: How does Ontario's income surtax differ from simply modifying tax brackets? What are the costs and benefits of the income tax surtax in Ontario? Ontario charges a surtax on tax above a certain amount. An overview of the

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Ignore this answer. I'll leave it since it does apply to the question but the rules changed. I was just looking up the gross-up and credit rates for Ontario and I read that it's changing for 2014. You can read about it here . In summary the surtax will be calculated before the dividend tax credit, not after as it is now.

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I'm not from Ontario but looking here will show you all the math involved in the surtax. It seems the main difference is dividends don't attract the surtax on the grossed up amount.

When a company earns a profit it pays tax. On the after tax money it can pay the owners a dividend. In order to account for the tax already paid what happens is,

The amount you get paid is grossed up to represent the gross amount the company earned before it paid tax.
Your personal taxes are then calculated on the grossed up amount as it represents the gross amount you really earned in the company.
After your taxes are calculated, you then get a credit for the amount of tax already paid by the company so as to avoid double taxation.

The surtax is calculated after you deduct the taxes already paid by the company (the dividend tax credit). Some of dividend income is taxable at the levels involved in the surtax, the credit doesn't reduce it to 0. The effect seems to be that some of dividend income doesn't attract the surtax.

Now if you get a lot of income from dividends you may have to pay alternative minimum tax. That does attract the surtax. Minimum tax is another topic but it rarely applies and you can get usually it back in the future.