Tax Rate Reduction
It was expected that personal tax rates would continue to decline, and the 2001 Ontario Budget lives up to that expectation.

The 2001 Budget proposes to continue reducing the tax rates for the low and middle income tax brackets. As with the 2000 Budget, the 11.16% rate applicable to the top tax bracket will remain unchanged.

Ontario taxpayers calculate their provincial tax using a "tax on income" method, rather than the "tax on tax" mechanism used up until the 1999 tax year. In 2000, Ontario taxpayers paid tax of 6.37% on the first $30,004 of income, 9.62% on the next $30,005, and 11.16% on income earned in excess of $60,009. The 2001 rates for the three brackets are 6.2%, 9.24% and 11.16% respectively, with the tax bracket thresholds fully indexed to inflation.

Effective January 1, 2002, the lowest Ontario tax rate will be reduced to 6.05% of taxable income up to $30,814. The middle Ontario tax rate will be reduced to 9.15% for taxable income between $30,814 and $61,629. Effective January 1, 2003, the low and middle income tax rates are reduced to 5.65% and 8.85% respectively.

Ontario also applies a two-tier surtax, calculated as a percentage of Ontario tax in excess of specified amounts. Ontario residents earning less than $53,650 in 2001 pay no Ontario surtax. The 2001 Budget proposes to eliminate, on January 1, 2003, the first-tier surtax altogether by increasing the first-tier threshold to the same level as the second tier. Only individuals with taxable income higher than $61,826 will pay the Ontario surtax. It will be calculated as 56% of Ontario income tax in excess of $4,491.

Equity in Education Tax Credit
Effective for 2002 and subsequent years, the Budget introduces a refundable tax credit for tuition fees paid to Ontario independent schools for kindergarten, elementary and secondary education. The credit will be based on up to $7,000 of annual tuition fees per child. Charges for books, uniforms, sports, travel, boarding and the like will not be eligible for the credit. It will be phased in over a five-year period. The credit will be 10% of eligible tuition fees in 2002, and will increase by 10% per annum reaching 50% for 2006 and subsequent years. The framework for establishing eligibility for the credit will be determined through a consultative process.

Medical Expenses Tax Credit
Claims for medical expenses paid for a dependent other than a spouse must be reduced if the dependent's net income exceeds the amount of the basic personal exemption. As a result of the changes introduced by this Budget, the claim made by an individual for a dependent's medical expenses for 2002 would be reduced by 25.71% of the amount by which the dependent's net income exceeds the basic personal exemption. This is reduced from 26.35% in 2001 as a result of changes to federal and provincial personal income tax rates.

Non-Refundable Personal Tax Credits
Enhancements to certain Ontario non-refundable tax credits are proposed to be effective on January 1, 2001. The credits are calculated by applying the rate for the lowest tax bracket to the amounts below. The following table summarizes these enhancements.

Capital Gains Inclusion Rate The Budget confirms that, as previously announced, the inclusion rate for capital gains on dispositions of property after October 18, 2000, is reduced to 50%, harmonizing provincial and federal taxation.