The Ontario government will introduce legislation that would create a new, enhanced dividend tax credit for Ontarians investing in Canadian corporations if approved, said Finance Minister Greg Sorbara.

“We’re moving to a higher dividend tax credit rate as an important part of our overall plan to enhance Ontario’s investment climate,” Sorbara said. “This plan would encourage more investment in Ontario corporations and better integrate our corporate and personal income tax systems.”

Currently, the federal and provincial income tax systems provide single dividend tax credits at the personal income tax level to recognize that taxes have already been paid on income at the corporate level.

However, the current structure is based on small business corporate tax rates, not the higher general corporate tax rates. To address this situation, the federal government introduced a second dividend gross-up and tax credit in its 2006 budget to reflect the general corporate tax rate.

Ontario proposes to parallel the new federal gross-up and introduce a second, higher tax credit for eligible dividends, to be phased in over five years — starting at 5.13% in 2006 and growing to 7.7% by 2010. The changes would apply to eligible dividends received on or after Jan. 1.

By lowering the effective tax rate on eligible dividends, the province would bring its tax rates on dividends more in line with the effective tax rates on other forms of investment.

“We are responding both to the needs of Ontario investors and to federal changes,” Sorbara said. “Our proposal promotes investment while setting out a fiscally prudent approach to better integrating the tax system and enhancing Ontario’s prosperity.”