On July 14, 2014 the Ontario Budget announced changes to the provincial tax rates retroactive to January 1, 2014 for employees earning over $150,000. In order to capture the retroactive provincial tax increase effective January 1, 2014, a higher tax rate in payroll deductions from September 1 to December 2014 has been established.

Effective September 1, 2014, the Ontario provincial tax rates will be as follows:

  • 11.16% for income between $80,242 and $150,000;
  • 14.16% for income between $150,000 and $220,000;
  • 17.16% for income between $220,000 and $514,090; and
  • 13.16% for income greater than $514,090.

Some key points:

  • Typical income tax updates are done on January 1 and July 1, which allows employers to expect and plan for changes based on these dates. Income tax changes require additional resources and processes for employers. The CRA normally requires employers to withhold and remit income taxes in line with current rates, however in this instance the CRA has agreed to a no penalty approach for employers. This means that employers will not face penalties for failing to withhold as a result of the Ontario budget changes introduced on July 14, 2014.
  • The increased taxes for employees earning more than $150,000 will be implemented through higher payroll tax deductions from September to December and/or on 2014 tax returns. The affected employees may receive a lower paycheque for the months of September to December due to increased Ontario provincial tax deductions.
  • The personal tax rate increases in the Ontario budget is 1% for earnings of $150,000 to $220,000 and 2% for $220,000 to $514,090.       Because the tax increases are effective January 2014 but implemented for only the last 4 months of 2014, the new CRA tax tables will result in many of these employees having a 3% or 6% increase in their Ontario tax deduction on regular pay from September to December 2014.
  • The CRA has published a September version of the T4127, Payroll Deductions Formulas for Computer Programs. 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 in December 2014. The changes to these tables apply to employees who earn more than $150,000 in 2014. Employees whose employers are unable to change their payroll systems or processes on time can fill out a new Provincial TD1 form requesting that additional tax be withheld from September to December 2014. This could reduce the amount the employees owe when they file their 2014 income tax return. Employees should also be reminded to consider other sources of income that they may have, such as investments or rental income, when deciding whether to have additional tax withheld.
  • In anticipation of employee questions with regard to reduced pay, organizations should prepare a memo outlining the new Ontario tax rates and deductions and provide each affected employee with notice of increased Ontario tax deductions with their August pay.

Here at PEO Canada our payroll system will have the required payroll programming changes in effect for September 1st, 2014.  In addition, to help prepare employers for questions and lessen the impact on affected employees we are sending out correspondence to our clients with Ontario employees as well as to the employees themselves. This could help to reduce the amount the employees owe when they file their 2014 income tax return. If higher income earners in Ontario have any concerns over personal tax liabilities that could arise at the end of 2014, it is recommended that they seek advice from professional finance and tax planners to help determine how to best deal with any situations that could arise.

Lori Thackray / Payroll Administrator / PEO Canada