Financial planners and tax advisers are bracing for a rush of wealthy Ontarians to come through their doors in the coming months, trying to find ways to avoid paying the new high-income surtax introduced by the provincial government.
The Ontario legislature on Tuesday passed a budget that included – at the request of the opposition New Democrats – a new two-percentage-point surtax on incomes of more than $500,000.
That will prompt many people in that tax bracket to seek ways to get around it, said Betty Tomsett, director of wealth management at Richardson GMP Ltd. “It’s just in our human DNA to want to find ways to pay less tax,” she said, and the new Ontario tax is just one more reason for wealthy individuals to try to keep what they have.
Karen Slezak, a tax partner at accounting firm Soberman LLP, said she expects to see an increase in wealthy people seeking professional advice about the tax increase.
She notes that it has been popular for many years for wealthy people living in Ontario to set up trusts in Alberta, where provincial tax rates are lower. That is legitimate, provided the trust is properly constituted and managed in Alberta. “Now with Ontario [rates]going that much higher, you may see even more people interested in using trusts in other jurisdictions in Canada,” Ms. Slezak said.
Another popular move is to try to split income with others who are taxed at a lower rate, she said. Usually that means getting money into the hands of children and grandchildren by setting up a trust, but the rules are strict, Ms. Slezak noted.
Thomas McDonnell, a tax lawyer at Thorsteinssons LLP, said he expects to have high-income clients come to him with questions about dealing with the new tax rate, and expects that some will be furious.
He noted that for a wealthy person receiving most of his or her income from employment in Ontario, it will be very difficult to avoid the new tax rates. “There is not a lot of shifting you can do with that kind of income.”
On the other hand, someone earning a lot of money from investments has many more options. “There are legitimate techniques where you can put your investments outside of Ontario. It is not rocket science to do that,” he said.
Mr. McDonnell noted that other jurisdiction that have tried raising tax rates on the rich have found that people do find ways to avoid some of the pain, and less revenue is generated than expected. Britain, for example, didn’t get anywhere close to what it had hoped when it boosted its rates a few years ago.
On the other hand, he said, it is important to remember that the top marginal income tax rate for people who live in Ontario – which will rise to just under 50 per cent under the new plan – was once close to 80 per cent in the 1960s. “Whatever the rate is, if you are paying it, you probably think it is too much,” Mr. McDonnell said.
Still, not many wealthy folk are likely to make the most drastic move, actually packing up and leaving the province. “I don’t honestly think there will be a large exodus,” he said. “You can squeeze the lemon quite a bit here and get a little bit more juice out of it, before it collapses and gives up.”
Even those who are the most upset are not likely to take the drastic action of pulling up stakes. “When they get over their angst and anger and start to think about what it really means to sell the house, move the kids and leave other contacts behind … they will have reservations.”
Ms. Tomsett said anyone considering moving needs to realize that in tough times, other jurisdictions will also be temped to raise taxes on the wealthy, so anyone moving may be jumping from the frying pan into the fire.
“With what is going on in the world, this is going to be a reality worldwide,” she said, and anyone packing up and leaving may be going “from the beast you know to a beast you don’t know necessarily.” Over all, she added, “we’re a pretty good place to live, relative to the rest of the world.”
HOW THE NEW TAX RATE WILL WORK
– Ontario’s new basic provincial tax rate for taxable income over $500,000 will move to 13.16 per cent from 11.16 per cent, an increase of two percentage points.
– There are already two high-income provincial surtaxes at this level of income, so the top Ontario marginal tax rate will actually move to 20.5 per cent from 17.4 per cent.
– When combined with federal tax, the top marginal tax rate for residents of Ontario will be just under 50 per cent.
– The new tax rate is projected to raise an additional $470-million in fiscal 2012-13.
– The new levy will affect about 23,000 people, costing them on average an additional $19,000 in tax.
– Ontario said it will use the money raised to pay down the deficit, and the surtax will be eliminated once the Ontario budget is balanced, in 2017-18.