Tax Expenditures 2000:
Notes to the Estimates/Projections: 2
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Chapter 2 - Description of Personal Income Tax Provisions

Culture and Recreation

Deduction for Clergy Residence

Objective: The special treatment of clergy housing expenses recognizes the special nature of the contributions and circumstances of members of the clergy. (Budget Speech, March 1949.)

A taxpayer who is a full-time member of the clergy or a regular minister of a religious denomination may deduct housing costs from income for tax purposes. Where a member of the clergy is supplied living accommodation by his/her employer or receives housing allowances, an offsetting deduction may be claimed to the extent that this benefit is included in income. The estimate for this item is based on the number of clergy in Canada and Statistics Canada expenditure data on rent.

Flow-Through of Capital Cost Allowance on Canadian Films

Objective: To assist the financing and development of the Canadian film industry, until 1995 the tax law provided a special write-off for investment in certain Canadian motion picture films or videotapes certified by the Secretary of State. After 1995, this provision was replaced with a tax credit to producers in order to maximize the benefit to eligible productions. (Budget Plan, 1995.)

Prior to 1995, the capital cost allowance (CCA) rate generally available on films was 30 per cent, subject to the half-year rule. On Canadian content films, the half-year rule did not apply. The CCA could be flowed through to investors and deducted against all sources of income. An additional allowance of up to the remaining undepreciated capital cost of the film was deductible against an investor's income from certified Canadian films.

Losses arising from CCA claimed at the partnership level and flowed through as limited partnership losses are included in the "deduction of limited partnership losses" tax expenditure. It is estimated that 15 per cent of limited partnership losses relate to CCA on Canadian films.

The 1995 budget replaced the special tax shelter rules that applied to Canadian content films by a 12-per-cent credit that can be claimed only by certain film and video production corporations. Transitional rules for the 1995 taxation year allowed full deductibility of undepreciated capital cost against film income and the flow-through of the CCA to the investor only if the 12-per-cent refundable tax credit was not claimed in respect of the production.

Deduction for Certain Contributions by Individuals Who Have Taken Vows of Perpetual Poverty

Objective: This measure recognizes the special situation of members of religious orders. (Section 110(2), Income Tax Act, Charitable gifts.)

Where a person has taken a vow of perpetual poverty as a member of a religious order, that person may deduct donations to the religious order up to his/her total employment and pension income (but not investment or other income) in lieu of the charitable donations credit.

Write-off of Canadian Art Purchased by Unincorporated Businesses

Objective: The special capital cost allowance claim for Canadian art is intended to further the dissemination of Canadian art, as well as to support Canadian artists. (Budget Papers, 1981).

Canadian art acquired by businesses for display in an office may be depreciated on a 20-per-cent declining-balance basis even though it may depreciate at a much slower rate, and may even appreciate.

No data are available.

Assistance for Artists

Objective: The special treatment of costs incurred by artists recognizes artists' problems in valuing their works of art on hand, attributing costs to particular works, and carrying inventories over long periods of time. The special election with respect to a charitable gift from an artist's inventory removes an obstacle to artists donating their works of art to charities, public art galleries and other public institutions. (Budget Papers, 1985).

Artists may deduct the costs of creating a work of art in the year the costs are incurred rather than in the year the work of art is sold.

Artists may also elect to value a charitable gift from their inventories at any amount up to its fair market value. This value is included in the artist's income. The percentage of income limit for the charitable donations tax credit does not apply.

No data are available.

Deduction for Artists and Musicians

Objective: The deductibility of certain expenses incurred by artists and musicians recognizes that these expenses are necessary to carry on employment in those fields. (Musical instruments: Income Tax Reform, 1987. Artists' employment expenses: Section 8(1)(q), Income Tax Act. The latter was added in 1991, for expenses incurred after 1990.)

Employed musicians are able to claim the cost of maintenance, rental, insurance and capital cost allowance on musical instruments against employment income earned as a musician. Employed artists are also entitled to deduct expenses related to their artistic endeavours up to the lesser of $1,000 or 20 per cent of their income derived from employment in the arts.

