Ontario Tax Law — Income Tax Act, HST/GST, and Corporate Tax

Income Tax Act Framework

The Income Tax Act RSC 1985 c 1 (5th Supp) (ITA) is Canada's primary federal income tax statute. It is administered by the Canada Revenue Agency (CRA) and imposes tax on the income of persons resident in Canada and on Canadian-source income earned by non-residents. Provincial income taxes are harmonized with the federal system: Ontario imposes income tax under the Taxation Act SO 2007 c 11 Sch A, which adopts the federal tax base with Ontario-specific adjustments.

The ITA taxes "income from a source" — employment, business, and property — under Part I. Capital gains are included in income at the inclusion rate (one-half of the gain, increased to two-thirds for gains realized after June 24, 2024 for corporations and trusts and for gains exceeding $250,000 for individuals — Budget 2024 proposal subject to legislative enactment). Division B of Part I (ss.3-108) computes net income; Division C (ss.109-114.2) applies deductions to arrive at taxable income; Division E (ss.117-127.41) applies rates and calculates tax.

Corporate Tax Rates in Ontario

Federal and Ontario provincial tax rates combine to produce the effective rate applicable to corporations:

• Canadian-Controlled Private Corporation (CCPC) — Small Business:Federal small business rate of 9% applies to the first $500,000 of active business income (the "small business deduction" under ITA s.125). Ontario's small business tax rate is 3.2% on the first $500,000. Combined rate: 12.2%. The small business deduction is phased out for CCPCs with taxable capital employed in Canada between $10 million and $50 million.
• CCPC — General Rate: Federal general corporate rate 15% after the general rate reduction (ITA s.123.4). Ontario general corporate tax rate 11.5%. Combined general rate: 26.5%.
• Investment Income in CCPCs: ITA Part IV refundable tax (38.67%) on portfolio dividends received by private corporations. ITA Part I tax on investment income at 50.67% combined federal (including RDTOH mechanism) and Ontario rates, with the refundable element recovered when dividends are paid (the RDTOH — Refundable Dividend Tax on Hand mechanism). Effective after-tax rate on investment income in CCPCs designed to approximate individual top marginal rates to remove deferral advantages.
• Non-CCPC (public corporations and others): Federal 15% + Ontario 11.5% = 26.5% combined general corporate rate.

Individual Income Tax — Ontario Rates

Ontario individual income tax rates for 2025 (combined federal + Ontario):

• Up to $57,375 (federal basic): approximately 20.05% combined
• $57,376 to $114,750: approximately 24.15% combined
• $114,751 to $150,000: approximately 29.65% combined
• $150,001 to $220,000: approximately 31.48% combined
• $220,001 to $246,752: approximately 33.89% combined
• Over $246,752: approximately 53.53% combined (federal 33% + Ontario top rate 20.53%)

Ontario's surtax (s.2(1.1) Taxation Act 2007) — a tax on provincial tax — applies at 20% on Ontario income tax over $5,315 and at a further 36% on Ontario income tax over $6,802 (approximate 2025 thresholds), pushing the Ontario top marginal rate to 20.53% and the combined top rate to approximately 53.53%.

HST/GST — Excise Tax Act

Ontario harmonized sales tax (HST) is imposed under the Excise Tax Act RSC 1985 c E-15 (ETA), as Ontario harmonized its provincial retail sales tax with the federal GST effective July 1, 2010. The Ontario HST rate is 13% (5% federal + 8% provincial component). Suppliers of taxable supplies in the course of a commercial activity must register for HST if their taxable revenues exceed $30,000 in any calendar quarter or four consecutive quarters.

Law firms are suppliers of taxable legal services and must collect and remit HST on all legal fees charged to clients, with limited exceptions. Key HST concepts for Ontario lawyers:

• Taxable supplies: Legal services are taxable at 13% Ontario HST (ETA Schedule V Part I lists legal aid services as an exempt supply; otherwise most legal services are fully taxable).
• Zero-rated supplies: Some legal services may be zero-rated when supplied to non-residents for use outside Canada (ETA Schedule VI Part V).
• Input tax credits (ITCs): Law firms may claim ITCs for HST paid on business inputs — office rent, supplies, software, professional services purchased in the course of making taxable supplies. ITCs must be claimed within four years of the reporting period in which the underlying supply was made.
• Trust account HST: Funds held in client trust accounts are not the law firm's income until earned — HST is collected and remitted on legal fees as they are billed, not when trust funds are received. The accounting treatment must align with when services are provided and invoiced.
• HST on disbursements: Disbursements made as agent for the client (where the client is the recipient of the third-party supply) pass through to the client without HST charged by the law firm. Disbursements that are expenses of the law firm re-billed to clients are subject to HST.

Trust Account Tax Reporting Obligations

Ontario lawyers who administer estate trusts, hold funds in constructive trusts, or receive large cash transactions have specific tax reporting obligations:

• T3 Trust Returns: Trusts with annual income over $500 must file a T3 return. Lawyers administering estate trusts, family trusts, or other formal trusts as trustee must file T3 returns. Amendments to the T3 regime (2024/2025) significantly expanded annual T3 filing requirements for bare trusts and agency arrangements, though these rules have been the subject of ongoing amendment and relief announcements.
• Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA):Law firms are designated reporting entities under the PCMLTFA for real estate and certain other transactions. Lawyers must comply with FINTRAC client identification, record-keeping, and suspicious transaction reporting requirements for applicable transactions, while being mindful of Law Society guidance on solicitor-client privilege limitations on these obligations.
• Large Cash Transaction Reports: Financial transactions involving cash of $10,000 or more must be reported to FINTRAC. Trust accounts must be monitored for structuring (breaking large cash amounts into smaller transactions to evade reporting).

CRA Audit and Objection Procedures

When the CRA reassesses a taxpayer's return, the taxpayer has 90 days from the date of the notice of (re)assessment to file a notice of objection under ITA s.165. The objection is reviewed by the CRA Appeals Division. If the objection is not resolved, the taxpayer may appeal to the Tax Court of Canada within 90 days of the CRA's confirmation or notification of reassessment following objection.

The Tax Court of Canada has two procedures: the Informal Procedure (for amounts under $25,000 per year in dispute, or $50,000 for loss determinations) and the General Procedure. The General Procedure follows the Tax Court of Canada Rules (General Procedure). Appeals from the Tax Court on questions of law go to the Federal Court of Appeal, and from there to the Supreme Court of Canada with leave.

The normal reassessment period under ITA s.152(3.1) is three years from the date of the original assessment (four years for non-CCPC corporations). There is no limitation period where the taxpayer has made a misrepresentation attributable to neglect, carelessness, wilful default, or fraud — the CRA may reassess at any time. Voluntary Disclosure Program (VDP) applications allow taxpayers to come forward before CRA contact to correct past non-compliance with penalty relief.