BUDGET HIGHLIGHTS

The Ontario Finance Minister Ernest Eves delivered the government’s third budget on May 5, 1998. In the budget the Minister announced the final phase of personal income tax reduction, adjustments to the health care levy and a reduction in the Ontario small business corporate tax rate.

The significant proposed tax changes as well as other recent developments of interest are discussed below:

Personal Income Tax Rates

The government announced in the 1996 Budget the first phase of the Ontario personal income tax rate reductions. The 1998 budget implements the final phase of the government’s personal tax rate reduction ahead of schedule. Effective July 1, 1998, the personal income tax rate will be reduced from 45 percent of Basic Federal Tax to 44.5 percent of Basic Federal Tax, therefore the Ontario personal tax rate for 1998 will be 42.75% percent of the Basic Federal Tax. The rate of 40.5% will be effective for 1999 and subsequent years.

Fair Share Health Care Levy ("FSHCL")

The FSHCL is a surtax that is applied to higher income individuals. The surtax will reduce the benefit of the personal income tax rate reductions for those individuals who have income higher than $50,980. Effective July 1, 1998 the FSHCL will be adjusted in order to offset the lost of the proposed Employer Health Tax exemption.

Ontario Tax Reductions

The budget proposes that effective July 1, 1998, the basic reduction will be $160 and the amount in respect of each dependent child age 18 or under and each dependent with a disability will be $325.

Enhanced Support for Families with Children

The 1997 Budget announced a refundable tax credit for low income families who incur child care expenses. The tax credit will be combined with funds made available by the National Child Benefit Initiative to create a new Ontario Child Care Supplement for working families. The maximum annual benefit will be $1,020 for each child under age 7.

Employer Health Tax

The 1997 Budget introduced a $200,000 payroll exemption for private sector employers. This exemption increased to $300,000 for 1998 and was proposed to increase to $400,000 for 1999. The 1998 Budget proposed to increase the $400,000 exemption July 1,1998 ahead of schedule. Consequently, the 1998 payroll exemption will be $350,000. For self employed individuals the 1998 exemption will also be $350,000 and in 1999 the tax on self employed individuals will be eliminated.

Land Transfer Tax Refund

On April 1, 1998 the government announced that the land transfer tax refund for first time buyers of new homes will be extended by one year to March 31, 1999.

Small Business Rate Reduction

The 1998 budget proposes to reduce the small business corporate income tax rate from 9.5% to 4.75% over the next right years. Effective May 5, 1998, the small business corporate income tax rate will be 9%. For more companies that have taxation years that straddle May 5, 1998, the rate reduction will be pro-rated. A further .5 percent reduction as of January 1 for each year until January 1, 2005 when the rate will be 5.5 percent, the tax ratio will be prorated for taxation years that straddle these dates. On January 1, 2006, the small business corporate income tax rate will be reduced to 4.75 percent. As a result, the benefits of the small business rate will begin to be reduced where income is greater than $200,000 and eliminated when income is $500,000 or greater.