No data are available.

Non-Taxation of Capital Gains on Gifts of Cultural Property

Objective: This provision encourages the donation to designated institutions (such as museums and art galleries) of cultural property determined to be of outstanding significance to Canada's national heritage. (Budget Plan, 1998.)

Certain objects certified as being of cultural importance to Canada are exempt from capital gains tax if donated to a designated museum or art gallery. Such donations amounted to $99 million in 1995, $78 million in 1996, and $111 million in 1997. However, there is no information on the portion of the value that represents capital gains.

Education

Tuition Fee Credit

Objective: This measure provides tax relief to students (and their parents) by recognizing the costs of enrolling in qualifying programs or courses. (Budget Speech, September 1960.)

A 17-per-cent tax credit is available for tuition fees paid by students to a prescribed educational institution. A credit is available with respect to fees paid to an institution if the total tuition fees paid to the institution exceed $100. The 1997 budget extended the credit to most mandatory ancillary fees imposed by post-secondary institutions, starting in 1997.

Education Credit

Objective: This measure provides assistance to students by recognizing non-tuition costs associated with full- and part-time education. (Budget Supplementary Information, 1972)

Students who are enrolled at prescribed educational institutions on a full-time basis are entitled to claim a tax credit of 17 per cent of an education amount. The amount was $80 for every month of full-time attendance for 1994 and 1995, $100 for 1996, $150 for 1997 and $200 for 1998 and subsequent taxation years.The 1998 budget extended this tax relief to part-time students for 1998 and subsequent years. Students enrolled at an educational institution in Canada in an eligible program lasting at least three consecutive weeks and involving a minimum of 12 hours of courses each month will be eligible. For each qualifying month, the education amount is $60 per month, on which the 17-per-cent tax credit is provided.

Education and Tuition Fee Credits Transferred

Objective: This measure increases the availability of tax assistance for education, and acknowledges the significant contributions made to students by supporting individuals. (Income Tax Reform, 1987.)

The unused portions of the education and the tuition fee amounts may be transferred to a supporting spouse, parent or grandparent. The maximum transfer for the two amounts combined was $4,000 for taxation years 1994 and 1995 and $5,000 for 1996 and subsequent taxation years.

Carry-Forward of Education and Tuition Fee Credits

Objective: Combined with the provision for transfer of tuition and education credits, this measure ensures that students can use these credits fully, whether they have supporting individuals or not. (Budget Plan, 1997.)

The 1997 budget allowed students to carry forward indefinitely for their own use education and tuition fee amounts that have not been either already used by the student or transferred to a supporting individual, effective in 1997.

Student Loan Interest Credit

Objective: This measure was introduced in the 1998 budget in recognition of the costs of investment in higher education, and to help ease the burden of student loans. (Budget Plan, 1998.)

In order to ease the burden of student debt, the 1998 budget introduced a 17-per-cent tax credit on the interest portion of student loan payments made in a year for 1998 and subsequent years. The credit, which is available in respect of payments under the Canada Student Loan Program and similar provincial programs, may be claimed in the year in which it is earned or in any of the subsequent five years.

Registered Education Savings Plans

Objective: Tax assistance for education savings plans broadens access to higher education by encouraging Canadians to save towards the post-secondary education of children. (Budget Plan, 1998.)

A taxpayer may contribute to a registered education savings plan (RESP) on behalf of a designated beneficiary (usually the taxpayer's child). Contributions to RESPs are not deductible, but are usually returned to the subscriber free of tax. The investment return on these funds is not taxable until they are withdrawn for the education of the named beneficiary. This tax deferral constitutes the tax expenditure associated with RESPs. In 1994 and 1995, the annual contribution could not exceed $1,500 per beneficiary, with an overall lifetime limit of $31,500 per beneficiary. Effective in 1996, the annual limit was increased to $2,000 with a lifetime limit of $42,000. In 1997, the annual limit was increased to $4,000.

