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Tax Expenditures and Evaluations - 2000: 1
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Preface

Starting with this issue, Tax Expenditures will be published as two separate documents: Tax Expenditures and Evaluations and Tax Expenditures: Notes to the Estimates/Projections.

Tax Expenditures and Evaluations

, which will be published annually, will continue to provide estimates and projections for broadly defined tax expenditures. In addition, starting this year, this report will include descriptive papers on tax expenditures that readers may find useful. This year's report contains the following three papers:

  • "Defining Tax Expenditures." In light of developments in this area over the past decade and in light of the diverse practices followed by different countries in reporting tax expenditures, this paper reviews various methodologies for identifying and reporting tax expenditures. 
  • "The Alternative Minimum Tax." This paper reviews the alternative minimum tax (AMT) and demonstrates that the Canadian AMT has achieved its objective of reducing the extent to which high-income tax filers pay little or no income tax. 
  • "GST/HST Treatment of Export Distribution." This paper provides further background information on measures in this area introduced in the 2000 budget. 

The second document, Tax Expenditures: Notes to the Estimates/Projections, sets out the approach used in developing the estimates and projections for the tax expenditures contained in the first report. It also provides a description of each tax expenditure and a statement of their objectives. Until now, this information was published in the same report as the estimates and projections; the move to separate documents will therefore make the main report easier to use. This second report will be published less frequently than the main report given that the information it contains does not change often.

Part 1
Tax Expenditures: Estimates and Projections

Estimates and Projections of Tax Expenditures

While there is agreement on the conceptual definition of tax expenditures, there is no widely accepted operational methodology for estimating them. A range of methodologies exists internationally, some restrictive, others very broad. The broadest of the available options is to estimate tax expenditures as all deviations from a benchmark tax system. Typically, these deviations take the form of exemptions, deductions, rate reductions, rebates, credits, deferrals and carry-overs.

The approach used in this document seeks to provide as much information as possible to the reader, without getting into a controversy as to whether or not an item is a tax expenditure. Consequently, any deviation from a narrowly defined tax structure is reported. This allows the reader to decide whether or not a particular item qualifies as a tax expenditure. These deviations from the tax system are reported in two parts: one includes a list of all items that could be considered tax expenditures under a very broad (and perhaps unrealistic) definition; all other deviations from the benchmark tax system are reported as memorandum items.

Caveats

Care must be taken in interpreting the estimates and projections of tax expenditures in the tables for the following reasons.

  • Tax expenditures are values of tax revenues forgone to achieve a variety of economic and social objectives. Whether or not the magnitudes of tax expenditures are appropriate depends upon an evaluation of the social and economic policies that generated them. The values reported in the tables provide no information to permit such an evaluation. 
  • Estimates of various tax expenditure items cannot be added together – this is because the cost of each tax expenditure is estimated separately, assuming that all other tax provisions remain unchanged. 
  • The estimates assume all other factors remain unchanged (i.e., there is no allowance for behavioural changes, consequential government policy changes or changes in aggregate economic activity in response to the change in the tax expenditure). 
  • In addition to these considerations, the projections are subject to forecast error and are "best efforts" that have no greater degree of reliability than the variables that explain them. 
  • The federal and provincial income tax systems interact with each other to various degrees. As a result, changes to tax expenditures in the federal system may have consequences for provincial tax revenues. In this publication, however, any such provincial effects are not taken into account – that is, the tax expenditure estimates are purely federal in nature. 
  • In the case of the harmonized sales tax in effect in Nova Scotia, New Brunswick, and Newfoundland and Labrador, only the federal cost of the tax expenditures is reported. 

It should also be noted that, on occasion, the estimated or projected change in the value of a tax expenditure in this report does not coincide with that shown in the 2000 budget. For example, this report shows that the cost of the capital gains inclusion rate increased by $450 million between 1999 and 2000. This increase is due to the reduction in the inclusion rate from three-quarters to two-thirds that was announced in the 2000 budget. However, according to the 2000 budget estimate, the cost of this change is only $135 million for that same period. By itself, the reduction in the capital gains inclusion rate raises tax expenditures and lowers budgetary revenues by the same amount. But the lower inclusion rate is expected to induce additional realizations, which reinforces the increase in tax expenditures while providing an offset to the loss in budgetary revenues. As a result, a substantial gap between the two estimates emerges.

