May 2, 2014

Ontario Budget 2014 – Summary

2014 Ontario Budget

The Ontario government tabled its 2014 provincial budget on May 1, 2014 with the title of “Building Opportunity Securing our Future”.
Note: It appears as though the other political parties will not support the minority Liberal government’s budget, a move that would trigger a provincial election in June.

Proposed measures include an increased tax rate for higher-income Canadians and a new provincial pension plan modeled after the Canada Pension Plan (CPP).

Below is a summary of budget measures that were tabled.

Overview

Ontario’s economy continues to grow at a moderate pace, but the global economic environment remains challenging. Ontario’s deficit for 2013-14 is estimated to be $11.3 billion – a $0.4 billion improvement from that which was forecasted in the 2013 Budget. The province is projecting deficits of $12.5 billion in 2014-15, $8.9 billion in 2015-16, and $5.3 billion in 2016- 17 with a return to a balanced budget in 2017-18.

Personal Measures

Increased Personal Tax Rates

Budget 2014 proposes to increase the top marginal tax rate for taxpayers who earn a taxable income of $150,000 or more. The change will be implemented by lowering the income threshold to which the top rate (13.16%) applies. Currently, the top rate applies to income in excess of $514,090. Once the proposed change is implemented, income in excess of $220,000 will be subject to this rate. In addition, a new tax rate of 12.16% will apply to taxable income between $150,000 and $220,000. People with taxable incomes below $150,000 will see no change to their rates. Subject to a passing of the budget, the proposed changes will take effect immediately. See below for current and proposed personal tax rates for Ontario residents.

Changes to Dividend Tax Credit

The 2013 federal budget announced changes to the tax treatment of non-eligible dividends (ie. dividends paid from corporate income taxed at the small business tax rate). The changes would automatically reduce Ontario’s dividend tax credit rate for non-eligible dividends. When combined with Ontario’s surtax the changes have an unfair impact to some taxpayers based on income. For people with higher incomes, the surtax increases the benefit of the dividend tax credit. To mitigate the impact of the changes and improve fairness, the 2013 Ontario Economic Outlook and Fiscal Review proposed changes that would change the dividend tax credit and surtax calculation, resulting in the credits having the same value for all taxpayers regardless of income. Budget 2014 confirms that the province will introduce legislation to implement these measures.
Indexation of the Ontario Child Benefit (OCB)

Ontario provides support for low‐ to moderate‐income families through the Ontario Child Benefit (OCB). This benefit enhances the incomes of low‐ to moderate income families and helps provide a more stable income base for those who may experience uncertain earnings. To maintain the effectiveness of the OCB, Budget 2014 proposes to begin indexing the OCB benefit and the income threshold at which the benefit starts to be reduced to annual increases in the Ontario Consumer Price Index (CPI). This change would take effect in July 2015.

Increased Social Assistance Benefits

Social assistance benefits are provided to individuals who have a temporary financial need (ie. Ontario Works recipients) and also to individuals who have disabilities (ie. Ontario Disability Support Program (ODSP) recipients). Budget 2014 proposes to increase social assistance rates in 2014 by an additional one per cent for adult Ontario Works recipients and people with disabilities receiving ODSP benefits. Also, as in 2013, the government will provide a further top‐up for single adults without children receiving Ontario Works. These rate increases will take effect in September 2014 for ODSP and in October 2014 for Ontario Works.

Corporate Measures

Phase Out of Small Business Deduction (SBD) for Large Corporations

The Ontario small business deduction provides tax relief to small businesses in the province — savings they can use to invest in the growth of their businesses and hire more people. Ontario’s general corporate income tax rate is 11.5 per cent. The SBD reduces the general rate to 4.5 per cent on the first $500,000 of active business income of Canadian‐controlled private corporations (CCPCs).

Currently, all CCPCs in Ontario can take advantage of this rate regardless of how large they are. Ontario is the only province that allows large CCPCs to claim this deduction. Budget 2014 proposes to take action to ensure only small CCPCs can qualify for the deduction, which would bring Ontario in line with every other province and the federal government.

To achieve the desired result, effective immediately, the SBD will be phased out for large CCPCs with more than $10 million in taxable capital and will be fully eliminated for CCPCs with taxable capital in excess of $15 million. The proposed measure will not impact small businesses.

