26 February 2016 Global Tax Alert News from Americas Tax Center Canada: Ontario budget 2016 17 EY Global Tax Alert Library The EY Americas Tax Center brings together the experience and perspectives of over 10,000 tax professionals across the region to help clients address administrative, legislative and regulatory opportunities and challenges in the 33 countries that comprise the Americas region of the global EY organization. Copy into your web browser: http://www.ey.com/us/en/services/ Tax/Americas-Tax-Center---borderlessclient-service Executive summary On 25 February, Ontario Finance Minister Charles Sousa tabled the province s fiscal 2016 17 budget. The budget contains no new taxes, but includes several tax measures affecting individuals, trusts and corporations. As set out in Table A, the Minister anticipates a deficit of $5.7 billion for 2015-16, which is $2.8 billion less than projected a year ago. A further deficit of $4.3 billion is projected for 2016-17 and balanced budgets in 2017-18 and 2018-19. Measured in relation to the size of the economy, the Ontario accumulated deficit is expected to decline to 23.3% of gross domestic product (GDP) by 2018 19. In 2015, Ontario s real GDP grew by 2.5%. The Government projects real GDP growth of 2.2% in 2016, 2.4% in 2017, 2.2% in 2018 and 2.0% in 2019.
2 Global Tax Alert Americas Tax Center Table A Projections of Ontario budgetary deficit 2015-16 2016-17 2017-18 2018-19 Revenue outlook 126.5 130.6 137.7 141.9 Program expense outlook (120.9) (122.1) (124.2) (127.6) 5.6 8.5 13.5 14.3 Interest on debt (11.2) (11.8) (12.5) (13.1) Reserve (0.2) (1.0) (1.1) (1.2) (Deficit) Accumulated deficit % of GDP (5.7) (4.a3) 0.0 0.0 193.4 197.7 197.7 197.7 25.9% 25.4% 24.3% 23.3% Numbers may not add due to rounding. Following is a brief summary of the key tax measures. Detailed discussion Business tax measures Corporate tax rates No changes are proposed to the corporate tax rates or the $500,000 small-business limit. Ontario s 2016 and 2017 corporate tax rates are summarized in Table B. Table B Corporate tax rates 2016 2017 ON Federal and ON combined ON Federal and ON combined Small-business tax rate* 4.5% 15.0% 4.5% 14.5% Manufacturing and processing tax rate 10.0% 25.0% 10.0% 25.0% General corporate tax rate 11.5% 26.5% 11.5% 26.5% *The federal small-business tax rate is 10.5% in 2016, 10.0% in 2017, 9.5% in 2018 and 9.0% in 2019 and beyond. Business tax credits Further to a review of the province s business support programs, Ontario proposes the following tax credit changes Ontario research and development tax credit (ORDTC): The budget proposes to reduce the ORDTC rate from 4.5% to 3.5%. Ontario innovation tax credit (OITC): The budget proposes to reduce the OITC rate from 10% to 8%. The rate reductions will be effective for eligible research and development expenditures incurred in taxation years that end on or after 1 June 2016. The reductions will be prorated for taxation years straddling that date.
