The Cost Advantage

Corporate Income Tax Rates in Ontario (%), 2004

Rate Type	General	M&P	CCPC rate on first $250,000 of income (federal threshold)	CCPC rate on next $150,000 of income*
Federal Rate	22.12	22.12	13.12	22.12
Ontario Rate	14.0	12.0	5.50	5.50
Combined Rate	36.12	34.12	18.62	27.62

* Federal threshold to Ontario threshold
Federal CCPC threshold = $300,000 in 2004, $275,000 in 2005 and thereafter
Ontario CCPC threshold = $400,000

* More precisely, a corporation is a CCPC if it is not controlled by non-residents, public corporations or a combination of them.

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5. An income surtax of 4.667% applies to non-M&P income of CCPCs, and 2.667% for M&P income of CCPCs, for taxable income over $400,000.The lower small business tax rate is thus fully recaptured when taxable income reaches $1,128,519, after which the surtax doesn't apply.

Income to Ontario = {
(Salaries and wages paid in Ontario / Total salaries and wages paid )

+(Gross revenue earned in Ontario / Total gross revenue earned)
} ÷ 2

Tax Credits and Incentives

In addition to providing lower corporate income tax rates, and special rate incentives for small business, and for M&P operations, Ontario also offers numerous tax credits and incentives designed to encourage investment in specific activities. The tax credits can generally be used to reduce income tax. Several of the credits are refundable. They result in a net payment from the government if a corporation does not have any taxes to pay, or the credit amounts exceed the tax otherwise payable by the corporation.

Research and Development (R&D) Incentives

Ontario offers a number of tax incentives designed to encourage R&D in the province. These include the Ontario Business Research Institute Tax Credit (OBRI), and the Ontario Innovation Tax Credit (OITC).

The Co-operative Education Tax Credit

This tax credit is provided to businesses that hire a student in a qualifying work placement. A refundable tax credit is provided to the business for wage costs incurred in providing the student placement, so long as that placement qualifies as a co-operative work program.

The value of the credit is:

• 10% of eligible expenditures if the total of salaries and wages paid by the employer in the previous taxation year was $600,000 or more.
• 15% of eligible expenditures if the total of salaries and wages paid by the employer in the previous taxation year was $400,000 or less.
• a graduated rate between 10% and 15% if payroll in the previous year was between $400,000 and $600,000.

Apprenticeship Training Tax Credit

This proposed tax incentive should provide a 25% refundable tax credit on salaries and wages paid to apprentices in skilled construction, industrial, motive power and service trades during their first 36 months of an apprenticeship training program.

The employer would be eligible for a tax credit of up to $5,000 per year (pro-rated to the number of days of employment), to a maximum of $15,000 over three years of apprenticeship. The tax credit rate would be 30% for businesses with annual payroll not exceeding $400,000. There is no limit to the number of apprentices that can be hired.

Tax Credits For Particular Industries

In addition to the generally available tax credits, including those for R&D, Ontario offers a number of tax credits targeted at particular industries.

The Ontario Film & Television Tax Credits

Ontario provides generous incentives for film and video productions in the province. The incentives are in the form of refundable tax credits, based on eligible labour expenditures in the province for the productions. Their design parallels those of the federal tax credits for film and video productions.

The Government of Canada provides a refundable tax credit (the Canadian Film or Video Production Tax Credit) of 25% of labour expenditures (to a maximum of 60% of the total production budget) for film or video productions that meet the prescribed Canadian content requirements and are certified by the government as such. Ontario provides a refundable provincial tax credit of 20% of Ontario labour expenditures (with no cap based on total production budget) for productions that are certified to meet the Canadian content requirements.

Ontario provides further enrichment of the incentives. In the case of productions that are certified to meet the Canadian content requirements, “first-time productions" qualify for 30% credit for the first $240,000 of labour expenditures, plus 20% of any remaining balance for labour expenditures incurred. For productions that have at least five location days in Ontario and at least 85% of location days in Ontario outside the Greater Toronto Area, there is a further bonus credit of 10% of Ontario labour expenditures.

