Why the Ontario budget vote matters to all Canadians

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–Updated at 5:15 p.m.

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Ontario Premier Dalton McGuinty has agreed to a key NDP budget demand to temporarily hike taxes for the rich, according to reports.

The minority Liberals need NDP MPPs to vote in favour of the austerity budget Tuesday to avoid a snap election.

In exchange for her support, NDP Leader Andrea Horwath had been pushing McGuinty to include a new surtax on anyone earning more than $500,000 a year and succeeded, the Canadian Press is reporting.

In a statement issued late Sunday, Horwath said the surtax would help fund services like healthcare.

“Budget cutbacks will erode health care services in communities across the province. It’s only fair that those most able to help fund our public health care system be asked to do a little more,” she said.

The surtax affects an estimated 23,000 Ontarians. Under the plan, anyone making $600,000 for instance would have to cough up an extra $3,120 annually. The surtax would raise an additional $440 million to $570 million a year for Queen’s Park , according to NDP estimates.

McGuinty said Monday that money raised by the surtax will go towards paying down the province’s $15.2-billion deficit and will end once the budget is balanced in 2017, reports said.

Canadian Taxpayers Federation director Gregory Thomas said the surtax unfairly targets those who already pay more than the bottom 5 million tax filers combined.

“This is just herding a tiny minority of taxpayers into a small room and extracting money from them.”

“Essentially, McGuinty is telling high-income earners that they are not wanted in Ontario,” Thomas said adding that both the Liberals and NDP have violated the Taxpayer Protection Act since they did not file the tax-raising plan with the Chief Electoral Officer.

Either way it’s a first for Canada, said Bruce Ball national tax partner at BDO.

It’s still unclear exactly how the surtax will affect a person with a more modest salary but who has seen a one-time gain and reinvested that money. Of those who consistently bring in $500,000 or more per year, many own their own corporations, Ball said. “They can control how much income they take by changing their financial plan and leaving more money within the corporation.”

A study of a now defunct U.K. surtax on the richest 1% found high-income earners used legal means to reduce their taxable income including, increasing pension contributions, delaying receipt of income, converting income to capital gains, splitting incomes with spouses, reducing taxable income by working less, retiring early and by moving to countries with lower tax rates.

Still, Ontario’s surtax could give other struggling provinces ammunition to do the same.

Similar ideas are already being floated south of the border, including U.S. President Barack Obama’s “Buffett Rule” which would see anyone making more than $1 million taxed at a rate of 30%. Closer to home, a group of Canadian doctors is calling on all levels of government to raise income taxes on high-income earners. Doctors for Fair Taxation have proposed an additional 1% tax for anyone bringing in more than $100,000 per year with incrementally higher taxes on individuals making even more.

Ontario’s impact on pensions

The future of Canada’s pension system also hinges on the final draft of the budget.

The original document contained an ultimatum for the federal Conservatives hoping to launch Pooled Retirement Pension Plans. PRPPs have been touted as a low-cost alternative to company pension plans for small businesses. PRPPs would be mandatory for all employers to offer, though contributions by employees would be voluntary.

“Ontario will continue to work collaboratively with other provinces and the federal government to develop this model. However, Ontario believes the implementation of pension innovation should be tied to CPP enhancement as part of a comprehensive approach,” the province’s budget stated.

Federal Minister of State (Finance) Ted Menzies has responsibility for PRPPs at the federal level.

“The federal government cannot unilaterally change the CPP, and many provinces and small business are opposed to CPP premium hikes. But we can and are moving forward with PRPPs to give a low-cost pension option to the 60% of Canadians without a workplace pension plan. I would hope Dwight Duncan would not deny this viable low-cost option to hard working Ontario families,” a spokesperson for Menzies said in an emailed statement to MoneySense.ca on Monday.

“Ontario certainly tossed a wrench in the works. I don’t think anyone was expecting Ontario to take this position,” said Oma Sharma, a partner at human resources consulting firm Mercer and an expert on pensions.

Quebec on the other hand has already moved forward with its own version of PRPPs. The province’s Voluntary Retirement Savings Plan, or VRSP, is mandatory for bosses with five or more employees with at least one year of uninterrupted service to offer starting January 2015. Employees on the other hand, can decide whether or not to participate.

Eventually, the default contribution rate for workers will ramp up to 4% “which seems a little bit high for low income earners,” Sharma said.

There are other drawbacks. Employers will be charged with a number of new tasks including choosing a VRSP provider, deciding whether or not to top-up employee savings and facilitate VRSP contributions with payroll deductions.

“They are certain administrative duties that employers will not be able to escape and that is going to be onerous for small businesses, I’m sure.”

None of the other provinces have made clear statements for or against PRPPs, Sharma said. She expects another meeting on the issue later this summer but without Ontario’s support it will be an uphill battle for federal Finance Minister Jim Flaherty to get PRPPs off the ground.

Either way Canadians have their work cut out for them on the savings front, Sharma said, especially those that just missed the cutoff for existing OAS benefits.

“Clearly Canadians are going to have to work hard to make up the difference. They’ll have to save more,” she said.

“The bottom line is we are all living longer and I think we are going to be strained at every turn when we retire.”