November 8, 2013
Ontario’s Minister of Finance Charles Sousa announced proposed measures that will increase the tax rate on non-eligible dividends as part of its fall Economic Update released on November 7, 2013. The Economic Update also proposes to enhance certain research and development (R&D) tax credits, among other changes. Highlights of tax changes included in the Economic Update are included below.
Note that, because Ontario has a minority government, it is not yet clear whether these tax changes will be introduced into law.
Ontario bumps up non-eligible dividend income tax rate
Ontario is proposing to effectively increase the tax rate on non-eligible dividends of up to 3.9% compared to 2013, effective January 1, 2014. As a result of the changes, the combined federal/Ontario top marginal tax rate on non-eligible dividends for 2014 will be:
The tax rate increase on non-eligible dividends results from a change in the Ontario tax credit rate as well as a change in the calculation of Ontario surtax. Due to changes in the 2013 federal budget, the Ontario rate for non-eligible dividends for 2014 would have been effectively increased because Ontario did not change its dividend tax credit formula in response to the federal non-eligible dividend tax changes. The Economic Update is intended to rectify this by resetting the Ontario tax credit rate for non-eligible dividends to the 2013 rate of 4.5%.
The Economic Update also proposes to calculate the Ontario surtax before deducting dividend tax credits from Ontario tax. Surtax is usually applied after non-refundable tax credits, including dividend tax credits, have been deducted from basic income tax. By changing the formula so that surtax is applied to income tax before dividend tax credits, the effective income tax rate on non-eligible dividends is increased.
If you are an owner-manager, you may be able to save up to 3.9% in taxes on non-eligible dividend income by paying out non-eligible dividends in 2013 rather than deferring until 2014.
The Economic Update does not result in a change to the effective tax rate on eligible dividends for individuals subject to the top two marginal income tax rates. Thus, the rates for 2014 and 2013 remain at 33.9% for individuals with income greater than $509,000 and 29.5% for individuals with income less than $509,001, but still within the second top marginal income tax bracket.
The Economic Update includes proposed measures intended to promote capital investment including replacing existing R&D tax credits with an incentive that would reward incremental R&D spending. This new credit would redirect support to incremental R&D expenditure growth, to encourage businesses to increase R&D and expand research operations in Ontario.
Ontario also proposes so-called “pay or play” tax incentives, such as a special corporate tax that could be eliminated or reduced through investments in new equipment or other eligible investment expenses, and a payroll tax that could be eliminated or reduced by employer investments in employee training or training programs.
The Economic Update proposes transitional support for three contact centre apprenticeship trades that will no longer qualify for the Apprenticeship Training Tax Credit effective April 1, 2014, as announced in Ontario’s 2013 budget. This relief is intended to help apprentices hired before the budget announcement to complete their programs. In addition, employers will also be able to access regional economic development programs and the Youth Employment Fund.
Other tax changes
The Economic Update also proposes to:
- Freeze the Provincial Land Tax (PLT) rates for 2014 while consultations with northern communities on reforms take place
- Introduce a non-refundable tax credit to encourage the donation of surplus fresh food to those in need
- Delay implementation of the raw leaf tobacco oversight system until January 1, 2015.
Download KPMG’s Tax Hub Canada app
KPMG’s free Tax Hub Canada App for iPads and Blackberrys provides timely, convenient tax news and tax rates to help you respond to changes in tax rules and regulations. Download the app today.
We can help
Your KPMG adviser can help you assess the effect of the Ontario’s tax changes on your personal finances or business affairs, and point out ways to take advantage of their benefits or ease their impact. We can also keep you abreast of the progress of these proposals as they make their way into law and help you bring any concerns you may have to the attention of the Ontario Ministry of Finance.