Ontario introduces healthcare premiums, tinkers with taxes

(May 18, 2004) Backing down from an earlier promise not to raise taxes, the Ontario government today introduced a healthcare premium, designed to fund billions of dollars in new spending. The premiums — the major announcement in the Liberal government’s first budget — will be used to fund an additional $4.8 billon in health spending over the next four years.

The premiums will be tied to yearly income, starting at $300 annually for those earning between $20,000 and $36,000. Those with salaries between $48,000 and $72,000 will pay $600 a year. The premium tops out at $900 for those earning upwards of $200,000. Because the program kicks in July 1, this year’s premiums will be 50% lower.

“This is something we promised not to do,” Ontario Finance Minister Greg Sorbara conceded in his budget speech. “But in the context of the deficit, it is the right thing to do. It is the fairest way to fund the necessary investment.”

Sorbara forecasts a $6.2 billion deficit this year, but also includes a plan to completely eliminate that shortfall by 2008. Ontario Premier Dalton McGuinty had promised to balance the budget in the first year.

Still, the Investment Dealers Association commends the province for setting out a four year plan to eliminate the deficit and return to a balanced budget. “While it will take longer than hoped, getting its fiscal house in order is certainly a priority to gain fiscal maneuverability to restore tax competitiveness in the province,” noted IDA senior vice president Ian Russell.

The healthcare premium generated the most reaction amongst experts contacted by Advisor.ca. “They’re calling it a premium, but to me it looks a lot like a tax,” says Jamie Golombek, vice-president of taxation and estate planning at AIM Trimark. Golombek points out that the levy will be charged regardless of whether or not the taxpayer is eligible for provincial health insurance coverage.

Dave Clarke, tax manager at Collins Barrow in Ottawa, says he was a bit surprised by the income thresholds in the new health premiums. “If you have a couple making $25,000 a year each, that’s an extra $600 tax, which is a lot of money for people in that income bracket.”

“It’s not the usual strategy of hitting the higher-income earners, it’s really hitting low and middle class taxpayers,” Clarke adds.

“The re-introduction of the Ontario Health Premium places an additional burden upon the average family, further reducing disposable income that could otherwise be earmarked for educational and family retirement investment planning,” says Beverly Brooks, vice president of public affairs at Advocis.

Tax tinkering

The budget also includes a number of tax-related changes. Pointing out that some labour sponsored investment funds (LSIFs) haven’t raised enough money this year to be viable entities, the budget calls for a moratorium on new LSIFs, effective today, while the federal and provincial governments review the program.

The budget also points to two other difficulties LSIFs face. One is that older LSIFs may be confronted with a requirement to increase their investments, even though they have no new capital to invest, since they are harvesting gains from maturing companies.

The second issue is that there may be structural disincentives to LSIF mergers. The budget proposes new rules to allow amalgamations through asset purchases as well as new offsets for realized losses. The budget also proposes to increase the maximum permissible investment by LSIFs in publicly traded companies to 25%.

In another change aimed at venture capital investors, the province has introduced Ontario Commercialization Investment Funds (OCIFs), which would raise capital from institutional, corporate and accredited investors, to be used by eligible public research institutes to bring intellectual property to the market. The minimum investment would be $25,000 while OCIFs would also be eligible for grants of up to 30% after investing in seed stage businesses.

OCIFs would be sponsored by universities, community colleges, hospital research institutes and centres of excellence; each institution would be limited to sponsoring one OCIF. LSIFs would be prevented from investing in OCIFs. Also, grants would be limited to $9 million a year. The $36 million in funding the budget proposes would run out after 2008.

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Ontario today also announced plans to phase out the capital tax, but at a slower rate than the previous government. In the 2003 budget, the Tories announced a plan to eliminate the capital tax on the same schedule as the federal government. This would have seen the complete elimination by 2008. In the 2004 budget, the Liberals plan to gradually eliminate the capital tax by 2012.

“Ontario’s capital tax is widely recognized as a barrier to attracting the investment that Ontario needs to build an innovative economy of high-wage and high-skill jobs,” the budget document reads.

In its response, the IDA said it’s disappointed over the capital tax elimination delay. “This move will not yield significant revenue gains and sends the wrong signal to the capital markets,” the brokerage industry association said.

The province also says it will propose technical legislation to clarify limited liability for investors in publicly-traded trusts. The previous Tory government proposed a similar change, but the legislation died when last year when an election was called.

Filed by Doug Watt, Advisor.ca, with additional reporting by Scot Blythe and Steven Lamb

(05/18/04)