The Ontario Production Services Tax Credit

Productions that do not meet the Canadian content requirements are eligible for the federal Film or Video Production Services Tax Credit of 16% of Canadian labour expenditures. This credit is available to both Canadian and foreign productions that are filmed in Canada. Ontario's Production Services Tax Credit provides an 11% refundable tax credit for qualifying labour expenditures for those productions that do not meet the Canadian content requirements.

There is a bonus incentive of 3% of Ontario labour expenditures for productions that have at least five location days in Ontario and at least 85% of location days in Ontario outside the Greater Toronto Area.

The Ontario Computer Animation and Special Effects (OCASE) Tax Credit

This refundable tax credit is available to corporations for Ontario labour expenditures incurred with regard to computer animation and special effect activities carried out in Ontario for use in film or television productions. The OCASE tax credit is 20% of qualifying labour expenditures, which include amounts paid to the employees and non-employees of the corporation so long as they are engaged in qualifying activities performed in Ontario.

It should be noted that a corporation is allowed to claim the OCASE tax credit, in addition to the Ontario Film and Television Tax Credit, or the Ontario Production Services Tax Credit.

The Ontario Interactive Digital Media Tax Credit

Ontario provides a 20% refundable tax credit for labour expenditures and eligible marketing and distribution expenditures for the creation of original interactive digital media products.

Eligible interactive digital media products are those that:

• are developed by a qualifying corporation in Ontario for commercial exploitation when the copyright is owned by the corporation;
• are delivered electronically, for example, via CD-ROM or the Internet, in digital format;
• are interactive, where users have the ability to direct the course of their immediate interaction with the electronic product; and
• integrate text, audio and video media.

A qualifying corporation is a taxable Canadian corporation that:

• has a permanent establishment in Ontario; and
• on an associated company basis, has together with other associated corporations, neither annual gross revenues in excess of $20 million nor total assets in excess of $10 million for the immediately preceding taxation year.

Ontario Sound Recording Tax Credit

Ontario provides a 20% refundable tax credit for all Ontario-based, Canadian-controlled sound recording companies for expenditures related to sound recordings by emerging Canadian artists. This credit can be combined with the Ontario Film and Video Tax Credit and the Ontario Production Services Tax Credit.

To be eligible, a sound recording company must have carried on its sound recording business for at least 24 months preceding the taxation year and have allocated more than 50% of its taxable income to Ontario. To simplify compliance, the corporation must meet this allocation criterion in the preceding tax year.

Ontario Book Publishing Tax Credit

Ontario provides a 30% refundable tax credit to Ontario book publishing companies that publish and promote the first three works by a Canadian author in each eligible category (fiction, non-fiction, poetry, biography or children's books), to a maximum value of $30,000 per literary work.

The credit is for 30% of the following expenditures:

• non-refundable author advances and salaries;
• pre-production costs carried out principally in Ontario, including salaries for editing, design and project management, and freelance costs for editing, design and research, artwork, development of prototype, and set-up and typesetting;
• 50% of production costs for activities carried out principally in Ontario, including printing, binding and assembly; and
• promotional cost incurred within 12 months of the publication date, including advertising, sales salaries and promotional tours by the author, including 50% of meals and entertainment expenses of the author while on tour.

International Comparison of Effective Tax Rates

Incentives offered by Ontario make it an internationally competitive jurisdiction in which to do business. As shown in the chart on the following page, the Competitive Alternatives study comparing business costs across various jurisdictions, found Canada's effective corporate income tax rates to be the second-lowest among the jurisdictions studied.

The effective corporate income tax rates in this study were determined by dividing the corporate income taxes applicable to an enterprise by its net profits before tax. This captures the impact of statutory tax rates as well as any applicable incentive credits and deductions.

Determining Taxable Income

The starting point for determining taxable income for corporate income tax purposes in Canada is income as measured under Generally Accepted Accounting Principles. It is then subject to adjustments under specified provisions, such as those relating to the treatment of depreciation, valuation of inventories, deductibility of provisions, and some specific expenses, such as meals and entertainment expenses – which are only 50% deductible. In general, provisions, such as warranty reserves, are not deductible for income tax purposes. Only actual expenses incurred are tax-deductible.

