Ontario won’t go along with federal passive income rules

The Ontario Conservative government says it won’t implement the controversial federal passive income rules for small business owners.

The government’s first fall economic statement, which covers the 2018-2019 year, says that the province will not parallel the federal government’s plan to gradually eliminate access to the small business deduction (SBD) for Canadian-controlled private corporations that earn passive income.

This reverses the position of the previous administration, which said in the March 2018 Ontario budget that it would parallel the federal government’s measure for the purposes of the Ontario SBD. That move would have increased taxes on Ontario small businesses by about $160 million annually by 2020–21.

The Ford government estimates that not paralleling the federal rules will save “up to $40,000 per year for about 7,900 of Ontario’s small businesses.”

After the 2018 tax year, the federal SBD limit will be reduced by $5 for every $1 of investment income above the $50,000 threshold. The limit will be reduced to zero at $150,000 of investment income.

Ontario’s fall economic statement provides no additional detail on the impact of its proposal to reject the federal approach.

More to come for financial advisors

The fall economic statement also promises better regulatory oversight of financial planners and advisors, but provides little detail.

“In Ontario today, there is no consistent regulatory oversight of financial planners and advisors,” says the statement. As a result, “Families risk receiving financial planning and advisory services from individuals who may not be appropriately qualified to help them save for the future.”

The Ford administration says in the statement that it will “review measures” that will help families know “they are dealing with someone who has received appropriate training and is subject to regulatory oversight.”

The previous government’s 2018 budget only used the term “financial planners,” and not “advisors.” Further, the budget mentioned specific actions, including “developing a framework to regulate financial planners in Ontario.” The goal was to “close the gap that currently allows financial planners to perform their work without regulatory oversight or specified proficiency requirements.”

Part of the framework would have included restrictions on the use of financial planning-related titles, and a March 2018 consultation paper offered more details.

As such language does not appear in the fall economic statement, it’s unclear whether the previous government’s work and consultations, which began in 2015, will continue.

The release of the fall statement follows the Conservative government’s September move to speak out against the Canadian Securities Administrator’s (CSA’s) plan to ban deferred sales charges and limit the use of trailing commissions. At that time, the administration said the CSA’s proposals would work against families by discontinuing a payment option that helps them save.

In late October, Minister of Finance Victor Fedeli’s office told Advisor.ca, “The government is committed to supporting consumer protection and making life better for people across Ontario. We will have more to say on this in the future.”

Read: With Ontario out, what’s next for CSA’s proposals?

Other details in the fall statement

The fiscal update also promises to eliminate income tax for those earning less than $30,000 a year. The government says the tax cut offsets its decision to scrap a planned increase of the province’s minimum wage that was set to take effect next year.

Critics, however, have said raising the minimum wage to $15 an hour as the Liberals had planned would give low-income workers more money than the income tax cut would save. An independent financial analysis came to a similar conclusion.

The tax cut is expected to cost the province $495 million in lost revenue, the document says.

The Ford government is also nixing 2018 Ontario budget proposals to adjust the rates, brackets, surtax and credits for Ontario’s income tax. The new administration estimates this will prevent a personal tax increase of about $200, on average, for approximately 1.8 million people.

The Ontario administration also says it has cut the province’s deficit by $500 million, bringing the figure down to $14.5 billion in its first few months in office.

“The fiscal hole is deep,” Fedeli said in presenting the document to the legislature on Thursday afternoon. “The road ahead is not an easy one and will require difficult decisions. Everyone across the province will be required to make sacrifices, without exception.”

The government said it has made progress on cutting the deficit by finding $3.2 billion in efficiencies in operations, including a hiring freeze across the public service.

The belt-tightening measures laid out also include rolling the positions of three independent officers—the environmental commissioner, the child and youth advocate and the French language services commissioner—into the offices of the auditor general or the provincial ombudsman.

Government staff could not say what will happen to those working in the eliminated offices, but Premier Doug Ford has consistently promised that no jobs would be lost as a result of his cost-cutting.

Plans for a French-language university have also been cancelled, though the government could not immediately say how much money the move would save.

Though it is spending less, the government said it is also taking in $2.7 billion less in revenue in the fiscal year, including $1.5 billion attributed to the cancellation of cap and trade.

More than $300,000 in lost revenue is attributed to cancelling planned tax increases, including one that would have raised taxes for small businesses, the document says.

The Tories had said the previous Liberal government left a $15 billion deficit, a figure disputed by critics, who said it includes spending promised by the Liberals but cancelled by the current regime.

While the document mentions returning the province’s budget to balance, it does not spell out how long it will take to achieve that goal.

“Our path forward is clear, and that is why it is important to maintain our resolve to pursue fiscal discipline and ultimately restore our books to balance,” Fedeli said.