Thursday, May 31, 2012

Ontario's $500,000 Tax Bracket, What Exactly is it?

The recent change to taxing income over $500,000 in Ontario prompted by the NDP and acquiesced to by the provincial Liberals has been subject to some confusion. It has been termed in the media as a 2% surtax for incomes over $500,000. However I found a KPMG document (warning PDF) that suggests that the 2% over $500,000 is actually a new tax bracket, not a surtax and the two existing surtaxes actually apply to this new tax bracket. I've seen this fact mentioned in the National Post, but nowhere else. Here's the relevant paragraph from the document:

In an amendment to its 2012 budget, Ontario temporarily introduced the “Deficit-Fighting High-Income Tax Bracket” which will apply to an Ontario individual taxpayer’s taxable, income in excess of $500,000. As a result, the top statutory Ontario income tax rate on taxable income of more than $500,000 will increase to 12.16% for all of 2012 (from11.16%) and to 13.16% in 2013. The Ontario Liberal government says it will eliminate the bracket once Ontario’s budget is balanced.

There's another interesting paragraph in the document about Ontario's tax indexation for inflation. The province uses its own value and for 2012 it is 3.3%. Raising the tax brackets by 3.3% should be interesting in such a moribund economy. Ontario's average wage is barely moving, so this should hurt tax revenue.

Ontario indexes its tax brackets and surtax thresholds using the same formula as thatused federally, but uses the provincial inflation rate rather than the federal rate in the calculation. The province’s inflation factor is 3.3% for 2012

One last thing about indexation. Will the $500,000 tax bracket in 2013 stay at $500,000 or will it get indexed to inflation? Who knows? I'm tempted to write my MPP, NDP leader Andrea Horwath to get some clarification since the NDP proposed it.

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