Depreciation

For tax purposes, depreciation or amortization in financial statements is added back into income, and then tax depreciation, generally calculated on a declining-balance basis at prescribed rates, is deducted. The tax depreciation rates are set to approximate the economic depreciation rates. However, several of the rates exceed economic depreciation rates and are designed to provide incentives for investment in those assets. The depreciation deduction is limited in the first year the asset is acquired, to 50% of the available deduction; known as the “half-year rule." Furthermore, tax depreciation cannot be claimed until the asset is available for use. Tax depreciation may be fully or partially claimed at the taxpayer's option.

The following are examples of the prescribed deprecia-tion rates for specific major categories of assets:

Commercial and industrial buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4%

Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20%

Motor vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . 30%

Manufacturing and processing machinery and equipment . . . . . . . . . . . 30%

Computers (as proposed in the 2004 federal budget) . . . . . . . . . . . . . . .45%

Other plant machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 20%

Capital assets are generally pooled into various classes. In general, if an asset is disposed of, the undepreciated balance of the assets in the class is reduced by the proceeds of disposition. However, if the proceeds of disposition exceed the balance of the asset pool after depreciation, the excess is recaptured and is subject to taxation as regular income. If the asset was the only asset in the class and if a balance remains in the pool after the proceeds are charged to the class, then the balance may be deducted as a terminal loss.

Non-capital Losses

Non-capital losses, i.e., business losses other than those from a capital asset, can be deducted from income from other sources. Any excess losses can be carried back to the three preceding years, or forward to the seven following years. The 2004 federal budget proposes to extend the carry-forward period for taxation years that end after March 22, 2004, from seven years to ten years.

Capital Gains and Losses

As discussed, only 50% of any capital gains (net of any capital losses) are included in income for tax purposes.

Capital losses can be used only to reduce capital gains. They cannot be deducted from income from other sources. However, capital losses from an investment in debt or shares of a CCPC, called allowable business investment losses, can be deducted against income from any source. The deductible portion of capital losses (other than allowable business investment losses) in excess of capital gains is termed “net capital loss” and may be carried back three years and carried forward indefinitely, but may be applied only against capital gains.

Proceeds in excess of cost from the disposition of capital assets are generally taxed as capital gains. For depreciable assets, tax depreciation previously claimed that is recovered on disposition is generally fully included in income. (Subject to the discussion above on pooled assets.)

Dividends

In general, dividends paid by one Canadian corporation to another are tax-free. However, to prevent the use of private companies to obtain significant tax deferrals on portfolio dividend income, such corporations are subject to a special 33% refundable tax on dividends received from portfolio investments. This tax is refunded when the dividends are redistributed to the shareholders. Additional taxes may be imposed on dividends paid on certain classes of shares that are viewed as substitutes for debt (e.g., preference shares that are redeemable or retractable).

Dividends paid by a Canadian company to individual shareholders who are Canadian residents are grossed up by a notional amount of underlying corporate income tax and included in income. Shareholders pay tax on the grossed-up amount but are allowed to claim a tax credit (dividend tax credit) for the notional amount of the corporate income tax by which the dividends were grossed up.

Inventories

For tax purposes, inventories may be valued in either of two ways:

(1) All items may be valued at fair market value; or

(2) Each item may be valued at the lower of its cost and its fair market value.

The last-in, first-out (“LIFO") basis is not permitted for tax purposes, despite its acceptability for accounting purposes in certain circumstances. Corporations may use a different inventory valuation method for accounting purposes than the one used for tax purposes.

Foreign Tax Credits

Taxpayers are allowed to claim a credit (foreign tax credit) for income taxes paid to foreign governments on income earned abroad. Generally the credit is allowed for the lesser of the foreign income taxes paid and the domestic income taxes otherwise applicable to the foreign income.

