Ontario revamps tax brackets, increases taxes on high earners

The two new tax brackets, which would increase the total number of brackets to seven from five, will be from $71,501 to $82,000 and $82,001 to $92,000, respectively. The top provincial bracket remains the same at $220,000 and above.

The changes aim to simplify the province’s system of personal income tax and to make it fairer, the government says. The issue, the government argues, is that the surtax is calculated after personal tax credits have been applied to taxable income, thereby reducing that amount. Because of that, higher income taxpayers were receiving a disproportionate benefit from those credits relative to the benefit available to lower-income individuals.

“That means that taxpayers who had been subject to the surtax — their tax credits were more valuable because they got as much as 56% more on those credits,” says Doug Carroll, practice lead for tax, estate and financial planning for Meridian Credit Union.

According to budget documents, under the proposed changes, approximately 1.8 million Ontarians would pay about $200 more in provincial income taxes every year on average, while about 680,000 lower income Ontarians would see a reduction of about $130 annually. All other taxpayers would see their PIT stay the same.

As an example, an individual with an income of $95,000 would pay $168 more in PIT under the proposed changes.

The government says the proposed tax changes would result in an increase in tax revenue to the government of about $275 million in 2018, $285 million in 2019, and $295 million in 2020.

“They’ve upped the rates sufficiently to offset what might have been lost to the elimination of the surtax,” adds Carroll. “They’re bringing [the rates] in line, and they’re getting a bit extra in revenue out of it.”

The government says that “this increased revenue would help support key initiatives in this budget,” which includes several new or expanded social programs introduced ahead of a provincial election to be held in June.

The proposed tax rates are effective for the 2018 tax year, with the government saying that it will introduce legislative amendments to implement them. If the changes are passed, new PIT withholding rates on employment income would begin July 1.

In alignment with the changes in PIT, and “to maintain support for charitable giving”, the government is also proposing to increase the rate for the Ontario Charitable Donation Tax Credit to 17.5% for all taxpayers for eligible donations above $200, effective Jan. 1, 2018.

Currently, the donation tax credit is 5.05% for donations below $200, and 11.06% for donations above $200. However, because of the effect of the surtax, high income earners receive a greater proportionate benefit from the donation credit for gifts above $200 than do lower income earners.

“No one will be worse off in terms of making charitable donations after the proposed changes, and those below the surtax level are better off [because of the higher rate],” Carroll says. “It’s a harmless way [for the government] to mollify what might have been a concern for people who are making large donations [after the proposed PIT changes], and to charities that may have felt the brunt of that.”

Carroll says that the proposed changes are positive in as much it makes the province’s personal income tax system more transparent: “This is something that should have been addressed some time ago. Getting rid of the surtax is a good idea for the sake of a cleaner tax system.”