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Tax Expenditures and Evaluations - 2000: 2

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Table 2
Corporate income tax expenditures*

	Estimates		Projections1
	19952	1996	1997	1998	1999	2000	2001	2002
	($ millions)
Tax Rate Reductions
Low tax rate for small businesses3	2,465	2,385	2,715	2,860	3,240	3,405	3,415	3,340
Low tax rate for manufacturing and processing (M&P)4	1,515	1,350	1,600	1,655	1,875	1,970	1,810	1,765
Low tax rate on general income of small businesses5	–	–	–	–	–	–	60	95
Low tax rate for credit unions	33	42	39	39	43	44	44	43
Exemption from branch tax for transportation, communications, banking and iron ore mining corporations	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Exemption from tax for international banking centres	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Tax Credits
Investment tax credits
Scientific research and experimental development investment tax credit	980	980	990	1,030	1,130	1,170	1,215	1,260
Atlantic investment tax credit6	87	120	175	180	125	130	135	140
Special investment tax credit7	19	–	–	–	–	–	–	–
Investment tax credits carried back	57	87	83	86	90	93	96	100
Investment tax credits claimed in current year but earned in prior years	855	735	810	895	985	1,085	1,190	1,310
Political contribution tax credit	S	S	S	S	S	S	S	S
Canadian film or video production tax credit8	10	40	70	85	105	110	115	120
Film or video production services tax credit9	–	–	S	55	57	59	60	62
	Estimates		Projections1
	19952	1996	1997	1998	1999	2000	2001	2002
	($ millions)
Exemptions and Deductions
Partial inclusion of capital gains10	595	620	925	680	720	920	1,070	1,110
Royalties and mining taxes
Non-deductibility of Crown royalties and mining taxes11	-320	-400	-400	-325	-400	-410	-420	-430
Resource allowance11	435	505	505	410	505	510	525	540
Earned depletion	48	71	54	40	30	20	10	S
Deductibility of charitable donations	96	140	140	150	175	180	190	190
Deductibility of gifts to the Crown	8	8	8	9	10	11	11	11
Interest on small business financing loans	S	S	S	S	S	S	–	–
Non-deductibility of advertising expenses in foreign media	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Non-taxation of provincial assistance for venture investments in small business	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Deferrals
Accelerated write-off of capital assets and resource- related expenditures12	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Allowable business investment losses13	29	33	35	36	39	40	42	45
Holdback on progress payments to contractors14	40	10	25	25	25	30	30	30
Available for use	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Capital gains taxation on realization basis	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Expensing of advertising costs	7	6	25	25	25	25	25	30
Deductibility of contributions to mine reclamation and environmental trusts	S	S	S	S	S	S	S	S
Deductibility of countervailing and anti-dumping duties15	–	–	–	n.a.	n.a.	n.a.	n.a.	n.a.
Deductibility of earthquake reserves15	–	–	–	3	16	17	18	19
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.
Deferral of income from grain sold through cash purchase tickets	7	S	S	3	3	3	3	3
Deferral of income from destruction of livestock	S	S	S	S	S	S	S	S
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.
	Estimates		Projections1
	19952	1996	1997	1998	1999	2000	2001	2002
	($ millions)
International
Non-taxation of life insurance companies' world income	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Exemptions from non-resident withholding tax16
Copyright royalties	57	60	63	66	69	72	76	80
Royalties for the use of, or right to use, other property17	51	150	160	165	175	185	190	200
Interest on deposits	445	445	470	490	500	515	535	535
Interest on long-term corporate debt	665	665	700	730	745	770	795	795
Dividends	52	66	80	83	94	90	93	96
Management fees	17	18	19	19	20	21	23	24
Exemption from Canadian income tax of income earned by non-residents from the operation of a ship or aircraft in international traffic	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Other Items
Transfer of income tax room to provinces in respect of shared programs	695	715	860	895	1,020	1,075	1,120	1,125
Interest credited to life insurance policies	73	75	75	79	83	87	91	96
Non-taxation of registered charities and other non-profit organizations	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Income tax exemption for provincial and municipal corporations	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Non-taxation of certain federal Crown corporations	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Aviation fuel excise tax rebate18	–	–	n.a.	n.a.	n.a.	n.a.	–	–
Surtax on the profits of tobacco manufacturers	-63	-67	-70	-70	-70	-70	-70	-70
Resource sector tax rate19	–	–	–	–	–	–	-33	-41
Temporary tax on the capital of large deposit-taking institutions20	-34	-50	-52	-58	-66	-74	-83	n.a.
	Estimates		Projections1
	19952	1996	1997	1998	1999	2000	2001	2002
	($ millions)
Memorandum Items
Refundable taxes on investment income of private corporations
Additional Part I taxes21	-80	-190	-465	-475	-495	-495	-545	-590
Part IV tax22	-830	-990	-895	-925	-955	-985	-1,020	-1,050
Dividend refund23	1,185	1,450	1,610	1,660	1,720	1,770	1,830	1,890
Net expenditure24	275	270	250	260	270	290	265	250
Refundable capital gains for investment corporations and mutual fund corporations25	145	170	185	190	205	195	195	205
Loss carry-overs26
Non-capital losses carried back	650	715	800	1,010	1,025	1,065	1,135	1,250
Non-capital losses applied to current year27	2,870	2,035	2,495	2,245	2,655	2,675	2,700	2,710
Net capital losses carried back28	69	40	80	81	82	85	90	100
Net capital losses applied to current year29	115	205	235	180	150	150	155	155
Farm losses applied to current year	18	8	14	14	15	16	17	17
Deduction of meals and entertainment expenses	190	215	210	220	230	240	250	260
Large corporations tax
Threshold30	515	540	550	560	570	585	595	605
Exempt corporations	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Patronage dividend deduction	215	210	235	255	290	305	305	305
Logging tax credit	28	29	29	29	29	29	30	31
Deductibility of provincial royalties (joint venture payments) for the Syncrude project (remission order)31	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Deductibility of royalties paid to Indian bands	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Non-resident-owned investment corporation refund	105	25	59	68	63	64	76	66
Investment corporation deduction	S	S	S	S	S	S	S	S
Deferral through capital gains rollovers	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Deduction for intangible assets	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Tax exemption on income of foreign affiliates of Canadian corporations	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.

