Ontario Personal Income Tax Rate Structure Changes, but Creates Complexities for Payroll

Usually, income tax table updates occur January 1 and July 1 of each year. However, because the Ontario budget was passed on July 24, 2014, the income tax table changes and resulting processes have been delayed to September 1, by the Canada Revenue Agency (CRA).

In addition, on July 24, the Ontario government tabled Bill 26, the Taxation Amendment Act, 2014. The bill passed from first reading straight through to royal assent on the same day. The new law is deemed to have come into force on January 1, 2014. The changes affect Ontario’s personal income tax rate structure.

Previously, subsection 3(1) of the Ontario Taxation Act, 2007 defined four tax rates used in calculating an individual’s basic personal income tax. The new amendments define two additional tax rates, effective for taxation years ending after December 31, 2013: first, the income threshold for the highest tax rate (currently 13.16 percent) is reduced from $514,090 to $220,000. Second, a new tax rate of 12.16 percent will apply to taxable income between $150,000 and $220,000. As a result, there are now five tax rates. The two new income thresholds will not be adjusted for inflation each year.

The basic personal income tax for a taxation year of an individual ending after December 31, 2013, is the sum of the following amounts:

  1. The amount calculated by multiplying the lowest tax rate for the year by the portion of the individual’s tax base for the year that does not exceed $40,120.
  2. The amount calculated by multiplying the second-lowest tax rate for the year by the amount by which the individual’s tax base for the year exceeds $40,120 and does not exceed $80,242.
  3. The amount calculated by multiplying the middle tax rate for the year by the amount by which the individual’s tax base for the year exceeds $80,242 and does not exceed $150,000.
  4. The amount calculated by multiplying the second-highest tax rate for the year by the amount by which the individual’s tax base for the year exceeds $150,000 and does not exceed $220,000.
  5. The amount calculated by multiplying the highest tax rate for the year by the amount by which the individual’s tax base for the year exceeds $220,000.

Consequently, the September 1, 2014, version of “Guide T4127, Payroll Deductions Formulas for Computer Programs,” contains adjustments for the increases to the personal income tax rates in Ontario. The proposed changes are retroactive to January 1, 2014, and the revised tables reflect prorated tax rates to allow employers to withhold the correct additional amounts from affected employees between September and the final pay of 2014. The changes to the tables apply to employees who earn more than $150,000 in 2014.

So how do these changes impact employers’ withholding and remitting obligations?

The Canada Revenue Agency states:

“The CRA normally requires employers to withhold and remit income taxes in line with current rates, but because of the complexities and timing of the Ontario budget measures, it is recognized that these income tax changes will be implemented on a best-effort basis where practical, in full appreciation of the different payroll systems and administrative capacities of employers. Employers will not face penalties for failing to withhold as a result of the Ontario budget measures introduced on July 14, 2014.”

“Employees whose employers are unable to change their payroll systems or processes on time can ask their employers to increase withholdings from September to December 2014. This could reduce the amount the employees owe when they file their 2014 income tax and benefit return.”

The Canadian Payroll Association (CPA) has indicated that, “for these organizations, the CRA will enable employees to request the additional taxes using Ontario TD1s effective from September to December 2014 and make any final payments owing on the T1 personal tax return.”

The CRA is encouraging employers to discuss these changes with affected employees.

In addition, it is important to note there are no changes to the federal tax rates, income thresholds or personal amounts required for September 1, 2014. However, some provincial and territorial changes have been announced for September 1, 2014. At this time, this version only includes the Ontario changes and will be revised by September with the other provincial and territorial personal income tax changes.

In the Ontario provincial budget of July 14, 2014, changes were announced to the provincial tax rates and income thresholds. Effective September 1, 2014, the rates and income thresholds are as follows:

  • 5.05% on income less than or equal to $40,120
  • 9.15% on income greater than $40,120, but less than or equal to $80,242
  • 11.16% on income greater than $80,242, but less than or equal to $150,000
  • 12.16% on income greater than $150,000, but less than or equal to $220,000
  • 13.16% on income greater than $220,000

The CPA outlines the complications:

“The personal tax rate increases in the Ontario budget are one percent for earnings of $150,000 to $220,000, and two percent for $220,000 to $514,090. Because the tax increases are effective January 2014, but implemented for only the last four months of 2014, the new CRA tax tables will result in these employees having a three percent or six percent increase in their Ontario tax deduction on regular pay from September to December 2014.”

“Employees earning over $514,090 will also have a retroactive tax increase from September to December 2014, since their earnings between $150,000 and $514,090 would have been taxed at the lower rates from January to August 2014.”

The updated payroll deductions online calculator and the electronic version of the T4008 Payroll

Deductions Supplementary Tables and T4032 Payroll Deductions Tables for Ontario will be available on the CRA website by mid-August.

The paper and CD version of the T4032 will be available by the end of August.

Employers should ensure that their payroll service and software providers have made the programming changes required by September 1, 2014, to enable employers and Ontario employees affected to comply with the higher tax rate.

Sources: Canada Revenue Agency website and Canadian Payroll Association legislative briefing

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Comments

  1. For the highest bracket for Ontario, why would there need to be a “catch up”, if the highest rate has been applied all year, and is not changing? It has been applied due to annualization of each paycheck, same as PDOC does.

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