants and other direct support programs. The final report is expected to be provided to the Province in time to inform the 2014 Budget.

A Fair and Efficient Tax System

Building on the changes to the dividend tax credits to make the Ontario tax system fairer, the government will review whether the interaction of the surtax with other Personal Income Tax credits results in inequitable treatment of taxpayers. Any decisions on the treatment of the surtax will be made in the context of creating a fairer tax system.

As outlined in Chapter I, Section A, the government will study various approaches, including those taken in other jurisdictions, to encourage higher levels of business investment in new equipment, research and development, and training.

On October 28, 2013, the Institute for Competitiveness and Prosperity released a Working Paper entitled “Taxing for Growth: A Close Look at Tax Policy in Ontario.” The paper calls for an effective, equitable and efficient tax system in Ontario, and points out numerous potential changes to achieve these goals. Recommendations include reviewing targeted personal tax incentives and the efficiency of the corporate tax system. These recommendations and others will be studied by the government to ensure that Ontario’s tax system is progressive, fair, and designed to encourage jobs and growth.

Property Tax

Provincial Land Tax Reform

Provincial Land Tax (PLT) is a property tax that applies in unincorporated areas outside municipal boundaries.

The Province is responsible for setting PLT rates, which have not been adjusted in several decades. As a result, PLT rates are currently significantly lower than municipal property tax rates in neighbouring municipalities.

For example, homeowners in northern municipalities pay on average about $2,200 in municipal property taxes each year, whereas residential PLT taxes in bordering communities average less than $150. In fact, PLT taxes are less than $325 for 90 per cent of residential properties. Even when other local levies are taken into consideration, property tax rates in the unincorporated areas are much lower than in municipalities.

While a portion of this tax difference may arise from differences in available services, northern municipalities have expressed serious concerns with the inequity they have identified between taxpayers within their boundaries and those outside. Municipalities have also suggested that very low PLT rates have encouraged development in unincorporated areas just beyond their boundaries, while these developments continue to rely on services in the municipality.

The Province is committed to addressing the concerns of northern municipalities in a fair and balanced manner. The government will be consulting with municipalities, taxpayers and other northern stakeholders on reforms to the PLT and bringing forward solutions in 2014 that address tax fairness in the north. While the review is underway, PLT rates will be frozen for 2014 at the 2013 rates.

Education Property Tax

As part of efforts to protect the Province’s revenue base, the government will explore options to avoid further erosion of the support education property taxes provide to Ontario’s elementary and secondary schools.

As noted by the Commission on the Reform of Ontario’s Public Services, the Province’s education property tax rate policies have resulted in a significant decline in the share of funding for elementary and secondary schools in Ontario that is supported by education property taxes.

The Commission determined that since the Province first assumed responsibility for education tax rates in 1998, the share of education funding that is supported by education property taxes had decreased from 44 per cent to 30 per cent in 2010–11. It is worth noting that subsequent to the Commission’s report, the share has continued to decrease to 28 per cent in 2012–13.

Chart 6.1 Education Property Taxes as a Per Cent of Elementary and Secondary Education Funding

To date, the Province has increased transfers to school boards by $3.8 billion to offset the decline in property tax support for education.

Residential Education Tax

According to the Commission on the Reform of Ontario’s Public Services, the decline in the share of education funding that is supported by education property taxes is primarily the result of the Province’s tax rate policies. Since 1998, the Province has reduced education tax rates to fully offset reassessment increases. In fact, the residential education tax rate has been cut in half since 1998.

As recommended by the Commission, the Province will review its residential education tax rate policies in order to explore options to avoid further erosion of property tax support for Ontario’s elementary and secondary schools.

It is also important to note that the Province provides a total of over $1 billion per year in municipal and education property tax relief to low- to moderate-income people. This tax relief represents a significant portion of the total $2.9 billion in residential education tax revenue raised each year.

Business Education Tax

The Commission on the Reform of Ontario’s Public Services also raised concerns related to economic distortions caused by the wide range of Business Education Tax (BET) rates across the province. This variance in BET rates reflects historical assessment and tax inequities that existed before the Province assumed responsibility for the rates. To address these inequities and distortions, the Commission recommended moving towards a policy of a single province-wide BET rate for all regions of the province.

Since 2007, the Province has made significant progress in addressing BET rate inequities by lowering high rates towards a BET target rate that was set well below the average BET rate. However, the Province has not adjusted low rates upwards towards the BET target rate.

In recognition of the importance of continuing to narrow the variance in BET rates, the Province will review the Commission’s recommendation to move towards a single uniform BET rate.

Other Measures

Employer Health Tax Exemption

As proposed in the 2013 Budget, to support small business, the Employer Health Tax (EHT) exemption for private-sector employers would be increased from $400,000 to $450,000 of annual Ontario payroll. This change would be effective January 1, 2014, and would increase the tax relief the exemption provides by up to $975 per employer with annual Ontario payroll of $5 million or less.

