Doing income taxes can be challenging. You have to deal with both the Canadian and provincial/territorial regimes, with multiple brackets and rates for each.
Add surtaxes and it verges on a superhuman feat to calculate tax without dedicated software, let alone to understand where it’s all going and why.
Purpose and place for surtax
Surtax is a tax on tax, but it’s not double taxation. Rather, it is a way to use a common base to calculate tax for two different purposes—or in the case of personal income tax, two different tax collectors.
Historically, many provinces calculated their taxes as a percentage of federal taxes. Today, each province applies its own calculation, though most continue to have CRA collect that revenue on their behalf.
Though surtaxes no longer serve the purpose of piggybacking off the federal calculation, they still exist in some provincial tax formulas. Provinces have modernized by weaning away from surtaxes, with only one holdout remaining after the March 2018 Ontario budget.
Ontario eliminates surtax
In its 2018 budget, Ontario took the overdue step to eliminate the surtax from its personal income tax calculation. Once enacted, that will leave P.E.I as the only province or territory with a personal income surtax.
Ontario’s surtax applies to its own tax calculation based on five brackets, with surtax rates of 20% (to Ontario tax between $4,638 and $5,963) and 56% (to Ontario tax greater than $5,936). The proposed changes would create seven brackets applied directly to taxable income, as outlined in Table 1.
Under pre-budget rates, Ontario charges 9.15% from $42,960 up to the first application of surtax at $75,653. With the new 11% bracket beginning at $71,500, there’s an extra 1.85% as soon as you break that threshold. The extra tax is about $150 by $90,000, and peaks at $221 in the top bracket.
Eliminating the surtax also reduces the value of non-refundable tax credits for those previously subject to surtaxes. For example, the basic personal credit is worth $523 in 2018, but those subject to the 56% surtax would have gotten an additional $293. Nixing the surtax makes the value of these credits the same for all taxpayers, meaning that higher earners will see their taxes owing climb.
As these changes are to be retroactive to the beginning of 2018, payroll withholding amounts to date will have been too low for some Ontarians (earners making more than $71,500 per year). To address this, withholding rates will be reset on July 1 as part of the legislative package.
Overall, better transparency
While perhaps efficient for calculation and collection purposes at one time, surtax complicates our ability to understand taxes. Even when apparently in plain sight, the net effect, in practice, can be far from transparent.
As one final example, a few years ago Ontario introduced a new top bracket that it promoted as being 2% above the existing top rate. In truth, including the 56% surtax, it was effectively 3.12% above. Elimination of the surtax will make communication of future rate changes clearer.
Table 1: Removing the Ontario surtax
|Bracket from||Tax rate||Rate + surtax||Bracket from||Tax rate|
(or 10.98% or 14.27%, depending on the surtax rate)
Doug Carroll, JD, LLM (Tax), CFP, TEP, is Practice Lead — Tax, Estate & Financial Planning at Meridian.