Indexing has been a core principle of Canadian taxation and fiscal policy in recent decades. Each year, federal and provincial income-tax brackets are nudged upward, to avoid inflation subjecting taxpayers to higher rates.
But there is an odd exception to that approach: the Ontario Health Premium. Despite its name, the levy is not a health-care premium at all but is instead an income surtax, put in place by the Liberal government of Dalton McGuinty nearly two decades ago.
In fact, the Ontario government’s FAQ on the OHP points out quite bluntly that the measure is not linked to the provincial health insurance plan and “does not affect a person’s eligibility to receive health care in Ontario.”
So, the OHP is nothing more than an income tax by another name. Back in the 2004 tax year, the OHP kicked in at $20,000 of taxable income, at a rate of 6 per cent on income above that threshold, with a maximum of $900 payable once a person’s taxable income hit $200,600.
Fast forward 17 years, and those thresholds have not changed. By contrast, the thresholds for the province’s personal income tax have moved up substantially over that same period. In 2004, for instance, the province’s lowest tax rate applied to taxable incomes of $33,375 or less. For the 2021 tax year, that threshold has risen 35 per cent, to $45,142. That’s the logic of indexing at work.
But that logic is not applied to the Ontario Health Premium. Unsurprisingly, the OHP has increased at a much faster clip than personal income-tax revenues. Revenue from the OHP rose from $1.6-billion in 2004 to a forecasted $4.1-billion in fiscal 2021-22, a steep 156-per-cent increase.
Personal income-tax revenue has risen as well during that time, but by a smaller 126 per cent, moving from $18.8-billion in fiscal 2004-05 to $42.6-billion in 2021-22, according to the most recent estimates. One caveat in that comparison: income-tax rates have also changed over those two decades, with the lowest rate falling and two new higher brackets introduced for higher-income individuals.
In a statement, Ontario’s Finance Department said that “in most cases, modest increase in taxable income will not result in a higher premium.” That’s true, to a limited extent. The structure of the tax does indeed impose a flat rate in some income bands. For instance, anyone earning $38,500 to $48,000 pays the same amount in OHP, $450.
But after that threshold, a 25-per-cent rate is charged until the next income band is reached. With some hiccoughs, Ontarians pay more in OHP as their taxable income rises, until they reach $200,600.
That points to another way in which the OHP diverges from another tenet of Canadian income taxation, namely that higher-income earners should not just pay more in tax, but should pay higher rates of tax. (That is what economists mean when they talk about a progressive tax system – progressively higher tax rates.)
The OHP, however, is regressive because of the $900 cap in place. After that point, the effective tax rate represented by that premium declines. For someone with $1-million in taxable income, that effective rate is just 0.09 per cent. By contrast, someone with a taxable income of $25,000 pays $300 in OHP – and an effective rate of 1.2 per cent, 12 times greater than the million-dollar earner.
In its statement, the Finance Ministry said the OHP “is a key component of Ontario’s progressive personal income tax, where higher tax rates apply as an individual’s taxable income increases.” That’s true of the province’s personal income-tax rates; it is decidedly not true of the OHP.
Sheila Block, senior economist with the Canadian Centre for Policy Alternatives, said the lack of indexing of the OHP is an odd anomaly. It might be possible to amend its structure to bring it into line with the overall tax system, she said. Or perhaps the OHP could be scrapped altogether, with personal income-tax rates being adjusted to make up for that lost revenue, Ms. Block added. Such a move would, if done correctly, have the added virtue of eliminating the odd regressive structure of the OHP.
Taxing Questions
Responding to last week’s Tax and Spend on the delay in returning fuel-charge proceeds to businesses, one reader asked why companies would be compensated if they are already passing on their added carbon costs in the form of rising prices.
It would be unfair for businesses to be doubly compensated. But that scenario is highly unlikely, given the current structure of the federal fuel charge and its associated rebates, and the expected ability of businesses to pass on costs.
First, it should be noted that rising prices are driven by factors beyond carbon pricing, for the most part. The increase of 2.2 cents a litre as of Friday will add some costs, most visibly at the gas station. But if you’re looking for the primary culprit in the recent surge in the cost of living, you’ll need to look beyond the fuel charge.
Still, there’s no doubt that the rising rate of the federal fuel charge does increase costs for consumers, and for business. Michael Bernstein, executive director of the non-profit group Clean Prosperity, says his organization estimates that small and medium businesses pay about 25 per cent of the federal fuel charge, but only about 7 per cent of the proceeds are designed to be returned to them.
Mr. Bernstein says it’s true that business will be able to pass on some of those costs, estimating that around 60 per cent of costs will be passed through to customers in the short term. If that’s true, that would leave businesses on the hook for 10 per cent of the fuel charge – still substantially more than the proportion of revenue flowing back to businesses. (And that assumes that Ottawa gears up programs that will get those funds out the door.)
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Marginally effective: Recent increases to the Canada Workers Benefit refundable tax credit puts more money in the pockets of low-income families – but also reduces financial incentives to work, concludes a new study published on the Finances of the Nation site. The changes introduced in 2021 made the credit more generous, including by raising the income threshold at which clawbacks begin. But that clawback rate was also increased. The result is that lower-income workers are better off initially, with lower marginal effective tax rates (the METR concept treats reductions in income resulting from clawbacks as if they were taxes). But as income increases, the METRs of the new CWB end up being higher than the pre-existing program. The study’s authors recommend shielding some portion of increased work income from the clawback in order to avoid eroding work incentives.
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