tabled the province’s 2018 Budget. The 2018 Ontario Budget includes significant new investments in health care, child care, home care and measures aimed at creating more job opportunities. The government is projecting deficits of $6.5 to $6.7 billion in each of the next three years. Below are highlights from the announcements:
A. Corporate Tax Measures
Corporate Tax Rates
No new corporate income tax rate changes have been announced in this year’s Budget. As previously announced, the Ontario small business rate has decreased to 3.5 percent (from 4.5) effective January 1, 2018. The current corporate income tax rates for 2018 are outlined below:
The Ontario Research and Development Tax Credit (“ORDTC”)
The ORDTC is a 3.5 percent non-refundable tax credit on eligible research and development (R&D) expenditures. Effective for eligible R&D expenditures incurred on or after March 28, 2018, companies that qualify for ORDTC will now be eligible for an enhanced rate of 5.5 percent on expenditures over $1 million in a taxation year.
The enhanced ORDTC will be available if the eligible R&D expenditures in the current taxation year is at least 90 percent of eligible R&D expenditures in the prior taxation year. The enhanced tax credit will be prorated for taxation years straddling March 28, 2018.
The Ontario Innovation Tax Credit (OITC)
The OITC is an 8 percent refundable tax credit for small to medium-sized companies on eligible R&D expenditures. For R&D expenditures incurred on or after March 28, 2018, if a company that qualifies for the OITC has a ratio of R&D expenditures to gross revenues that is:
- 10 percent or less, the OITC will remain at 8 percent;
- Between 10 and 20 percent, the OITC rate would increase gradually from 8 to 12 percent; and
- 20 percent or greater, the OITC rate would be 12 percent.
Employer Health Tax Exemption to Small Employers
The Employer Health Tax (EHT) exemption relieves more than 85 percent of Ontario employers from having to pay the EHT. The exemption is available to employers who would not be eligible for small business relief under the federal Income Tax Act (ITA) through the Small Business Deduction (SBD).
As previously announced in Budget 2017, the government proposes to follow the eligibility criteria for the federal Small Business Deduction in determining which corporations qualify for the EHT exemption. The EHT exemption for corporations would only apply if the corporation is a Canadian-controlled Private Corporation (“CCPC”). If passed, legislation would be effective January 1, 2019.
B. Personal Tax Measures
Personal Tax Rates
The top marginal personal income tax rate for Ontario remains at 20.53 percent for 2018. The current top combined federal and Ontario marginal rates for 2018 are outlined below:
Changes to Personal Income Tax Rates and Brackets
Budget 2018 is proposing to eliminate the surtax that is included in the personal income tax (PIT)system, and make adjustments to the tax brackets and rates effective for the 2018 tax year. Personal tax brackets would incorporate the former surtax and make the system more progressive. The top tax bracket rate on income in excess of $220,000 would remain at 20.53 percent (53.53 percent when combined with the federal tax).
Ontario currently has five statutory PIT rates plus two surtax rates calculated separately. The proposed changes would create seven statutory PIT rates applied directly to taxable income, and simplify the PIT calculation.
The following table outlines the proposed 2018 Ontario personal income tax rates and brackets:
Eliminating the surtax will also ensure that higher income taxpayers do not receive more tax relief from claiming non-refundable tax credits compared to other taxpayers.
Enhancing Support for Charitable Giving
The government is proposing to increase the Ontario charitable donation tax credit (“OCDTC”) rate to 17.5 percent for all taxpayers for eligible donations exceeding $200. The first $200 of donations would continue to be eligible for an OCDTC rate of 5.05 percent.
The change allows lower income donors to receive more tax relief from the OCDTC. Unlike the federal system, income earners subject to the highest marginal rates will not have access to the top tax relief.
C. Other Tax Measures
Excise Duties related to Cannabis
Ontario intends to enter into an agreement with the federal government under which Ontario would receive 75 percent of the federal excise duty collected on cannabis intended for sale in the province.
Paralleling Federal Tax Measures
Ontario will automatically parallel the changes made by the federal government to extend the tax on split income rules to adult family members who are not active in the business, effective with the 2018 taxation year.
Small Business Deduction
The 2018 federal budget proposed to reduce the $500,000 small business limit for CCPC’s that earn between $50,000 and $150,000 of passive investment income in the year.
Ontario proposes to parallel the federal measure on passive investment income.