A second example is the change in the partial exemption of scholarship, fellowship and bursary income, which was also announced in the 2000 budget. The cost of this change was estimated at $30 million for the 2000 tax year. In contrast, the associated tax expenditure provided in this document is $16 million in 2000 (up $13 million from $3 million in 1999). In this case, the apparent disparity is largely a matter of presentation. The total cost of this measure shown in the budget is spread over two or more categories in this report. The 2000 budget estimate of $30 million consists of $13 million that will be claimed by students and a further $17 million that will either be carried forward or transferred to parents and claimed by them. These amounts are shown separately in this report.

What's New in the 2000 Report?

The 2000 budget made changes that affect the value of a large number of tax expenditures. The benchmark against which tax expenditures are measured was altered by reducing the middle tax rate and reintroducing full indexation in the personal income tax system, and by reducing the general corporate tax rate. This has an indirect effect on the value of personal and corporate tax expenditures. For example, the tax expenditures associated with the low rate for small business and for manufacturing and processing are reduced because they are measured against a lower benchmark. In addition, changes were made to specific tax expenditures, and this affects their value directly.

These changes are noted below.

Personal Income Tax

Eliminate Automatic Increases in the Tax Burden Due to Inflation

  • Immediately restore full indexation of the tax system effective January 1, 2000, for all amounts that were previously partially indexed, the income thresholds affecting these amounts, and the taxable income thresholds at which all marginal tax rates begin to apply. The indexation factor for a given taxation year beginning January 1 is the percentage change in the average consumer price index for the 12-month period ending on September 30 of the previous year. 
  • Indexation will increase tax expenditures associated with indexed credits, such as the spousal credit, by increasing their value, and with credits with indexed thresholds, such as the Canada Child Tax Benefit, by increasing the number of eligible claimants. 
  • On the other hand, by eliminating bracket creep, indexation will reduce the tax expenditures associated with non-refundable credits, such as the tuition credit, used by low-income earners to reduce their federal taxes owing to zero. 

Reduce the High Tax Burden at the Middle-Income Level

  • Reduce the middle income tax rate from 26 per cent to 24 per cent effective July 1, 2000. 
  • Increase the 5-per-cent surtax threshold from $12,500 to $18,500 of basic federal tax (at an income level of about $85,000) effective July 1, 2000, and reduce the surtax rate from 5 per cent to 4 per cent effective January 1, 2001. 
  • These measures will generally reduce tax expenditures associated with certain deductions and non-taxable benefits, such as business-paid health and dental benefits, by reducing marginal tax rates. 

Increase Support for Children

  • Increase the Canada Child Tax Benefit base benefit by $70 per child, including indexation, effective July 2000. 
  • By July 2001, increase the National Child Benefit supplement by $200 per child, including indexation, from the currently scheduled July 2000 levels of $955 for the first child, $755 for the second child and $680 for each subsequent child. 

Make the Income Tax System More Internationally Competitive

  • Reduce the capital gains inclusion rate from three-quarters to two-thirds for capital gains realized after February 27, 2000. 
  • Postpone taxation of gains on shares acquired under qualifying stock options to when shares are sold rather than when options are exercised. 
  • Allow tax-free rollover of capital gains on qualified investments from one small business to another. 
  • Increase the limit for the foreign property rule in respect of deferred income plans generally to 25 per cent for 2000 and 30 per cent after 2000, from the prior level of 20 per cent. The limit had been raised from 10 per cent between 1990 and 1994. 
  • Increase the annual exemption on scholarship, fellowship and bursary income from $500 to $3,000 beginning with the 2000 taxation year. The increase applies only to amounts received by students enrolled in programs that entitle them to claim the education credit. 

Enhance Tax Assistance for Charities

  • Eliminate the $1,000 minimum deemed adjusted cost base and deemed proceeds of disposition when personal-use property is donated as a charitable gift, if the personal-use property is acquired after February 27, 2000. 
  • Extend the charitable donations tax credit to donations of registered retirement savings plan, registered retirement income fund and insurance proceeds that are made as a consequence of direct beneficiary designations. This measure will apply in respect of an individual's death that occurs after 1998. 
  • Further enhance the incentives for the protection of ecologically sensitive lands by reducing the income inclusion rate by one-half in respect of capital gains arising from gifts of ecologically sensitive land and related easements, covenants and servitudes to qualified donees other than private foundations. 
  • Reduce by half the income inclusion of stock option employment benefits realized as a result of the charitable donations of shares acquired with employee stock options. This will allow the tax treatment of such donations to parallel the reduced capital gains inclusion rate for donations of publicly traded securities. 