Starting in 1998, RESP contributors are allowed, under certain conditions, to receive investment income from their plan either directly or through their registered retirement savings plans (RRSPs) where beneficiaries of the plan do not pursue higher education. The income received directly is subject to regular tax plus a deferral tax of 20 per cent while the amount transferred to an RRSP is subject to available RRSP room as well as lifetime limitations. Prior to 1998, RESP income could be used only for educational purposes.

Effective in 1998, the Government supplemented contributions to RESPs with a 20-per-cent grant (the Canada Education Savings Grant [CESG]), subject to annual and lifetime limitations. While this enhancement does not directly represent a tax expenditure, the grant increases the cost of the tax expenditure to the extent that it encourages increased use of RESPs.

Estimates are based on the data and projections provided by the CESG program. No data are available for years prior to 1996.

Partial Exemption of Scholarship, Fellowship and Bursary Income

Objective: This measure provides additional tax assistance to students. (Summary of 1971 Tax Reform Legislation, 1971).

From 1972 to 1999, the first $500 of scholarship, fellowship and bursary income was exempt from income tax. The 2000 budget proposed to increase this tax exemption to $3,000 for students eligible for the education credit. The tax expenditures reported in the table are understated since no data are available on individuals receiving scholarship, fellowship or bursary income of less than $500.

Deduction of Teachers' Exchange Fund Contributions

Objective: This measure encourages contact with educators in other Commonwealth countries, thereby expanding the scope of the educational experience of Canadian students and encouraging the exchange of information on modern teaching methods. (Budget Speech, 1957.)

Teachers may deduct up to $250 per year in contributions to a fund established by the Canadian Education Association for the benefit of teachers from Commonwealth countries visiting Canada under a teachers' exchange agreement.

Employment

Deduction of Home Relocation Loans

Objective: This deduction is intended to facilitate labour mobility by allowing employers to compensate relocated employees facing higher housing costs at the new location. (Budget Papers, 1985.)

An offsetting deduction from taxable income is provided for the benefit received by an employee in respect of a home relocation loan. The amount of the deduction is the lesser of the amount included in income as a taxable benefit and the amount of the benefit that would arise in respect of a five-year interest-free loan of $25,000.

Non-Taxation of Allowances for Volunteer Firefighters

Objective: The tax-free allowance for volunteer firefighters acknowledged the importance of these volunteers to small and rural communities. (Budget Plan, 1998.)

Volunteer firefighters were eligible to receive up to $500 per year in non-taxable allowances. The 1998 budget replaced this measure with an exemption of up to $1,000 for amounts received by emergency service volunteers.

The estimates are based on census data.

Tax-Free Amount for Emergency Service Volunteers

Objective: This measure was introduced in the 1998 budget to further support small and rural communities, which are often unable to maintain full-time emergency staffs and depend on the services of volunteers. (Budget Plan, 1998.)

The 1998 budget provided an exemption of up to $1,000 for amounts received by emergency service volunteers who, in their capacity as volunteers, are called upon to assist in emergencies or disasters.

Northern Residents Deductions

Objective: These tax preferences assist in drawing skilled labour to northern and isolated communities by providing recognition for the additional costs faced by residents of these areas. (Budget Papers, 1986.)

Individuals living in prescribed areas in Canada for a specified period may claim the northern residents deductions. The benefits consist of a residency deduction of up to $15 a day, a deduction for two employer-provided vacation trips per year and unlimited employer-provided medical travel. Residents of the Northern Zone are eligible for full benefits, while residents of the Intermediate Zone are eligible for 50 per cent of the benefits.

Overseas Employment Credit

Objective: This measure ensures the competitive international position of Canadian companies undertaking work outside Canada on specified business activities by offering tax treatment comparable to that provided by other countries. (Budget Papers, 1983.)

A tax credit is available to Canadian employees working abroad for more than six months in connection with certain resource, construction, installation, agricultural or engineering projects. The credit is equal to the tax otherwise payable on 80 per cent of the employee's net overseas employment income taxable in Canada, up to a maximum income of $80,000.

