New Income Tax Brackets in Ontario Mean Higher Taxes for Many

Topic: Tax Planning

Dianne C. White, CPA, CA, CFP, TEP

August 16, 2014


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New Income Tax Brackets in Ontario Mean Higher Taxes for Many

More sand in the gears

I always look forward to the pace of summertime.  Things slow down and there is a sense of calm.  This summer seems no different than any others with the added bonus of buoyant markets.  However, looking below the calm surface, there are a number of changes coming full force related to taxes and tax compliance that may catch some investors off guard.  The first of these relates to Ontario tax changes and the second relates to Canadian taxpayers who are also U.S. citizens.  Investors have many obstacles to navigate around in order to ensure they are maximizing their returns and getting the best value for their money.  The last thing they want to worry about is more “sand in the gears” in the form of taxes and compliance. However, in a world where tax compliance is ever increasing, and so are the penalties for failure to comply, it is important that you understand the impact of these changes. 

The newly elected Liberal government in Ontario has proposed to increase income taxes for those who earn more than $150,000 of taxable income through changes to its income tax brackets. There are two key changes to be implemented.  The first is lowering the income threshold to which the top Ontario rate applies and the second is introducing a new tax bracket. Currently, the top rate applies to income in excess of $514,090. The new top bracket will start at $220,000 of taxable income and will be subject to the current highest tax rate which is referred to as the combined Ontario/Federal “super” tax rate of 49.53%.

The new Ontario tax bracket being introduced is for those with taxable incomes between $150,000 and $220,000. The combined Ontario/Federal tax rate for this bracket is 47.97%.  Those with taxable incomes below $150,000 will see no change to their rates. The proposed changes take effect immediately. This means the new rates are applicable for the 2014 tax year.  If you earn $514,090 or more, then you could end up paying as much as $10,000 or so more in income tax this year.   It is more important than ever for high income earners in Ontario to consider ways to reduce their overall tax costs.  Aside from moving out of province, income splitting strategies like prescribed rate loans, the use of family trusts and holding companies will become even more attractive options in the right circumstances.

US citizens in Canada also face new reporting challenges

It is not just the Ontario government looking to increase its revenues.  Thanks to new foreign account tax compliance requirements, U.S. citizens in Canada face significant tax reporting challenges that they can no longer avoid.  Both Canada and the U.S. attempt to impose tax on U.S citizens living in Canada on their world wide incomes and require the disclosure of foreign assets.  The Canada-U.S. tax treaty provides some assistance in avoiding double taxation, but this is not perfect.  In the end, U.S. citizens have the worst of both worlds: report and pay tax in Canada at high Canadian tax rates, and then report everything to the IRS.  A separate article that addresses the long reach of the IRS and the implications of the new foreign account tax compliance requirements.

Taxes are not the only cost investors need to pay attention to.  Fees and expenses can erode returns significantly over time.  Also in this issue Nexus Notes, you will find an article that addresses fees and expenses in the investment industry in Canada.  See how Nexus’s value proposition stacks up to other options in the marketplace.

To close out this edition, you will read that it is not all work and no play at Nexus.  A group of us strapped on the bicycle helmets in the early summer for a good cause. Thankfully there was no sand in the gears for our ride. Read on to find out more about our adventure. 

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