Tax Alert – Tax Measures Contained in Ontario’s Fall Economic Update

November 20, 2018

On November 15, the Ontario government issued their Fall Economic Statement, including draft legislation with tax changes. This statement included a well-publicized personal income tax change providing a new tax credit to low-income taxpayers, the Low-income Individual and Families Tax (LIFT) credit starting in 2019. The government documents also provided comments on tax issues that affect owner-managed businesses. The most significant of these is a statement that Ontario will not parallel the new federal tax changes that would reduce the small business deduction for companies that earn more than $50,000 in passive income annually. This could result in a maximum annual deferral of $40,000 of Ontario corporate income tax for those companies affected. More details on this measure and other comments from the Fall Economic Statement are below.

Personal Tax Measures

Personal Income Tax — Rate Structure

The Ontario government will not proceed with the changes to the personal income tax rates, brackets and surtax proposed in the 2018 Ontario budget on March 28, 2018 by the previous government. The structure of five personal income tax brackets plus two surtax rates calculated separately will be maintained. Therefore, there is no change in personal income tax rates from 2017.

Non-Eligible Dividend Tax Credit

The previous Ontario government reduced the Ontario small business tax rate from 4.5% to 3.5%, effective January 1, 2018.

In this Economic Update, the current Ontario government introduced legislation to bring the dividend tax credit on non-eligible dividends to 3.2863% of taxable dividends for 2018 and subsequent years. This results in a decrease of 1% in the dividend tax credit on non-eligible dividends from the rate in 2017, consistent with the reduction in the corporate tax rate on small business income. Consequently, the combined top marginal tax rate in Ontario on non-eligible dividends is 46.65% in 2018 and will be 47.40% in 2019. Without this change, the combined top marginal tax rate on non-eligible dividends was set to increase from 45.30% in 2017 to 46.84% in 2018 and 47.78% in 2019.

Low-income Individuals and Families Tax Credit

The Ontario government is introducing a new non-refundable LIFT credit. For eligible low-income Ontario taxpayers who have employment income, the LIFT credit would be available up to a maximum of $850 per individual.

Tax on Split Income – Disability Tax Credit

The Ontario government announced that it will parallel the federal change allowing payers of the tax on split income to apply the disability tax credit against that tax.

Business Tax Measures

The Small Business Limit

The Ontario government will not parallel the federal measure to phase out the $500,000 small business limit for Canadian-controlled private corporations that earn between $50,000 and $150,000 of passive investment income in a taxation year as the previous government proposed in the 2018 Ontario budget. As such, all eligible Ontario small businesses will be eligible to receive the Ontario small business deduction, regardless of the amount of passive income earned in the company.

The Ontario Research and Development Tax Credit and Ontario Innovation Tax Credit

The Ontario government will not proceed with implementing changes to enhance the Ontario Research and Development Tax Credit (ORDTC) and Ontario Innovation Tax Credit (OITC) as proposed by the previous government in the 2018 Ontario budget. As such, the ORDTC will remain as a 3.5% non-refundable tax credit on eligible research and development expenditures, and the OITC will be maintained as an 8% refundable credit for small to medium-sized companies on eligible research and development expenditures.

Other Measures

Employer Health Tax

The Ontario government will not move forward with the measures pertaining to Employer Health Tax (EHT) proposed in the 2018 Ontario budget. These measures would have created restrictions in eligibility for a lower EHT rate or in claiming the exemption from EHT for some employers. However, consistent with existing legislation, the EHT exemption will increase from $450,000 to $490,000 as of January 1, 2019.

Electricity Distribution Sector

The Ontario government is extending the tax relief on the sale of electricity assets by municipalities to the private sector to December 31, 2022. This relief was due to expire on December 31, 2018. For transfers of electricity assets occurring between January 1, 2019 and December 31, 2022, the transfer tax rate will be reduced from 33% to 22%, and the rate will be nil for transfers by municipal electricity utilities with fewer than 30,000 customers. In addition, any capital gains arising under the “payments in lieu of taxes” “PILs” deemed disposition rules will be exempt from PILs.

If you have questions regarding how these proposed changes will affect you or your business, please contact your BDO advisor.

For more information, contact:

Dave Walsh
Partner, Tax Service Line Leader

Rachel Gervais
Partner, GTA Group Tax Service Line Leader & Transaction Tax Practice Leader

Peter Routly
Partner, Central Group Tax Service Line Leader

Jennifer Dunn
Partner, East Group Tax Service Line Leader

The information in this publication is current as of November 15, 2018.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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