Let's begin with a basic, but increasingly controversial, statement: Ontario taxpayers believe they pay some of the lowest taxes in Canada, when in fact the province's personal income tax rate is one of the highest in the country. That this is not altogether believable at first blush (or even on a second) is due to a long running campaign of academics, organized labour and social activists to paint tax relief in Ontario as a give-away to the rich with trivial benefits to low- and middle-income earners.

The truth is the Ontario Conservative government has taken impressive steps to reduce income taxes on lower and middle-income earners since 1996, but has done little to lower its top tax rate. Currently, the personal income tax rate on workers who earn less than $32,121 is 6.05 per cent of wages. Those earning between $32,121 and $64,306 pay 9.15 per cent. And the third rate of 11.16 per cent applies to incomes above $64,306. Most would agree these are competitive rates.

Yet two levels of income surtaxes cloud this pleasant tax picture - a 20 per cent rate on provincial income tax paid between $3,710 and $4,682, and a 56 per cent rate (the 20 per cent rate plus a second 36 per cent rate) on provincial income tax paid above $4,682. When these rates are measured in terms of earned income, the 20 per cent surtax is levied against workers who earn between $55,000 and $65,000 and the 56 per cent surtax is applied to income over $65,000.



Rate 6.05% 9.15% 11.16% 20.00% 56.00% (20% + 36%)

Surtaxes are the political ruse that allows Ontario to claim there are three low rates and hide the fact high taxes are imposed on incomes that many would properly define as middle class. Moreover, they make it difficult for taxpayers to know exactly how large the tax bite is or to compare tax rates with other jurisdictions. Sadly, Ontario is in company with the high tax provinces of P.E.I., Nova Scotia and Newfoundland in imposing surtaxes.

The hidden truth of these surtaxes means individual Ontario taxpayers actually face four rates (see chart below) and they peg the effective high-income tax rate at a whopping 17.41 per cent on incomes above $65,000. This is a far cry from the posted 11.16 per cent rate, and affects an awful lot of people that do not consider themselves rich. Of the six million people in Ontario who pay personal income taxes, over one million - 1 in 6 - are hit by provincial surtaxes. By way of comparison, income earners do not pay Ottawa's top federal income tax rate until their taxable income exceeds $104,648. In the United States, the top federal rate kicks in on incomes above $450,000.

That Ontario's top tax rate is high even by Canadian standards and puts the province in league with Quebec and Atlantic Canada - high tax and lower growth jurisdictions - comes as a surprise to many. Yet the numbers speak for themselves: Ontario's tax rate is bested by Alberta with its single 10 per cent income tax rate; British Columbia where its top rate of 14.70 per cent is paid on income above $88,260; and even Socialist Saskatchewan where its top rate of 15 per cent kicks in at $65,000.



In the 2001/02 Ontario budget, the government announced it would eliminate the 20 per cent surtax for workers who earn between $55,000 and $65,000 in 2004. While this is a positive step, this change will widen the tax inequality and strengthen the disincentive on individuals with higher incomes to work longer hours. Moreover, with the lower and middle brackets scheduled to fall again in 2004 (see 2004 Tax Year chart), the tax gap will further widen for people earning more than $65,000 a year (so-called high-income earner). Regrettably, the Ontario government has no plan to reduce its third tax rate or raise the income threshold.



At 17.41 per cent on earnings over $65,000, Ontario's true top personal income tax rate is punitive, contributes to the brain drain, and is a disincentive to work. While the government's overall tax relief programme has been very positive, the top marginal rate must be given much greater attention and reduced. Back in 1996, the Ontario government was Canada's tax cutting leader. The province's determination to lower taxes prompted all other Canadian jurisdictions to follow suit. Yet Ontario's Conservative government has not done the work necessary to maintain its advantage, and other provinces - and even Ottawa - have moved ahead.

Today, the province taxes more from individuals with incomes above $60,000 than the federal Liberal government. These earners contribute approximately 68.5 per cent of Ontario's total personal income tax revenues versus 61.8 per cent of Ottawa's personal income tax take - a gap that is unique in Canada.

In the upcoming budget, to be tabled on March 27th, the Ontario government should eliminate its 20 per cent surtax on all income earners and establish a schedule to phase out its 36 per cent rate. Moreover, the income threshold of the third rate should be raised to match Ottawa's. These changes will ensure Ontario's tax system does not discourage the incentive to work and will give the economy a boost by encouraging investors and wealth builders to work harder and create jobs and long term prosperity.

Widening the tax gap between the middle and top rates is bad tax policy and will only make Ontario less competitive and a poorer province. If people, particularly those with higher incomes, believe it is no longer advantageous to work harder because the government taxes them too highly, they will simply work and invest less or seek opportunities elsewhere.

The Ontario Tories say they are on the side of weary taxpayers. It is time they prove it by catching up with Canada's low tax jurisdictions. But if they won't do this, is it too much for taxpayers to ask they at least match the federal Liberals by taxing us more fairly