Global Tax Alert Americas Tax Center 3 Other business tax measures The Minister also proposed the following business tax measures: Apprentice training tax credit (ATTC): The Government reiterated its commitment made in 2015 to continue to monitor and review the ATTC in the future to ensure it is encouraging businesses to provide apprentices with the certifications and skills they need. Further details on an engagement process with stakeholders will be announced in 2016. Personal tax Personal income tax rates The budget does not include any changes to personal income tax rates. The 2016 Ontario personal tax rates are summarized in Table C. Table C 2016 Ontario personal tax rates First bracket rate Second bracket rate Third bracket rate Fourth bracket rate Fifth bracket rate $0 to $41,536 $41,537 to $83,075 $83,076 to $150,000 $150,001 to $220,000 Above $220,000 5.05% 9.15% 11.16% 12.16% 13.16% For 2016, the 20% surtax applies to basic Ontario tax in excess of $4,484, and the additional 36% surtax applies to basic Ontario tax in excess of $5,739. For taxable income in excess of $150,000, the 2016 combined federal-ontario personal income tax rates are outlined in Table D. Table D 2016 combined federal and Ontario personal tax rates Bracket Ordinary income* Eligible dividends Non-eligible dividends $150,001 to $200,000 47.97% 31.67% 38.80% $200,001 to $220,000 51.97% 37.19% 43.48% Above $220,000 53.53% 39.34% 45.30% *The rate on the actual capital gain is one-half the ordinary income rate. Personal tax credits The budget proposes a number of personal tax credit changes. Dividend tax credit The budget confirms that Ontario will automatically parallel the changes to the federal dividend gross-up rate applicable to non-eligible dividends that were announced in the 2015 federal budget. Specifically, thea federal gross-up factor for noneligible dividends is reduced from 18% to 17% effective 1 January 2016, to 16% effective 1 January 2018, and to 15% effective 1 January 2019. As a result of the federal changes, Ontario s dividend tax credit rate for 2016 will automatically decline from 4.5% to 4.2863%. The combined federal-ontario top marginal rate on non-eligible dividends for 2016 will be 45.30% (see Table D above). Ontario announced that it will review its non-eligible dividend tax credit rate for 2017 and later years.
4 Global Tax Alert Americas Tax Center Tax on split income Ontario proposes to parallel the federal tax on split income (sometimes referred to as kiddie tax), by introducing a new approach to how it taxes split income, effective 1 January 2016. This change is intended to close a tax planning loophole. The federal tax on split income is a special tax at the top marginal personal income tax rate imposed on certain income (referred to as split income) earned by individuals who are 17 years of age or under. Similarly, Ontario proposes to tax split income at Ontario s top marginal personal income tax rate of 20.53%. No surtax will be payable on the split income. Presumably, Ontario split income will continue to be determined on the same basis as federal split income. Federal split income essentially consists of dividends, certain capital gains, shareholder benefits on private corporation shares and certain income from a partnership or trust. Other personal tax measures Other personal tax measures include: Simpler personal income tax system Ontario announced that it will examine ways to simplify the calculation of personal income taxes (such as the Ontario surtax and the low income tax reduction) so that taxpayers can better understand their effective tax rates. Tax-free savings accounts The federal reduction in the annual contribution limit for tax-free savings accounts (from $10,000 in 2015 to $5,500 in 2016) will automatically apply for Ontario income tax purposes. Carbon cap-and-trade program In line with its Climate Change Strategy released in November 2015, the Government confirms that Ontario will join California and Quebec in moving forward with the implementation of a cap-and-trade program on greenhouse gas (GHG) emissions, beginning in 2017. Cap-and-trade programs operate by placing a cap on total carbon emissions for a given period and allowing the market to set a price for such emissions through the distribution and sale of emissions permits or allowances. Carbon emitters in sectors covered under the program are required to hold a sufficient number of allowances to cover their annual emissions. The budget proposes that the following emitters will be subject to the cap-and-trade program: Industries, institutions, electricity generators, and suppliers and distributors of heating fuels that emit 25,000 tons of GHG emissions per year or more Suppliers and distributors of transportation fuels that distribute 200 liters of fuel per year or more Electricity and fuel importers As in Quebec and California, Ontario will also provide allocation emission allowances free of charge to various industries to help maintain competitiveness and thus avoid the relocation of local industries to other jurisdictions. To move forward on initiatives related to the introduction of a cap-and-trade program, Ontario introduced