Tax Incentives to Further Reduce Taxable Income

Both the Canadian and Ontario governments allow accelerated deductions for investments in specific assets (e.g., pollution control equipment) or industries (e.g., manufacturing and mining).

Ontario Current Cost Adjustment (OCCA)

Ontario provides an additional 30% tax deduction, over and above the regular depreciation allowance, for investments in pollution control equipment. Eligible cost of pollution control equipment for the OCCA is the first $20 million in capital cost of the equipment acquired in a given taxation year.

Ontario New Technology Tax Incentive (ONTTI)

Ontario provides a 100% deduction of the eligible cost of qualifying intellectual property that is acquired by a corporation under a qualifying intellectual property transfer arrangement. A qualifying intellectual property transfer is an acquisition of knowledge in the form of “know-how," techniques, processes or formulas from an unrelated person for the purpose of implementing an innovation or an invention in a business of the corpora-tion that is carried on in Ontario. Qualifying intellectual property is a patent (either domestic or foreign), licence, permit, know-how, commercial secret or other similar property constituting knowledge, but not a trademark, industrial design, copyright or other similar property constituting the expression of knowledge. The ONTTI can-not be claimed in excess of the $20 million expenditure limit for the year for a corporation or partnership that is not associated with another taxpayer. Rules apply to allo-cate the expenditure limit among associated taxpayers.

Non-Taxation of Federal R&D Assistance

The portion of the prior year's federal investment tax credit claimed that relates to qualifying Ontario SR&ED expenditures are added back into the R&D “pool” when calculating Ontario taxable income. This reduces taxable income, and also increases the amount used to calculate the Capital Cost Allowance for the R&D equipment.

Research and Development Tax Incentives

Ontario offers numerous incentives for R&D. Combined with federal incentives for R&D, the after-tax cost of R&D in Ontario is lower than in many other jurisdictions, including the United States. The incentives offered in Ontario are available for both current and capital expenditures on R&D, including: wages, capital equipment, materials, overhead and consulting fees. By comparison, the U.S. research tax credit provides a tax incentive only for increases to research expenditures over certain base levels. Moreover, the U.S. credit is limited to current expenses, and is not available for capital expenses.

The incentives offered by Ontario under the provincial corporate income tax system include:

• an immediate 100% write-off of all current and capital R&D expenditures;
• for corporations with less than $400,000 in taxable income, the OITC provides a refundable tax credit of 10% of R&D expenditures;
• the 20% refundable OBRI Tax Credit, for R&D expenditures incurred through contracts with eligible Ontario research institutes, such as universities, colleges, hospital research institutes and other non-profit research organizations; and
• an immediate 100% deduction of the cost of acquiring a qualifying patent, licence, permit, know-how, commercial secret or other similar property constituting knowledge through a qualifying intellectual property transfer.

In addition, R&D machinery and equipment purchased for the use of a qualifying manufacturer is exempted from the Ontario RST.

These incentives are in addition to the incentives under the federal corporate income tax system, which include:

• a 100% write-off of all current and capital R&D expenditures; and
• the SR&ED expenditures, a refundable investment tax credit equal to 20% of qualifying expenditures, with the rate increasing to 35% for small CCPCs.

Combined, these incentives can have a significant impact on the after-tax cost of R&D expenditures. For example, in the case of a large manufacturing firm, the after-tax cost for an expenditure of $100 on capital equipment can be as low as $40.24 in Ontario. The table below demonstrates how this figure is calculated.

The net after-tax cost of an investment in the above table is for a large manufacturing corporation. It will vary depending on the type of corporation and the income tax rate applicable to them. For example, the $51.30 net after-tax cost in the above table would be reduced to $46.60 for a large non-manufacturer.