Enhance Tax Assistance for Persons With Disabilities

  • Extend eligibility for the disability tax credit (DTC) to individuals requiring extensive therapy. 
  • Expand the list of relatives to whom the DTC can be transferred. 
  • Increase the value of the DTC by up to $500 for families caring for children eligible for the DTC. 
  • Increase the maximum child care expense deduction available in respect of persons eligible for the DTC to $10,000 from $7,000. 
  • Make expenses relating to the costs of adapting a new home to the needs of a disabled person eligible under the medical expense tax credit. 
  • Expand the attendant care deduction to include the cost of an attendant required in order to attend school. 

Other

  • Reduce the special federal surtax levied on individuals who have income that is considered to have been earned in Canada, but which is not considered to have been earned in a province. In light of recent changes in provincial tax rates, the federal surtax on income not earned in a province will be reduced from 52 per cent of basic federal tax to 48 per cent. 
  • Offset interest on personal tax overpayments and underpayments to ensure that refund interest accruing over a period is taxed only to the extent that it exceeds any arrears interest that accrued over the same period to which the refund interest relates.

Business Income Tax

  • Reduce the federal corporate income tax rate on business income not eligible for special tax treatment by 1 percentage point from 28 to 27 per cent, effective January 1, 2001. This lower rate will not apply to small business and Canadian manufacturing and processing income, investment income that benefits from refundable tax provisions or income from non-renewable natural resource activities. The reduction will also not apply to mutual fund corporations, mortgage investment corporations and investment corporations. As such, the corporate tax rate used for the benchmark, including the corporate surtax, is reduced to 28.12 per cent for 2001 and 2002, from 29.12 per cent in previous years. 
  • Reduce the federal corporate income tax rate on income between $200,000 and $300,000 earned by a Canadian-controlled private corporation from an active business carried on in Canada by 7 percentage points from 28 to 21 per cent, effective January 1, 2001. Income eligible for this lower rate will be reduced to the extent that the corporation has manufacturing and processing (M&P) income subject to the reduced M&P tax rate or income from resource activities. 
  • Extend the temporary capital tax surcharge on large deposit-taking institutions to October 31, 2001, pending completion of a review of the application of the surcharge. This review was announced in June 1999 as part of the reform of the financial services sector. 

Sales Tax

  • Introduce a new partial rebate for the goods and services tax/harmonized sales tax (GST/HST) paid on newly constructed or substantially renovated residential rental property. 

The Tax Expenditures

Both the estimates and the projected values of the tax expenditures associated with the GST/HST have been substantially revised. These result from the use of more recent (1996) and more detailed data that have become available from Statistics Canada. This improved data has allowed us to prepare more accurate estimates and projections of these tax expenditures. This increased accuracy is due to improved data on the overall level of total expenditures on goods and services and on the proportion of that spending that is non-taxable.

Other minor changes have been made to provide information that was not previously available and to update or otherwise improve the estimates and projections for certain measures. For example, more detailed estimates and projections are provided relating to refundable taxes on investment income of private corporations. In previous years, this measure reflected only the portion of corporate taxes collected that were refundable. This report now provides details of the additional refundable taxes collected, the amount refunded and the net expenditure.

Tables 1 to 3 provide tax expenditure values for personal income tax, corporate income tax and the GST/HST for the years 1995 to 2002. In the case of personal income tax, tax expenditures are grouped according to functional categories. This grouping is provided solely for organizational purposes. It is not intended as a policy justification for the specific provisions and all tax measures do not fall neatly into one of the categories.

All estimates are reported in millions of dollars. The letter "S" indicates that the cost is less than $2.5 million, "n.a." signifies that data were not available and a dash means that the tax expenditure was not in effect. The inclusion in the report of items for which estimates are not available is warranted given that the report is designed to provide information on the type of assistance delivered through the tax system even if it is not always possible to provide a quantitative estimate. Work is continuing to obtain quantitative estimates where possible. For example, the personal income tax expenditure associated with the reclassification of flow-through shares is a new item this year.