With this change, over 60,000 smaller employers would pay less EHT, including more than 12,000 that would no longer pay this tax and would save on the cost of filing an EHT return. In 2014, an estimated 88 per cent of Ontario private-sector employers would not pay EHT.

The exemption would be adjusted for inflation every five years using the Ontario Consumer Price Index.

To better target this exemption to smaller employers, it would be eliminated for employers (including groups of associated employers) with annual Ontario payrolls over $5 million. This would increase EHT paid by up to $7,800 per year for over 5,000 larger employers. Registered charities, including those with Ontario payrolls over $5 million, would continue to claim the exemption.

When these changes are combined, the cost of the additional EHT relief provided to smaller employers would be largely offset by additional EHT paid by larger employers.

The government has introduced legislation through Bill 105, Supporting Small Businesses Act, 2013, to implement these changes. To implement these changes by January 1, 2014, the legislation would need to be approved by the end of 2013.

Apprenticeship Training Tax Credit

The Apprenticeship Training Tax Credit (ATTC) provides businesses with a 35 to 45 per cent refundable tax credit on the salaries and wages paid to eligible apprentices in designated construction, industrial, motive power and service trades. The ATTC, together with other provincial apprenticeship programs, supports the availability of skilled workers by encouraging businesses to hire and train apprentices in the skilled trades.

To better target the ATTC and help improve completion rates among ATTC-eligible trades, the 2013 Budget announced that three contact centre apprenticeship trades will no longer qualify under the ATTC beginning on April 1, 2014.

After March 31, 2014, employers of apprentices registered in these three trades will continue to be able to apply for other apprenticeship incentives such as the $1,000 bonus for each apprentice upon completion of the apprenticeship. In addition, contact centre employers will be able to apply for regional economic development programs and the Youth Employment Fund, which was launched in September 2013.

The government will provide qualifying employers with some transitional support. Transitional support will be available for employers who hired eligible apprentices in the three affected trades before May 3, 2013, and will last for up to 24 months from the date the apprentices were hired. This funding will help these apprentices complete their training.

This support will be provided through a grant program. Further details will be announced by the Ministry of Training, Colleges and Universities.

Revenue Integrity Measures

The government is committed to ensuring that all taxpayers pay their fair share of taxes. In this regard, the government is implementing a number of initiatives to address the underground economy and corporate tax avoidance. Specifically, working with the federal government, Ontario is supporting enhanced compliance activities that could generate more than $700 million in tax revenues over the next four years. Furthermore, in the administration of its own tax statutes, Ontario is conducting enhanced audits of accounts in high-risk areas and is on track to realize $65 million in tax revenues in 2013–14. The government also plans to introduce additional underground economy measures that will promote awareness and sharing of information among jurisdictions, and strengthen overall enforcement activities.

“[T]he Province also needs to look to enhanced administration and enforcement activities as a way to improve the integrity of the tax system…. Ontario businesses that employ aggressive tax planning as their competitive advantage must be challenged…. Addressing the underground economy creates a level playing field for taxpayers and businesses.”

Commission on the Reform of Ontario’s Public Services, “Public Services for Ontarians: A Path to Sustainability and Excellence,” 2012, pp. 411–12.

Ontario’s Tobacco Strategy

In the 2013 Budget, the government reaffirmed its commitment to the Smoke-Free Ontario Strategy aimed at protecting the health of Ontarians from tobacco use. Ontario is determined to have the lowest smoking rates in Canada and to reduce the supply of low-cost, illegal tobacco available to young people.

Building stronger partnerships with First Nation communities on issues related to tobacco remains a priority for the government. Good progress has been made on pilot projects commenced last year with the Chippewas of the Thames First Nation and the Mohawk Council of Akwesasne. These discussions have focused on research and analysis that will help Ontario and the pilot First Nation communities identify appropriate community-based regulatory approaches for tobacco on reserve. This opportunity may be expanded to other First Nation communities.

The government is commencing a formal review of the current system of allocating unmarked cigarettes. Bill 186, Supporting Smoke-Free Ontario by Reducing Contraband Tobacco Act, 2011, amended the Tobacco Tax Act to permit the government to enter into arrangements and agreements with Band Councils with respect to tobacco on-reserve. First Nation communities will be engaged with a view to modernizing the current allocation system, which has its limitations.

Given the impact on the tobacco industry and the need to seek broad input from various stakeholders, the government has decided to delay the implementation of the raw leaf tobacco oversight system until January 1, 2015.

The government also recognizes the need to address the problem of illegal tobacco through a balanced approach of enforcement and partnership. In this regard, the government will continue to work with law enforcement agencies to seize illegal products and to prosecute those who violate the law. New enforcement measures will continue to be explored.

Chart 6.1: Education Property Taxes as a Per Cent of Elementary and Secondary Education Expenditures
Bar chart shows that the share of education funding that is supported by education property taxes has decreased from 44 per cent in 1998–99 to 28 per cent in 2012–13.

Return to Chart 6.1