Further examples, and more detail on the advantages of Ontario's R&D incentives can be found in the Government of Ontario publication “Research and Development in Ontario, Incentives for Innovation”, or at http://www.2ontario.com

After-Tax Cost of R&D Expenditures, ($) 2004 (Large Manufacturers)

	R&D Expenditure	R&D Expenditure at an eligible Ontario research institute6	Non-R&D expenditure
Capital expenditure	$100.00	$100.00	$100.00
Ontario RST	$0.00	$0.00	$8.00
Gross Expenditure	$100.00	$100.00	$108.00
Ontario OBRI tax credit – 20%7		-$20.00
Subtotal	$100.00	$80.00	$108.00
Federal investment tax credit	– 20%	-$16.00
Subtotal	$80.00	$64.00	$108.00
Tax Deduction (at the 2004 combined corporate rate for M&P = 34.12%)	-$27.30	-$21.84	-$36.85
Ontario exemption of federal tax credit (at the 2004 Ontario rate for M&P = 12.0%)	-$2.40	-$1.92
Net After-Tax Cost	$50.30	$40.24	$71.15*

Source: Ernst & Young LLP
* This analysis incorporates Ontario RST. Note in some instances some R&D components might be sales tax exempt and the after-tax cost would be lower than quoted.

6. For RST purposes, eligible entities include qualifying universities, manufacturers and non-profit institutions that conduct medical research as their only function.
7. The 20% refundable OBRI tax credit.

Rules for Non-residents

Debt-to-Equity Rules

Canada imposes a thin-capitalization rule limiting the ability of non-residents to reduce their taxable profit through a deduction of interest paid on debt from non-resident shareholders. The interest deduction is restricted if interest is paid by a Canadian resident corporation to a specified non-resident on debt exceeding two times the shareholders' equity in the corporation. A specified non-resident is a non-resident shareholder who, either alone or with other persons not at arm's length, owns 25% or more of the issued shares of any class of the corporation, or any non-resident (including a subsidiary of the Canadian corporation) who doesn't deal at arm's length with such a shareholder. The thin-capitalization rule does not apply to a branch of a foreign corporation.

Foreign Affiliates

A non-resident corporation is considered a foreign affiliate if a Canadian corporation and related persons directly or indirectly own at least 10% of any class of shares of that non-resident corporation. Dividends received by a Canadian corporation from a foreign affiliate are generally received tax-free in Canada if the dividends are derived from active business profits earned in a country with which Canada has entered into a tax treaty. Dividends are taxable in Canada if they are derived from passive operations or any operations in a non-treaty country, with relief in the form of foreign tax credits for the underlying foreign taxes paid.

Capital Gains Realized by Non-residents

Subject to applicable tax treaties, non-residents are required to pay Canadian tax on their taxable capital gains (50% of gains net of losses) arising on the disposition of taxable Canadian property.

Such property includes:

• land situated in Canada;
• property used in a business carried on by the non-resident in Canada;
• interest in a partnership if more than 50% of the value of the partnership's property was attributable to taxable Canadian property at any time in the 60 months preceding the disposition;
• interests in certain trusts resident in Canada; and
• shares of a non-resident corporation or an interest in a non-resident trust if at any time in the 60 months preceding the disposition of more than 50% of the value of the interest and the value of the property owned by the non-resident corporation or non-resident trust was attributable to certain types of property.

A non-resident vendor of taxable Canadian property (other than property that qualifies as excluded) must obtain a tax clearance certificate from the CRA and provide acceptable security or must pay tax on the disposition at the time of sale. Unless the non-resident vendor has obtained a tax clearance certificate, the purchaser, if he or she knows the vendor is a non-resident, must withhold and pay to the federal government up to 25% of the cost of the property.

Withholding Tax Rates

Canada imposes withholding taxes on dividends, interest, and royalties paid to non-residents. The standard withholding rate is 25%, which can be reduced under tax treaties with the resident country of the recipient. Canada's withholding taxes are administered by the CRA.

The following table presents the domestic tax rates for dividends, interest and royalties paid from Canada to residents of selected countries with which Canada has tax treaties. Exceptions or conditions may apply, depending on the terms of the particular treaty.

Canadian Withholding Tax Rates, By Country, (%) 2004

Residence of Recipient	Dividends	Interest8	Royalties9
Australia	15	10	10
France	15/10/510	10/0	10/0
Germany	15/5*	10/0	10/0
Japan	15/511	10/0	10/0
United Kingdom	15/10*	10/0	10
United States	15/10/512	10/013	10/0

* The to a foreign corporation that controls at least 10% of the voting power of the payer.