Table 1
 Personal income tax expenditures* †
Estimates Projections
1995 1996 1997 1998 1999 2000 2001 2002
($ millions)
Culture and Recreation
Deduction for clergy residence 56 58 58 60 60 60 60 60
Flow-through of capital cost allowance (CCA) on Canadian films1 48 – – – – – – –
Deduction for certain contributions by individuals who have taken vows of perpetual poverty S S S S S S S S
Write-off of Canadian art purchased by unincorporated businesses n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Assistance for artists n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Deduction for artists and musicians n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Non-taxation of capital gains on gifts of cultural property n.a. n.a. 7 7 7 7 7 7
Education
Tuition fee credit2 195 210 225 205 200 195 200 210
Education credit3 44 55 64 76 72 68 69 71
Education and tuition fee credits transferred4 215 260 375 425 435 435 450 460
Carry-forward of education and tuition fee credits5 – – – 30 30 115 130 140
Student loan interest credit6 – – – 120 135 150 160 175
Registered education savings plans (RESPs)7 n.a. 35 32 43 80 135 210 290
Partial exemption of scholarship, fellowship and bursary income8 6 6 4 3 3 16 16 16
Deduction of teachers' exchange fund contributions S S S S S S S S
Estimates Projections
1995 1996 1997 1998 1999 2000 2001 2002
($ millions)
Employment
Deduction of home relocation loans S S S S S S S S
Non-taxation of allowances for volunteer firefighters9 4 4 4 – – – – –
Tax-free amount for emergency service volunteers9 – – – 14 14 14 14 14
Northern residents deductions 125 125 130 130 130 130 125 125
Overseas employment credit 31 44 37 38 39 39 39 39
Employee stock options10 74 125 200 205 210 280 285 285
Non-taxation of strike pay n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Deferral of salary through leave of absence/sabbatical plans n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Employee benefit plans n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Non-taxation of certain non-monetary employment benefits n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Family
Spousal credit11, 12 1,200 1,205 1,150 1,150 1,250 1,375 1,435 1,485
Equivalent-to-spouse credit11, 12 470 470 425 415 440 475 490 500
Infirm dependant credit12, 13 6 7 7 7 7 7 7 7
Caregiver credit12, 14 – – – 30 45 60 70 75
Canada Child Tax Benefit (CCTB)12, 15 5,240 5,235 5,325 5,625 5,995 6,930 7,820 8,160
Deferral of capital gains through transfers to a spouse, spousal trust or family trust
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Farming and Fishing
$500,000 lifetime capital gains exemption for farm property16 275 325 355 365 365 325 325 330
Net Income Stabilization Account
Deferral of tax on government contributions17 31 115 89 80 100 87 87 87
Deferral of tax on bonus and interest income 14 19 21 32 38 43 48 53
Taxable withdrawals17 -15 -35 -35 -63 -105 -67 -67 -67
Deferral of income from destruction of livestock S S S S S S S S
Deferral of income from grain sold through cash purchase tickets17, 18 19 6 -1 -32 -9 -9 -9 -9
Deferral through 10-year capital gain reserve17 8 -2 9 5 5 5 5 5
Deferral of capital gains through intergenerational rollovers of family farms n.a n.a n.a n.a n.a n.a n.a n.a
Exemption from making quarterly tax instalments n.a n.a n.a n.a n.a n.a n.a n.a
Cash basis accounting n.a n.a n.a n.a n.a n.a n.a n.a
Flexibility in inventory accounting n.a n.a n.a n.a n.a n.a n.a n.a
Estimates Projections
1995 1996 1997 1998 1999 2000 2001 2002
($ millions)
Federal-Provincial Financing Arrangements
Quebec abatement 2,320 2,410 2,560 2,730 2,840 2,925 3,025 3,155
Transfers of income tax room to provinces 9,745 10,240 11,215 12,105 12,630 12,995 13,455 14,060
General Business and Investment
$100,000 lifetime capital gains exemption19 34 – – – – – – –
Partial inclusion of capital gains20 405 655 920 930 940 1,390 1,370 1,355
Deduction of limited partnership losses 195 205 185 200 215 225 235 240
Investment tax credits 54 39 25 25 26 26 27 27
Deferral through five-year capital gain reserve17 -6 12 17 8 8 8 8 8
Deferral through capital gains rollovers21 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Deferral through use of billed-basis accounting by professionals n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Deduction of accelerated tax depreciation22 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
$1,000 capital gains exemption on personal-use property23 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
$200 capital gains exemption on foreign exchange transactions n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Taxation of capital gains upon realization n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Health
Non-taxation of business-paid health and dental benefits24 1,440 1,490 1,625 1,755 1,760 1,720 1,685 1,675
Disability tax credit (DTC)12, 25 270 265 270 270 275 310 310 310
Medical expense tax credit12, 26 305 330 350 355 375 395 430 465
Medical expense supplement for earners12, 27 – – 29 30 33 37 39 41
Income Maintenance and Retirement
Non-taxation of Guaranteed Income Supplement and spouse's allowance benefits 285 300 290 280 265 255 270 280
Non-taxation of social assistance benefits28 635 560 450 415 375 345 335 325