Employee Stock Options

Objective: This measure encourages employee participation in the ownership of the employer's business, and assists businesses in their efforts to attract and retain highly skilled employees. (Budget Documents, 1977.)

Provided certain conditions are met, the benefit provided by an employee stock option is taxed at a preferential rate. A deduction is available to partly offset the tax liability on the stock option benefit. The 2000 budget proposed that this deduction be increased from one-quarter to one-third of the stock option benefit, effective February 28, 2000.

For employees of Canadian-controlled private corporations (CCPCs), the stock option benefit is included in income when the share acquired with the option is disposed of. The 2000 budget proposed that similar treatment be available for employees of publicly traded companies who exercise options after February 27, 2000, on up to $100,000 in options that vest each year. For other options granted by non-CCPCs, the stock option benefit is included in income when the option is exercised.

Estimates presented in the table reflect the stock option deduction, but not the deferred income inclusion for certain stock option benefits.

Non-Taxation of Strike Pay

Objective: Strike pay is non-taxable by virtue of the Supreme Court of Canada's determination that it is not income from a source. (Wally Fries v. The Queen, (1990) 2 CTC 439, 90 DTC 6662. Canada Customs and Revenue Agency, IT-334R2 Miscellaneous Receipts.)

Strike pay is non-taxable.

Statistics Canada has ceased collecting information on the amount of strike pay.

Deferral of Salary Through Leave of Absence/Sabbatical Plans

Objective: This provision recognizes that the main purpose behind these plans is to provide in advance for extended leaves of a sabbatical nature within the employment relationship, and not the deferral of taxes. (Budget Papers, 1986.)

Employees may be entitled to defer salaries through a leave of absence/sabbatical plan. Provided certain conditions are met by the plan, these amounts are not subject to tax until received.

No data are available.

Employee Benefit Plans

Objective: The scope of tax-deferred salary arrangements was significantly reduced in 1986 to improve the fairness of the distribution of tax benefits to individuals in different employment situations. The preferential tax treatment under these plans is now available only in certain circumstances where an employee's right to income under a plan has not been fully earned, or where the main purpose behind the plan is to provide incentives and not the deferral of tax. (Budget Papers, 1979 and 1986.)

In certain circumstances, employers may make contributions to an "employee benefit plan" on behalf of their employees. The employee is not required to include in income the contributions to the plan or the investment income earned within the plan until amounts are received. Employers may not deduct these contributions to the plan until these contributions are actually distributed to the employees.

No data are available.

Non-Taxation of Certain Non-Monetary Employment Benefits

Objective: This treatment recognizes the significant administrative and compliance costs that would be incurred in taxing non-monetary employment benefits.

Fringe benefits provided to employees by their employers are not taxed when it is not administratively feasible to determine the value of the benefit. Examples include merchandise discounts, subsidized recreational facilities offered to all employees and special clothing.

No data are available.

Family

Spousal Credit

Objective: This credit recognizes that a taxpayer whose spouse has little or no income has a lesser ability to pay tax than a single taxpayer with the same income. (Report of the Royal Commission on Taxation, 1966, vol. 3.)

A taxpayer supporting a spouse is entitled to a tax credit of 17 per cent of the spousal amount. Prior to 1999, this amount was $5,380, and the credit was reduced by the dependent spouse's income above $538. The 1999 budget increased the maximum credit to 17 per cent of $6,055, and raised the threshold at which the credit amount begins to be reduced to $606, effective July 1, 1999. The 2000 budget proposed to fully index the spousal amount and the net income threshold by the rate of inflation effective January 1, 2000. Full indexation will increase the spousal credit to 17 per cent of $6,140 and will raise the threshold at which the credit amount begins to be reduced to $614 for the 2000 taxation year.

Equivalent-to-Spouse Credit

Objective: This credit recognizes that a taxpayer without a spouse who is supporting a dependent young child, parent or grandparent has a lesser ability to pay tax than a taxpayer with the same income and no such dependant. (Section 118(1)(b), Income Tax Act, Wholly dependent person.)

