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Ontario Response to Federal Dividend Tax Changes

Subject: Dividends Number: 06-21 Date: 9/8/2006

Ontario has decided to gradually introduce the reduced dividend tax rate

On August 3, 2006, Ontario released a tax information bulletin providing its proposal with regard to the federal dividend tax changes. The federal government had released a proposal to reduce the tax on certain dividends when paid from a Canadian public company or from active business income earned by a CCPC that is not subject to the small business deduction. The federal Department of Finance had released its draft legislation on June 29, 2006 as to the mechanics and details of the federal dividend tax system.

Ontario has now released its proposal. Instead of following the Federal lead by fully adjusting its taxation on dividends, it has decided to gradually change the provincial tax rate on eligible dividends.

At present, the highest Ontario tax rate on dividends is 11.76%. As per the schedule below, the dividend tax rate will be gradually reduced until it reaches an overall tax rate of 7.83% in 2010.

	Eligible Dividends
	Dividend Tax Credit		Top Rate
	No Surtax	With 56% Surtax	Ontario	Federal + Ontario
Before 2006	5.13%	8.0%	11.76%	31.34%
2006	6.5%	10.14%	10.54%	25.09%
2007	6.7%	10.45%	10.09%	24.64%
2008	7.0%	10.92%	9.41%	23.96%
2009	7.4%	11.54%	8.51%	23.06%
2010	7.7%	12.01%	7.83%	22.38%

The Bulletin released by Ontario states that the adjustment to dividends will be in line with the adjustments to corporate income tax rates that will also take effect ultimately in 2010. Unfortunately, this will add an extra level of complexity in planning as the benefits to the eligible dividends are not as high as expected until the lowest tax rate is reached in 2010.

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