Notes:

1. Unless otherwise indicated in the footnotes, changes in the projections from those in last year's edition of this document result from changes in the explanatory economic variables upon which the projections are based.

2. The 1995 figures are based on final data and may differ from the figures in last year's edition of this document, which were based on preliminary data.

3. The increase from 1996 to 1997 reflects an increase in the projected level of small business profits. The slight increase in 2001 and reduction in 2002 results from the change in the benchmark rate from 29.12 per cent to 28.12 per cent as of January 1, 2001. The impact of the change in the benchmark federal tax rate only partially affects estimates for taxation year 2001 since many firms will report income for this taxation year that will be partly earned in calendar year 2000.

4. The increase from 1996 to 1997 reflects an increase in the projected level of M&P profits. The decline in 2001 and 2002 results from the change in the benchmark rate from 29.12 per cent to 28.12 per cent as of January 1, 2001. The impact of the change in the benchmark federal tax rate only partially affects estimates for taxation year 2001 since many firms will report income for this taxation year that will be partly earned in calendar year 2000.

5. This measure was announced in the 2000 budget and is effective January 1, 2001.

6. The projected cost of the tax expenditure after 1998 is lower because a large portion of this tax expenditure relates to the Hibernia offshore oil project, which has completed its investment phase. No new offshore projects have been included in the projections. The tax expenditure could be higher if a project were to proceed.

7. New investments (other than those that were grandfathered) did not earn this credit after December 31, 1994. Credits not claimed in 1994 and prior years may be carried forward. However, they are included in the forecasts for investment tax credits claimed in a current year but earned in prior years.

8. Taxation year 1995 is a transition year. Some films are financed through tax shelter deductions for accelerated capital cost allowance.

9. This measure was introduced in 1997.

10. The increase in this tax expenditure in 1997 reflects a projected increase in capital gains. The increase in the expenditure in 2000 reflects the reduction in the capital gains inclusion rate from three-quarters to two-thirds, effective February 28, 2000 as proposed in the 2000 budget.

11. Negative tax expenditures due to non-deductibility of Crown royalties and mining taxes and positive tax expenditures due to the resource allowance are highly dependent upon the level of activity in the resource industries. The large increase from 1995 to 1996 and the sharp drop in 1998 reflect volatility in international prices for crude oil and minerals.

12. This tax expenditure consists of the fast write-off of certain capital assets, including capital equipment used for scientific research and experimental development, of resource exploration and development expenditures and of energy conservation and efficiency equipment. See Tax Expenditures: Notes to the Estimates/Projections for an explanation of why no figures have been calculated.

13. The amount of this tax expenditure can fluctuate from year to year depending upon the amount of current-year losses and the availability of income against which to apply these losses.

14. The amount of this tax expenditure can fluctuate significantly from year to year depending primarily upon the level of construction activity.

15. This measure was introduced in 1998.

16. These estimates and projections are based on the benchmark assumption that no behavioural response would occur after the hypothetical removal of existing withholding tax exemptions. This assumption is particularly difficult to sustain for this type of tax, as indicated in Tax Expenditures: Notes to the Estimates/Projections, which means that the amounts shown in the table should not be regarded as estimates and projections of the revenue gain that would be realized from the hypothetical removal of the listed withholding tax exemptions.

17. The large increase from 1995 to 1996 can be attributed to protocol changes to the Canada-U.S. tax treaty.

18. This measure is effective for the years 1997 to 2000 inclusive.

19. The resource sector tax rate is scheduled to remain at 29.12 per cent as of January 1, 2001, since this sector benefits from a number of special deductions such as the resource allowance when the allowance exceeds provincial royalties, accelerated exploration and development expenses and fast write-offs for certain capital assets. The negative tax expenditure results from a change in the benchmark federal tax rate to 28.12 per cent as of January 1, 2001.

20. This measure was first introduced in the 1995 budget and extended in subsequent budgets. The measure was last extended in the 2000 budget and is scheduled to expire after October 31, 2001, pending completion of a review of the surcharge.

21. An additional refundable Part I tax on investment income of 6 2/3 per cent was introduced effective July 1995.

22. Estimates and projections were not previously provided for this item. The 1993 and 1994 estimates are -$770 million and -$790 million respectively. The Part IV tax on dividends was increased from 25 per cent to 33 1/3 per cent effective July 1995.

23. Estimates and projections were not previously provided for this item. The 1993 and 1994 estimates are $870 million and $1,010 million respectively. The rate at which the refundable tax on hand is refunded was changed from $1 for every $4 of dividend paid to $1 for every $3 of dividend paid, effective July 1995.

24. Net expenditure represents the total tax expenditure associated with this measure. Estimates and projections were not previously provided for this item. The 1993 and 1994 estimates are $100 million and $220 million respectively.

25. The projected reduction in this tax expenditure in 2000 and 2001 reflects a reduction in the capital gain inclusion rate announced in the 2000 budget as well as the reduction in the benchmark tax rate effective January  1,  2001.

26. The impact of loss carry-overs can fluctuate significantly from year to year depending upon the amount of current and prior years' losses and the availability of income against which to apply these losses.

27. The decrease in this amount from 1995 to 1996 results from a decrease in the amount of losses of prior years being applied.

28. The decrease in this amount from 1995 to 1996 results from a decrease in the amount of losses available for carry-back to reduce income of prior years.

29. The increase in this amount from 1995 to 1996 results from an increase in the amount of income against which to apply losses of prior years.

30. The large corporations tax rate increased to 0.225 per cent from 0.2 per cent, effective February 28, 1995. Therefore, the value of the exempt threshold was increased for taxpayers.

31. The cost of the Syncrude Remission Order ("Order Respecting the Remission of Income Tax for the Syncrude Project," P.C. 1976-1026, May 6, 1976 [C.R.C. 1978 Vol. VII, c. 794]) has not been estimated for this edition. The costs of this particular remission order are now published annually in the Public Accounts of Canada (ISBN 0-660-177792-7).

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Table 3
GST/HST tax expenditures* †

	Estimates				Projections
	1995	1996	1997	1998	1999	2000	2001	2002
	($ millions)
Zero-Rated Goods and Services
Basic groceries1	2,610	2,720	2,885	2,990	3,130	3,300	3,470	3,630
Prescription drugs1	240	250	265	275	285	300	320	330
Medical devices1	70	75	80	80	85	90	95	100
Agricultural and fish products and purchases	S	S	S	S	S	S	S	S
Certain zero-rated purchases made by exporters (including those by Export Distribution Centres)	S	S	S	S	S	S	S	S
Non-taxable importations (including those by Export Distribution Centres)	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Zero-rated financial services	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Tax-Exempt Goods and Services
Residential rent1	1,190	1,240	1,310	1,360	1,420	1,495	1,575	1,650
Health care services1	585	610	650	680	710	750	790	825
Education services (tuition)1	545	570	605	630	660	695	730	760
Child care and personal services1	135	140	150	155	160	170	180	190
Legal aid services	30	30	30	35	40	40	40	45
Ferry, road and bridge tolls1	5	5	5	5	5	5	10	10
Municipal transit1	95	100	105	110	110	120	125	130
Exemption for small businesses	120	125	130	140	145	155	160	160
Quick method accounting	135	150	160	165	175	185	195	205
Water and basic garbage collection services1	150	160	170	175	185	195	200	210
Domestic financial services	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Certain supplies made by non-profit organizations	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)
Tax Rebates
Housing rebate2	355	435	475	455	495	520	560	600
New residential property rebate	–	–	–	–	–	15	40	45
Rebate for book purchases made by qualifying institutions3	–	S	25	25	30	30	30	30
Rebate for foreign visitors on accommodation4	55	65	70	75	75	80	80	80
Rebates for municipalities5	480	475	495	505	505	505	505	505
Rebates for hospitals5	270	260	255	260	260	260	260	260
Rebates for schools5	295	290	290	295	295	295	295	295
Rebates for universities5	115	105	110	110	110	110	110	110
Rebates for colleges5	60	55	50	55	55	55	55	55
Rebates for charities	165	165	160	160	165	175	180	190
Rebates for non-profit organizations	50	55	45	45	45	45	50	50
Tax Credits
Special credit for certified institutions	n.a.	n.a.	–	–	–	–	–
GST/HST credit	2,820	2,850	2,895	2,860	2,900	3,040	3, 065	3,155
Memorandum Items
Meals and entertainment expenses6	95	100	100	100	105	110	115	120
Rebate to employees and partners	60	70	70	75	75	80	85	90
Residential and other personal-use real property	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.

^†

GST/HST is used throughout the publication as the HST replaced the GST in Nova Scotia, New Brunswick, and Newfoundland and Labrador on April 1, 1997. For the purpose of this publication, the HST represents only the federal component (i.e., 7 per cent) in the participating provinces.

Notes:

1. The Sales Tax Model used to generate these estimates and projections has been revamped and is now based on the 1996 national input-output tables from Statistics Canada and the latest release of the national income and expenditure accounts. The new statistical data has resulted, in some instances, in significant revisions to the tax expenditures. This largely reflects the update from 1990 I-O tables to the 1996 tables and the historical revision which took place in 1999.

2. The housing rebate is based on information provided by Statistics Canada. The rebate has been revised downward for most years largely as a result of new information on housing prices.

3. This measure was introduced in October 1996.

4. The methodology for estimating this tax expenditure was derived as part of the review of the Visitors' Rebate Program conducted during 1997 and has been updated to reflect more recent information.

5. Since the value of this tax expenditure is influenced by provincial budgetary decisions, projected values are simply the value estimated for 1998.

6. The numerical approach used to derive the tax expenditure figures is tightly integrated with the tax expenditure estimates reported for the personal and corporate tax system.

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