An "equivalent-to-spouse" tax credit may be claimed in respect of a dependent child under age 18 or a parent or grandparent by taxpayers without a spouse. The amounts of the credit and limitation on the dependant's income are the same as for the spousal credit. The 2000 budget proposed to fully index these amounts effective January 1, 2000.

Infirm Dependant Credit

Objective: This credit recognizes that a taxpayer supporting an adult dependant who is physically or mentally infirm has a lesser ability to pay tax than a taxpayer with the same income and no such dependant. (Report of the Royal Commission on Taxation, 1966, vol. 3.)

For the taxation year 1995, taxpayers could claim the infirm dependant credit for dependent relatives over 17 years of age who were physically or mentally infirm. The credit was 17 per cent of $1,583 for dependants whose income was below $2,690. The credit was reduced by 17 per cent of the dependant's net income in excess of that amount and was reduced to zero when the dependant's net income exceeded $4,273.

Effective in the 1996 taxation year, the amount on which the credit is based was $2,353 and the credit began to be phased out at $4,103. The 1999 budget raised the net income threshold at which the credit began to be phased out to $4,778. The 2000 budget proposed to fully index the infirm dependent credit and the net income threshold at which the credit is reduced, effective January 1, 2000. Full indexation will increase this credit to 17 per cent of $2,386 and the net income threshold to $4,845 for the 2000 taxation year.

Caregiver Credit

Objective: This provision was introduced in the 1998 Budget to provide additional assistance to individuals providing in-home care for elderly or infirm family members. (Budget Plan, 1998.)

The 1998 budget introduced a caregiver tax credit of up to 17 per cent of $2,353 for individuals residing with, and providing in-home care for, an elderly parent or grandparent or an infirm dependent relative. The credit amount is reduced by the dependant's net income in excess of $11,500. This measure is effective for 1998 and subsequent years. The 2000 budget proposed to fully index the caregiver tax credit and the net income threshold at which the credit is reduced effective January 1, 2000. Full indexation will increase this credit to 17 per cent of $2,386 and the net income threshold to $11,661 for the 2000 taxation year.

Canada Child Tax Benefit

Objective: The Child Tax Benefit consolidated a number of child-related benefits to provide assistance to low- and middle-income families with children in a simpler, fairer and more responsive manner. It also recognizes the effect of children on the ability to pay tax for low- and middle-income families. The Canada Child Tax Benefit replaced the former refundable child tax credit, family allowance and non-refundable tax credit. (Budget Papers, 1992.)

The Canada Child Tax Benefit (CCTB) was introduced in 1993 (until July 1998, it was called the Child Tax Benefit), replacing the family allowance, the dependant credit for children under 18 years of age and the refundable child tax credit. CCTB payments are made monthly and are non-taxable.

The CCTB has two components: the CCTB base benefit for low- and middle-income families and the National Child Benefit (NCB) supplement for low-income families. For the program year July 1999 to June 2000, the CCTB base benefit provides a basic amount of up to $1,020 per child, plus $75 for the third and subsequent children. It also includes a supplement of $213 for each child under age 7, the total of which is reduced by 25 per cent of child care expenses claimed. The total base benefit is reduced by 5 per cent (2.5 per cent for one-child families) of family net income over $25,921.

The NCB supplement provides maximum benefits of $785 for the first child, $585 for the second child and $510 for each subsequent child. The NCB supplement is reduced by 11.5 per cent for a one-child family, 20.1 per cent for a two-child family and 27.5 per cent for larger families with incomes over $20,921. The NCB supplement is completely eliminated at family incomes of approximately $27,750.