8. The lower rate usually applies to government debt or government-assisted debt.
9. The lower rate usually applies to royalties on cultural works or to royalties relating to computer software, patents and know-how. Withholding tax of 25% applies if royalties relate to the use of real or immovable property, including resource property.
10. The 5% rate applies if the dividends are paid by a Canadian corporation that is not a NRO to a French corporation that controls at least 10% of the votes of the payer. The 10% rate applies if dividends are paid by a Canadian corporation that is a NRO to a French corporation controlling at least 10% of the votes of the payer.
11. The 5% rate applies to dividends paid to a company that owns at least 25% of the voting shares of the payer for the last six months of the accounting period for which the distribution of profits takes place.
12. The 5% rate applies to dividends paid to corporate shareholders owning at least 10% of the voting shares of the Canadian company. The 10% rate applies to dividends paid by NROs if the recipient owns a substantial shareholding.
13. The 0% rate applies to, among other things, interest payments that are exempt under Canadian domestic law.

Capital Tax Calculation

Sum of Capital (sum of capital stock, long-term debt, retained earnings, contributed surplus and non-deductible reserves)

- Investment Allowance (investments in other corporations to avoid double counting of aggregate corporate capital)

- Threshold Deduction (capital taxes are applied on capital above a certain limit; these thresholds vary across jurisdictions)

= Taxable Capital

x Capital Tax Rate

x % income allocation for Ontario

= Capital Tax

Retail Sales Tax Exemptions for Goods

Exempt Goods	Conditional Exemptions	Rebates
Food products for human consumption except candies, confections, snack foods and soft drinks Prepared food products $4.00 and under Energy Some transportation equipment Agricultural feeds Children's clothing Books, newspapers and magazines sold by subscription Prescription drugs and medicines Feminine hygiene products Footwear costing $30.00 or less Children's car seats Uncancelled postage stamps Coin, paper money or bank notes purchased at face value Goods purchased at a price of less than 21 cents Equipment designed solely for people with physical disabilities	Municipal fire-fighting vehicles Production machinery and equipment, and R&D equipment purchased for the use of a qualifying manufacturer Hospital equipment purchased by a qualified hospital Goods purchased for resale Goods incorporated into items for resale	Goods removed from Ontario within 30 days of purchase Alternative-fuel-powered motor vehicles (includes hybrid electric vehicles) Capital investments made by religious, charitable and benevolent organizations Solar energy systems purchased and incorporated into residential premises after November 25, 2002 and before November 26, 2007

The Federal Goods and Services Tax

The Goods and Services Tax (GST) is a value-added tax (VAT), similar to that levied in Europe, New Zealand and Australia, levied by the federal government at a 7% rate.

The GST is applied to a broad range of goods and services. Registered vendors can claim Input Tax Credits (ITCs) for the GST paid on their purchases of goods and services acquired for use in their taxable activities.

There are three categories of supplies under the GST: taxable, zero-rated, and exempt. Taxable supplies are taxed at 7%, and suppliers are allowed to claim an ITC for the GST paid on their purchases for use in making those supplies.

No tax is levied on zero-rated supplies, and the suppliers are allowed to claim ITCs for the GST paid on their purchases. They are essentially taxable supplies that are taxed at a rate of 0%. Zero-rated supplies include basic groceries, prescription drugs, and exports.

Exempt supplies are those that are not taxed, but the suppliers are denied any ITCs for the GST paid on goods and services acquired for use in making the exempt supply. Financial services and residential rents fall into this category. In addition, there are special rules for non-profit organizations.

Goods and Services Tax Implications for Non-Canadian Entities

Generally, non-residents of Canada are not required to register for, or collect the GST on their supplies unless they are “carrying on business" in Canada. Carrying on business in Canada generally means the non-resident has a significant presence in Canada. A non-resident “non-registrant" (who has not registered with CRA for purposes of collecting GST) is not required to collect GST on taxable supplies sold to Canadian customers.