Bill 172, Climate Change Mitigation and Low-carbon Economy Act, 2016, on 24 February 2016. This legislation, if passed, will set out a framework for the reduction in greenhouse gas emissions and a cap-and-trade system. It establishes targets for the reduction of greenhouse gas emissions (15% below 1990 levels by 2020, 37% below 1990 levels by 2030 and 80% below 1990 levels by 2050) and requires the Ontario Government to prepare an action plan to achieve those targets. In addition, the legislation is designed to: Ensure cap and trade auction proceeds are directed to a new Greenhouse Gas Reduction Account (to be used to fund green projects to reduce emissions) and require an annual public report on the funds flowing in and out of the account Require the Ministry of the Environment and Climate Change to prepare periodic progress reports with respect to the action plan and a review of the plan at least every five years
Global Tax Alert Americas Tax Center 5 Allow for transitional allowances to large industrial emitters (to be phased out over a period of time) Authorize the minister to enter into agreements with others (such as Quebec and California) for the harmonization and integration of the cap-and-trade system and similar programs Eligible initiatives (aimed at reducing greenhouse gases) that may be funded from the proceeds of the cap-and-trade system include those relating to energy use, land use and buildings, infrastructure, transportation, industry, agriculture and forestry, waste management, education and training, and research and innovation. Financial impact for energy consumers Table E outlines the government s forecast of the impact the implementation of the cap-and-trade program will have on transportation and home heating costs: Table E Impact on fuel costs Transportation Gasoline prices Home heating Natural gas prices Natural gas (average) costs 4.3 cents/liter 3.3 cents/liter $5/month Ontario Retirement Pension Plan (ORPP) The Minister provided an update on the province s phased-in launch of the ORPP and the renewed national dialogue to enhance the Canada Pension Plan (CPP). In the event an enhanced CPP to meet the intended goals of the ORPP is not possible, Ontario will move forward with its own plan to implement the ORPP. To provide more time for discussion, Ontario is proposing to phase-in the launch of the ORPP by starting enrollment in January 2017, one year later than the original start date, and by starting the first phase of contributions in January 2018. The updated phased-in contribution schedule is described in Table F. Table F ORPP contribution rates Type of employer 1 January 2018 1 January 2019 1 January 2020 1 January 2021 Wave 1: Large employers (500 or more employees) without registered Wave 2: Medium employers (50-499 employees) without registered Wave 3: Small employers (fewer than 50 employees) without registered Wave 4: Employers without comparable 0.8% 1.6% 1.9% 1.9% 0.8% 1.6% 1.9% 1.9% 0% 0.8% 1.6% 1.9% 0% 0% 1.9% 1.9% For more background information on the ORPP, see EY Global Tax Alerts, Canada: Ontario unveils details of retirement pension plan, dated 15 February 2016 and Ontario delays ORPP implementation, dated 18 February, 2016.
6 Global Tax Alert Americas Tax Center Other pension-related changes The budget also announced the following pension-related changes: Pooled registered pension plans (PRPPs) To further facilitate harmonization with other jurisdictions and ensure the efficient operation of PRPPs, Ontario will introduce amendments to the Pooled Registered Pension Plans Act, 2015. Regulations to support the implementation of PRPPs in Ontario are under development. The province will also develop an appropriate test to determine whether a PRPP is a comparable plan for purposes of the ORPP. Target benefit multi-employer pension plans Ontario will continue to consult with affected stakeholders on all aspects of a target benefit multi-employer pension plan framework. Other tax measures Provincial land tax The provincial land tax (PLT) is the property tax paid in unincorporated areas of northern Ontario outside municipal boundaries. As part of the ongoing review of the PLT, Ontario will consult with northern residents on ways to further address tax inequities in the north. This consultation will take place before the province determines any PLT rate adjustments for 2017. Underground economy initiatives In partnership with the Canada Revenue Agency, the province will launch specialized audit teams to focus on sectors that are at high risk of underground economic activity. These specialized audit teams will use advanced analytics and innovative enforcement tools. For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (Canada), Toronto Karen Atkinson +1 416 943 2172 karen.e.atkinson@ca.ey.com Neil Moore +1 416 932 6239 neil.moore@ca.ey.com Ernst & Young LLP (Canada), Ottawa Ian Sherman +1 613 598 4335 ian.m.sherman@ca.ey.com Ernst & Young LLP (Canada), London John Sliskovic +1 519 646 5532 john.t.sliskovic@ca.ey.com Ernst & Young LLP (Canada), Kitchener Cynthia McIntyre +1 519 581 5455 cynthia.m.mcintyre@ca.ey.com
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