Non-taxation of workers' compensation benefits 635 620 630 650 650 650 650 650
Non-taxation of certain amounts received as damages in respect of personal injury or death 19 18 18 18 18 18 18 18
Non-taxation of veterans' allowances, civilian war pensions and allowances, and other service pensions (including those from Allied countries)29 4 4 S S S S S S
Non-taxation of veterans' disability pensions and support for dependants29 135 140 155 160 155 150 150 150
Treatment of alimony and maintenance payments30 250 250 240 245 250 245 245 245
Age credit12 1,270 1,320 1,350 1,320 1,285 1,285 1,330 1,360
Pension income credit 350 365 385 390 390 395 405 410
Saskatchewan Pension Plan S S S S S S S S
Registered retirement savings plans
Deduction for contributions 5,290 5,940 6,385 6,420 6,935 7,315 7,675 8,290
Non-taxation of investment income31 3,850 3,520 3,190 3,175 3,655 4,465 4,680 5,200
Taxation of withdrawals -1,750 -2,190 -2,425 -2,610 -2,830 -3,015 -3,210 -3,515
Net expenditure32 7,390 7,270 7,150 6,985 7,760 8,765 9,145 9,975
Registered pension plans
Deduction for contributions 4,925 4,930 4,930 5,275 5,310 5,220 5,090 5,160
Non-taxation of investment income31 10,040 9,020 8,630 8,310 8,850 9,985 9,605 9,865
Taxation of withdrawals -4,520 -4,905 -5,370 -6,630 -7,290 -7,900 -8,555 -9,460
Net expenditure32 10,445 9,045 8,190 6,955 6,870 7,305 6,140 5,565
Deferred profit-sharing plans n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Non-taxation of RCMP pensions/compensation in respect of injury, disability or death33 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Non-taxation of up to $10,000 of death benefits n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Non-taxation of investment income on life insurance policies34 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Estimates Projections
1995 1996 1997 1998 1999 2000 2001 2002
($ millions)
Small Business
$500,000 lifetime capital gains exemption for small business shares16, 35 590 475 545 560 565 485 490 495
Deduction of allowable business investment losses 79 74 55 57 59 60 61 62
Labour-sponsored venture capital corporations credit 36, 37 235 91 79 130 180 180 180 180
Deferral through 10-year capital gain reserve17 -2 -5 13 2 2 2 2 2
Rollovers of investments in small businesses38 – – – – – 75 75 75
Other Items
Non-taxation of capital gains on principal residences16, 39
Partial inclusion rate 1,085 1,260 1,310 940 1,170 1,025 980 970
Full inclusion rate 1,435 1,680 1,745 1,250 1,555 1,505 1,470 1,455
Non-taxation of income from the Office of the Governor General S S S S S S S S
Assistance for prospectors and grubstakers S S S S S S S S
Charitable donations credit40 975 1,120 1,180 1,350 1,360 1,365 1,395 1,415
Reduced inclusion rate for capital gains arising from donations of ecologically sensitive land41 – – – – – n.a. n.a. n.a.
Reduced inclusion rate for capital gains arising from certain charitable donations42 – – 6 6 10 20 35 –
Political contribution tax credit 10 11 16 16 17 17 18 18
Special tax computation for certain retroactive lump-sum payments43 10 10 10 10 10 10 10 10
Non-taxation of income of Indians on reserves n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Non-taxation of gifts and bequests n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Estimates Projections
1995 1996 1997 1998 1999 2000 2001 2002
($ millions)
Memorandum Items
Non-taxation of lottery and gambling winnings44 1,155 1,380 1,340 1,515 1,575 1,635 1,675 1,760
Non-taxation of specified incidental expenses 6 5 4 4 4 4 4 4
Non-taxation of allowances for diplomats and other government employees posted abroad 9 8 8 8 8 8 8 8
Child care expense deduction45 365 420 480 515 520 515 500 495
Attendant care expense deduction S S S S S S S S
Moving expense deduction46 61 64 59 60 61 62 62 62
Deduction of carrying charges incurred to earn income17 645 590 575 600 590 590 590 590
Deduction of meals and entertainment expenses 97 130 71 74 75 75 75 75
Deduction of farm losses for part-time farmers47 56 57 57 57 58 58 58 58
Farm and fishing loss carry-overs 10 10 9 9 9 9 9 9
Capital loss carry-overs 89 160 180 185 185 185 185 185
Non-capital loss carry-overs 86 100 86 89 90 90 91 92
Logging tax credit S S S S S S S S
Deduction of resource-related expenditures 78 170 175 180 185 185 190 190
Reclassification of flow-through shares17, 48 n.a. 38 42 21 34 34 34 34
Deduction of other employment expenses 540 585 610 630 645 650 655 670
Deduction of union and professional dues 505 510 510 530 545 555 560 565
Employment insurance
Employment insurance contribution credit 1,320 1,260 1,400 1,330 1,275 1,210 1,245 1,275
Non-taxation of employer-paid premiums 2,715 2,610 2,935 2,845 2,760 2,580 2,600 2,640
Canada Pension Plan (CPP) and Quebec Pension Plan (QPP)
CPP and QPP contribution credit 1,135 1,195 1,310 1,460 1,645 1,865 2,140 2,410
Non-taxation of employer-paid premiums 1,470 1,550 1,695 1,915 2,170 2,410 2,715 3,030
Foreign tax credit49 280 300 335 345 350 355 365 370
Dividend gross-up and credit 730 815 895 965 1,035 1,110 1,215 1,320
Supplementary low-income credit50 – – – 140 150 – – –
Basic personal credit12, 51 17,650 17,885 18,250 18,145 19,145 20,445 21,180 21,810
Non-taxation of capital dividends n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

* The elimination of a tax expenditure would not necessarily yield the full tax revenues shown in the table. See the companion document, Tax Expenditures: Notes to the Estimates/Projections, for a discussion of the reasons for this.

†

The 2000 budget proposed to restore full indexation to the personal income tax system effective January 1, 2000. This eliminates the provision put in place in 1986 that applied indexation to the personal income tax system only for inflation above 3 per cent. Parameters affected include the basic personal credit and the level of income at which the middle and top tax rates begin to apply. The 2000 budget also proposed to reduce the middle tax rate to 24 per cent from 26 per cent effective July 1, 2000. These measures, which will reduce average tax rates in the 2000 tax year and again in 2001, explain some of the changes in tax expenditures from 1999 to 2000, and again from 2000 to 2001.

Notes:

  1. The flow-through of CCA on Canadian films is not available for taxation years later than 1995 – it was replaced by a tax credit for producers.

  2. The 1997 budget extended this credit to most mandatory ancillary fees imposed by post-secondary institutions, beginning in 1997.

  3. The 1996 budget increased this credit from $80 to $100 per month, beginning in 1996. The 1997 budget increased this credit to $150 per month for 1997 and $200 per month thereafter. The 1998 budget allowed part-time students to claim a part-time education amount of $60 per month.

  4. The 1996 budget increased from $4,000 to $5,000 the limit on the transfer of these amounts, beginning in 1996. The increase in this tax expenditure in 1997 reflects a 50-per-cent increase in the average claim in that year.

  5. The 1997 budget introduced this measure, effective for 1997 and subsequent years.

  6. This measure was introduced in the 1998 budget.

  7. In the 1998 budget, the Government announced that it would supplement annual contributions to RESPs with a 20-per-cent grant, the Canada Education Savings Grant, beginning in 1998. While this enhancement does not represent a tax expenditure, it increases the cost of the tax expenditure to the extent that it encourages participation in the RESP program. No information is available for years prior to 1996.

  8. The 2000 budget proposed to raise the exemption for scholarship, fellowship and bursary income from $500 to $3,000 for students eligible for the education credit. In addition, for 2000 and later tax years, the tax expenditure reflects the additional funds made available to students under the Canada Millennium Scholarships.

  9. The 1998 budget replaced the $500 tax-free allowance for volunteer firefighters with an exemption of up to $1,000 for emergency service volunteers. The tax expenditure estimate for the emergency service volunteer exemption includes claims by firefighters after 1997.

  10. This tax expenditure reflects only the stock option deduction and not the deferral from income inclusion. The increase in this tax expenditure in 1996 reflects a 30-per-cent increase in the number of claimants and a 30-per-cent increase in the average claim in that year. The increase in this tax expenditure in 1997 reflects a 65-per-cent increase in the number of claimants. The 2000 budget proposed to increase the stock option deduction from one-quarter to one-third.

  11. The 1999 budget increased this tax credit by $675 for all taxpayers, beginning July 1, 1999.

  12. The 2000 budget proposed to fully index this tax credit effective January 1, 2000. The 2000 budget also proposed to fully index the income levels at which the middle and top tax rates begin to apply. These proposals represent a change in the benchmark tax system, and consequently, there is no tax expenditure associated with indexation.

  13. The 1996 budget increased the maximum credit per dependant from $270 to $400.

  14. This credit, introduced in the 1998 budget, is projected to be significantly lower than previously reported in the absence of actual taxpayer data. Last year's publication projected this tax expenditure to be $120 million for 1998. Based on preliminary tax data, this tax expenditure is now projected to be $30 million for 1998. The lower figure indicates a much smaller number of filers claiming a dependent relationship than had been previously anticipated.

  15. The 1996 through 2000 budgets increased this tax benefit. Payments made between January and December of the year are reported. The 2000 budget proposed additional enrichments to the CCTB. It also proposed that the CCTB be fully indexed starting January 2000. Increases in amounts over and above indexation are scheduled for the CCTB base benefit in July 2000 and for the National Child Benefit supplement in July 2001.

  16. The decline in this tax expenditure after 1999 reflects in part the proposal in the 2000 budget to reduce the capital gains inclusion rate from three-quarters to two-thirds, effective February 28, 2000.

  17. This tax expenditure is highly volatile. It is projected at its historical average.

  18. Data upon which this tax expenditure is estimated was available up to 1998.

  19. The lifetime capital gains exemption for general property was eliminated after 1994. However, the tax expenditure for 1995 reflects late and adjusted elections filed in that year with respect to gains accrued up to February 22, 1994.

  20. The increase in the value of this tax expenditure for 1997 reflects a 45-per-cent increase in the amount of taxable capital gains reported in that year. Projections are based on historical trends. The 2000 budget proposed to reduce the capital gains inclusion rate from three-quarters to two-thirds, effective February 28, 2000.

  21. This tax expenditure does not include the 2000 budget proposal for rollovers of eligible small business investments.

  22. This tax expenditure includes the deduction of scientific research and experimental development expenditures. Data are not available to estimate this tax expenditure with precision.

  23. The 2000 budget proposed to amend the rules so that the $1,000 deemed adjusted cost base and deemed proceeds of disposition for personal-use property will not apply if the property is acquired after February 27, 2000, as part of an arrangement in which the property is donated as a charitable gift.

  24. The 1998 budget allowed unincorporated owner-operators to deduct premiums for supplementary health care coverage against their business income to a maximum amount, beginning in 1998.

  25. The 2000 budget proposed to enhance the DTC by extending eligibility to individuals requiring extensive therapy, and to expand the list of relatives to whom the DTC can be transferred. The 2000 budget also proposed a supplement of up to $500 for children eligible for the DTC.

  26. The 1997 budget broadened this credit to cover additional expenses, beginning in 1997. The 1999 budget further broadened this credit for the care and education of persons with disabilities, beginning in 1999.

  27. This measure was introduced in the 1997 budget.

  28. The projected decline in this tax expenditure after 1997 reflects changes in the 1998, 1999 and 2000 budgets to reduce tax rates on low-income individuals (e.g., the increase in the personal amounts in the 1998 and 1999 budgets).

  29. Public Accounts data used for this tax expenditure was available up to 1998.

  30. The 1996 budget eliminated the income inclusion for recipients of child support payments, and disallowed the deduction for payers, for agreements made after April 30, 1997.

  31. Projected values for this tax expenditure are lower than those provided in last year's publication due to lower-than-expected interest rates in those years.

  32. Net expenditure represents the total tax expenditure associated with this measure.

  33. The amounts reported in previous years for this tax expenditure included taxable amounts and did not cover all non-taxable RCMP pensions. This tax expenditure cannot be estimated with precision.

  34. Although this measure does provide tax relief for individuals, it is implemented through the corporate tax system. See under "Interest credited to life insurance policies" in the corporate income tax expenditure tables for an estimate of the value of this tax expenditure.

  35. The increase in this tax expenditure in 1997 reflects a 65-per-cent increase in the number of claims and a 10-per-cent increase in the average claim in that year.

  36. The 1996 budget reduced this credit from 20 per cent to 15 per cent and the purchase amount eligible for the credit from $5,000 to $3,500 per year, for purchases made after March 5, 1996. The purchase amount eligible for the credit was increased to $5,000 in 1998, effective for 1998 and subsequent years.

  37. The decline in the value of this expenditure in 1996 reflects a 30-per-cent decline in the number of claimants and a 45-per-cent decline in the average claim in that year. The increase in the value of this expenditure for 1998 reflects a 30-per-cent increase in the number of claimants and a 25-per-cent increase in the average claim in that year. The value of this tax expenditure in 1999 is based on preliminary information of sales of shares of labour-sponsored venture capital corporations for that year.

  38. This provision was proposed in the 2000 budget.

  39. The decline in this tax expenditure in 1998 reflects a decline in the volume of home sales and in the average home value. The decline in 2000 and 2001 reflects the reduction in the capital gains inclusion rate from three-quarters to two-thirds.

  40. This tax expenditure includes both gifts to the Crown and donations to other charities, as they were treated equivalently in the Income Tax Act beginning in 1997.

  41. This measure was proposed in the 2000 budget. No data are currently available.

  42. This measure was introduced in the 1997 budget for a five-year experimental period and will be reviewed in 2000. The 1997 and 1998 figures are based on income tax data. Consistent with the methodology of tax expenditures, these estimates assume that the measure did not bring forth any incremental donations. They therefore do not measure the full fiscal cost of the measure. Consistent with the legislated expiration of the measure at the end of 2001, no amount is estimated for 2002.

  43. This provision was introduced in the 1999 budget, effective for qualifying retroactive lump-sum payments received after 1994. Cost estimates and projections for 1995 to 1998 reflect the costs associated with qualifying payments received in those years, even though claims were not processed before 2000.

  44. This estimate assumes that the total amount of lottery and horse racing winnings would be included in income and subject to tax. However, there is some uncertainty regarding the proper benchmark tax system in this area. For example, if the benchmark system included taxation of winnings, it would also have to include a deduction for the purchase cost of tickets. A threshold below which winnings would not be taxable may also be necessary, due to the large administrative cost of taxing very small prizes. In addition, proceeds from the sale of lottery tickets are an important source of funds for provincial governments and not-for-profit organizations. As a result, there is already an element of taxation to lottery and gambling proceeds. This estimate is therefore included as a memorandum item only.

  45. The 1996 budget broadened eligibility criteria for claiming this deduction, beginning in 1996. The 1998 budget increased the maximum claim under this provision and extended it to part-time students, beginning in 1998. The 2000 budget proposed to increase limits in respect of persons eligible for the disability tax credit.

  46. The 1998 budget enhanced the moving expense deduction by including certain costs of maintaining a vacant former residence (including mortgage interest and property taxes) and other miscellaneous relocation expenses.

  47. The 1995 and 1996 figures have been revised due to methodological changes in calculations.

  48. This tax expenditure applies to a subset of resource-related deductions. Data was available for 1996, 1997 and 1998 on the volume of reclassified shares, and this data was used to calculate estimates. Due to volatility, the projections for 1999 to 2002 are based on a three-year historical average.

  49. The expected increase in this tax expenditure is in line with the historical trend.

  50. This measure was introduced in the 1998 budget. The 1999 budget extended this measure to all taxpayers, effective July 1, 1999. The 1999 budget increased the tax expenditures associated with the basic personal credit and the spousal/equivalent-to-spouse credits and eliminated the supplementary low-income credit.

  51. From 1996 to 1998, the basic personal credit was $6,456. The 1999 budget increased the credit by $675, effective July 1, 1999, raising its value to $7,131. (Since this credit was implemented half way through the year, the effective basic credit in the 1999 taxation year was $6,794, or half the proposed annual increase). The 2000 budget proposed to fully index this credit, effective January 1, 2000, raising its value to $7,231 in the 2000 taxation year.

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