However, where non-resident non-registrants pay GST on goods and services they acquire in Canada, it can be to their advantage to register, in order to be able to claim ITCs on these purchases. Once registered, non-residents have the same collection and reporting requirements as Canadian registrants. Registered non-residents will be required to collect GST on all taxable sales made in Canada. Unlike non-registrants, registered vendors will be entitled to recover GST paid on their inputs to the extent the inputs are acquired for use in the course of their taxable activities. Registrants are required to remit the GST collected less any ITCs on a monthly, quarterly or annual basis. The filing frequency is determined by the registrant's annual sales.

Gasoline and Diesel Fuel Taxes

Motive fuels (gasoline, diesel, and aviation fuels) are subject to both federal and provincial taxes. These taxes are levied at specific rates per litre of fuel. The current rates are as follows:

In addition to the above taxes, motive fuels also attract the federal GST. However, they are exempt from the Ontario RST.

Fuel taxes, (¢ per litre) 2004⁴

Fuel	Ontario	Federal	Combined
Unleaded gasoline	14.7	10.0	24.7
Diesel fuel	14.3	4.0	18.3
Aviation fuel	2.7	4.0	6.7

Local Taxes

Property taxes are the principal source of revenue for local government. Property taxes represent approximately half of all municipal operating revenues in Ontario.

Property taxes are based on the assessed value of properties as determined by the Municipal Property Assessment Corporation.

The provincial government establishes the legislative framework governing property assessment policy and the overall property tax structure. Municipalities administer property taxes, which includes billing and collection.

The tax has two components – a municipal tax and an education tax. The municipal portion finances a wide range of municipal services, including police and fire protection, garbage and snow removal, road maintenance, public health and welfare. The education portion helps finance education.

Municipalities set their own tax rates for the municipal portion of the property tax, “within provincially established limits on the relative municipal taxes on different classes of property.” The provincial govern-ment sets the tax rates for the education portion of the property tax.

Property taxes are calculated by multiplying the assessed value of a property by the tax rate.

• In 2003, combined municipal and education property taxes on a property with an assessed value of $500,000 would have been approximately $26,000 for an industrial property, and approximately $23,000 for a commercial property.

Property Tax Rates in Ontario Municipalities, (%) 2004

	Commercial Tax Rates			Industrial Tax Rates
Municipality	Municipal	Education	Total Tax Rates	Municipal	Education	Total Tax Rates
Toronto	2.31	2.30	4.61	2.71	2.59	5.30
Mississauga	1.04	1.83	2.86	1.17	2.15	3.33
Brampton	1.24	1.83	3.07	1.41	2.15	3.56
London	2.37	2.70	5.07	3.27	3.27	6.54
Ottawa	2.20	2.04	4.23	2.61	2.63	5.24
Kingston	2.21	2.24	4.45	3.49	3.46	6.95
Sault Ste. Marie	2.66	2.07	4.73	3.06	2.21	5.27

Source: 2003 Municipal Tax Rate by-laws; Ontario Property Tax Analysis

Personal Income Tax in Ontario

Basic Personal Income Tax

Ontario, like all provinces in Canada, levies personal income tax on the taxable income of individuals residing in the Province; this is in addition to the federal income tax. The federal and provincial taxes are based on a common definition of taxable income, to which different rates and credits are applied.

Basic Federal and Provincial Income Tax Calculation

Federal Income Tax Ontario Income Tax	Taxable Income Taxable Income
x Federal Tax Rates	x Ontario Tax Rates
= Gross Federal Tax	= Gross Ontario Tax
- Federal Non-refundable Credits	- Ontario Non-refundable Credits
= Basic Federal Tax	= Basic Ontario Tax
- Other federal amounts (Refundable Tax Credits)	+ Ontario Surtaxes - Ontario Tax Reduction - Ontario Credits
= Net Federal Tax	= Net Ontario Tax

The federal and Ontario basic income tax brackets and tax rates for the 2004 taxation year are as follows: