Tax the Rich is a Flawed Policy

National Post


For Canada's highest income earners, Ontario is just six months away from becoming the second-highest taxed province in Canada, following Nova Scotia. (Quebec is in second place for 2012).

This comes as a result of the Ontario minority government's temporary "Deficit-Fighting High-Income Tax Bracket," which kicked in July 1, 2012 and will be fully phased in by 2013.

The new tax bracket applies to an Ontarian whose taxable income exceeds $500,000. On income above this threshold, the tax rate will increase to 12.16% for 2012 (from 11.16% in 2011) and to 13.16% in 2013. When the Ontario surtax of 56% is added to this tax rate, it will bring the Ontario rates to 18.97% in 2012 and 20.53% for 2013. Add the federal top tax rate of 29%, which kicks in at income over $132,407, and you get combined federal and Ontario marginal tax rates of 47.97% for 2012 and 49.53% for 2013.

Nova Scotia's top provincial tax bracket of 21% kicks in at levels over $150,000 with a combined federal and provincial marginal tax rate of 50%, only slightly above Ontario's 2013 top rate, but at a much lower income threshold.

In other words, Ontario and Nova Scotia have a provincial tax rate for their highest income earners that is more than double the 10% flat tax rate Alberta applies to all its residents, regardless of income levels.

Both governments have indicated the new high-income brackets would be eliminated once their respective budgets have been balanced.

Last month, the C.D. Howe Institute's Alexandre Laurin released a report critical of the new ta Ontario's Tax on the Rich: Grasping at Straw Men. The report says Ontario's new tax bracket will affect only about 25,000 high-income earners yet "these families matter a lot for province's fortunes" as 20% of Ontario's income tax dollars already comes out of their pockets.

The report says Ontario's personal income tax system already redistributes more income than most other provinces and Ontario's top 1% pay more than 25% of all income taxes, while the bottom 75% shoulder about 12%. Mr. Laurin concludes the new tax "will likely create more economic costs than benefits: Taxpayers' behavioural responses will reduce revenue over the long run by more than the province can expect to collect from the tax hike."

For example, a small business owner contemplating selling her business resulting in a large capital gain could be tempted to move to a lower-tax province in the year of sale. Similarly, an Ontario executive about to cash in on a large amount of restricted share units that vest in 2013 could move to Alberta by the end of next year to reduce the tax hit on the deemed employment income. For example, on $5-million of restricted units vesting in 2013, the tax savings of moving to Alberta from Ontario by Dec. 31, 2013 would be about $526,500.