A new Ontario tax rule means business-owning clients should re-evaluate paying themselves dividends.

In the 2013 federal budget, the government increased the tax rate for non-eligible dividends, making it less attractive for business owners to pay themselves in dividends. In its fall economic update, the Ontario government says it will also modify how dividend tax credits are applied to income.

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Carol Bezaire, vice president of tax and estate planning at Mackenzie Investments, says, “If you’re taking a blend of salary and dividends, you might want to bump up the amount of dividends you take this year, because you’re taxed lower on them. Then, starting next year, take a look at your salary and your dividend blend again to make sure you’re not paying too much tax.”

Here’s what’s changing:

Currently, Ontarians making more than $70,000 must pay a wealth surtax. But that surtax is only applied after non-refundable tax credits have been subtracted, including the dividend tax credit.

Dividend earners can currently get either a 4.5% (non-eligible) or 6.4% (eligible) tax credit. For approximately 110,000 taxpayers, this credit is enough to bring them below the threshold of the surtax, giving them relief not only for their dividends, but also from the surtax, for a net benefit of up to either 7% or 10%.

The provincial government says that’s unfair, and it proposes calculating the surtax before deducting dividend tax credits.

Read: Effects of new dividend tax rules

Further, it’s proposing to maintain the credit for non-eligible dividends at 4.5% and to raise the tax credit for eligible dividends from 6.4% to 10%.

This means 945,000 taxpayers with low to moderate incomes will pay an average of $145 less income tax, while the 110,000 high income Ontarians will pay on average $1,180 more.

“With these proposed changes, Ontario’s dividend tax credits would have the same value for all taxpayers, regardless of their incomes,” writes the provincial government.

While the change is positive for middle- and low-income taxpayers, it’s not significant, Bezaire says.

“This is a nice thing, but I don’t think it’s going to mean a lot at the end of the day,” she says, adding low-income Canadians don’t usually hold investments that pay dividends.

Read: Top tax tips for clients: Golombek

Also, the tax credits for eligible and non-eligible dividends are evening out, she notes, after the federal government initially increased the non-eligible dividend tax credit to encourage small business owners to incorporate.

“We’re going back to where we were before. In Ontario, for example, an eligible dividend at the top tax bracket is at 33.85%. Compare that to a non-eligible, which is 36.47% right now,” she explains.

Bezaire adds the move allows the provincial government to alter taxation without affecting its revenue—important, considering the province is trying to balance its books by 2018.

“Right now they’re running at a deficit, so they have to do something that looks positive,” she says.

The changes take effect Jan. 1, 2014, alongside the federal changes.

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