 

Other Measures

Introduction of Ontario Retirement Pension Plan (ORPP)

The Canada Pension Plan (CPP) is fundamental to the retirement income security of Canadians. Some, including the Ontario government, believe that its benefits are too low to meet the needs of many workers and future retirees. Ontario has been an advocate for an enhancement to the CPP since 2010.

In December 2013, the federal government unilaterally shut down discussions on options for an enhancement to the CPP citing costs and the fragility of the economy. In response, Budget 2014 proposes to move forward with an alternative, the Ontario Retirement Pension Plan, to provide Ontarians with increased retirement income security.

Features of the ORPP will be as follows:

  • New mandatory provincial pension plan modeled after the CPP
  • Will target middle-income earners
  • Will provide a predictable retirement income stream and index benefits to inflation
  • Will require contributions to be shared equally between employers and employees
  • Contributions will not exceed 1.9 per cent for each of employer and employee (3.8 per cent combined) on earnings of up to a maximum of $90,000 annually.
  • Will aim to replace 15 per cent of earnings, up to maximum annual earnings of $90,000
  • Those participating in a comparable workplace pension plan will not be required to enrol in the ORPP
  • Impact to self-employed individuals is not yet determined
  • Will be publicly administered at arm’s length from the government
  • To be introduced in 2017; contribution rates will be phased in over two years

 

Further technical details will be released later this year prior to introducing legislation.

Ontario to Introduce Pooled Registered Pension Plans (PRPPs)

Pooled registered pension plans (PRPPs) are a new form of tax‐assisted individual retirement savings plan first introduced by the federal government. They are intended to make it easier to save for retirement by offering employees and the self‐employed an additional low‐cost savings vehicle.

In the fall of 2013 and the winter of 2014, the Ontario government consulted with interested parties to determine how PRPPs could best be implemented in Ontario to ensure that they meet the needs of Ontario’s current workforce. After reviewing feedback from a variety of stakeholders, the government has decided to move forward with a legislative framework for PRPPs that is broadly consistent with the model introduced by the federal government. Key design features will include:

  • Voluntary participation and contributions by employers
  • Automatic enrolment of employees (unless an employee chooses to opt out)
  • Low cost to plan members

 

The government intends to introduce PRPP legislation in the fall of 2014.

Target Benefit Pension Plans to be Considered

Target benefit pension plans are meant to provide employers with a new retirement income option for employees by combining features of defined benefit (DB) pension plans and defined contribution pension plans. Target benefit pension plans “target” a specific retirement income stream (similar to DB plans) funded by fixed contributions. Unlike DB pensions, the target income stream may be reduced to address funding shortfalls.

The Province intends to consult on a regulatory framework for these plans with a view towards introducing a suitable framework.

Refined Funding Rules for Defined Benefit (DB) Pension Plans

To ensure that DB plans are prudently funded and sustainable for the long term, the government will enact regulations that define the funding level at which a contribution “holiday” can be taken and set parameters for accelerated funding of benefit improvements in underfunded plans. These rules are intended to ensure that funding pressures can be managed while ensuring the payment of benefits that are promised.

Committee to Review Regulation of Financial Planning

The 2013 Ontario Economic Outlook and Fiscal Review acknowledged that many individuals rely on financial advisers, including financial planners, when making savings and investment decisions. However, financial planning in Ontario is not currently subject to general regulatory oversight. Budget 2014 indicates that the government will appoint an expert committee to consider more tailored regulation and to develop recommendations.

Ontario to Parallel Federal Tax Measures

The 2014 federal budget proposed several personal and corporate income tax measures including proposals related to:

  • Tax changes for farmers and fishers
  • Estate donations
  • Non-resident trusts
  • Pension transfer limits

 

Budget 2014 indicates that Ontario will adopt these (and other) measures for Ontario tax purposes once the federal changes have been approved.

Taxation of Testamentary Trusts

In its 2014 budget, the federal government proposed changes to the taxation of testamentary trusts. Generally, effective 2016, graduated rates will be eliminated with trust income becoming subject to tax at top rates. Budget 2014 indicates that this measure is under review for Ontario tax purposes.