The CCTB was changed in the 1997, 1998 and 1999 budgets as follows:

• In July 1997, the Working Income Supplement (WIS) was enriched and restructured. The maximum benefit under the WIS increased from $500 per family to $605 for the first child, $405 for the second child and $330 for each subsequent child.
• In July 1998, the NCB supplement replaced the WIS. The maximum NCB supplement was fixed at $605 for the first child, $405 for the second child and $330 for each subsequent child.
• In July 1999, the NCB supplement maximum was increased by $180 to $785 for the first child, $585 for the second child and $510 for each subsequent child. Also, the income threshold at which the NCB supplement was fully phased out was increased to $27,750 from $25,921.
• The 1999 budget also provided for an increase in the NCB supplement for July 2000. The NCB supplement was scheduled to increase by $170 per child, to reach $955 for the first child, $755 for the second and $680 for each additional child. In addition, the 1999 budget provided for increases in the thresholds at which NCB supplement benefits are fully phased out and the base benefit begins to be reduced to $29,590, up from $27,750 and $25,921, respectively.

The 2000 budget proposed the following changes to both the NCB supplement and the base benefit.

• Effective January 2000, CCTB parameters will be fully indexed based on the change in the CPI over the 12-month period ending on September of the preceding year. As the CCTB program year begins in July, benefits will be adjusted in July 2000 and indexation benefits for the January to June 2000 period will be paid in the second half of the year. The higher level of benefits from July to December 2000 will be maintained until future indexation raises benefits further.
• As of July 2000,^[1] the CCTB base benefit will increase by $70 per child, including indexation. The CCTB base benefit will reach $1,104 per child, and the additional benefits for the third and subsequent children will reach $77. The additional benefit for children under the age of seven will increase to $219.
• The NCB supplement will increase to $977 for the first child, $771 for the second child and $694 for each subsequent child. The NCB supplement will be reduced by 11.1 per cent for a one-child family, 19.9 per cent for a two-child family and 27.8 per cent for larger families with incomes over $21,214.
• The income thresholds at which the CCTB base benefit begins to be reduced and the NCB supplement is fully phased out will be set equal to the second tax bracket threshold. For July 2000, this income threshold will reach $30,004.

The 2000 budget also proposed to increase CCTB benefits in July 2001:

• All CCTB benefits and thresholds will increase with indexation.
• The NCB supplement will be increased by $200 per child including indexation to $1,155 for the first child, $955 for the second and $880 for the third and subsequent children.

The CCTB will provide benefits to 3.4 million families and 6.2 million children in July 2000. By the end of the Five-Year Tax Reduction Plan, the CCTB will provide benefits to 3.8 million families and 6.8 million children.

Deferral of Capital Gains Through Transfers to a Spouse, Spousal Trust or Family Trust

Objective: This deferral recognizes that it is not always appropriate to treat a transfer of assets between spouses as a disposition for income tax purposes, and therefore allows families flexibility in structuring their total assets. However, the tax treatment of family trusts was amended in the 1995 budget to ensure that they do not provide undue tax advantages. (Budget Speech, 1971. Budget Plan, 1995.)

Individuals may transfer capital property to their spouses/spousal trusts at the adjusted cost base of the property rather than the fair market value. This provides a deferral of the capital gain until the subsequent disposition of the property or until the transferee spouse dies.

Property transferred to other family members or to unrelated individuals (or to trusts of which they are beneficiaries) is treated differently. The transferor is generally deemed to have disposed of the property at the time of transfer at fair market value and must include any resulting capital gain in income at that time.

In the case of property transferred to a trust (other than a spousal trust), capital gains are generally considered to be realized at the time of the transfer on the basis of the fair market value of the property at that time. In addition, trust assets are generally subject to a deemed realization every 21 years at the fair market value of the assets.

No data are available.

Farming and Fishing

$500,000 Lifetime Capital Gains Exemption for Farm Property

Objective: This measure provides an incentive to invest in the development of productive farms, and allows farm owners to accumulate capital for retirement. (Budget Papers, 1985. The Lifetime Capital Gains Exemption: An Evaluation, Department of Finance, 1995.)

A $500,000 lifetime capital gains exemption is available for gains in respect of the disposition of qualified farm property. The $500,000 limit is reduced to the extent that the basic $100,000 lifetime capital gains exemption (where applicable) and the $500,000 lifetime capital gains exemption on small business shares have been used. Further, it can be applied only to the extent that the gains exceed cumulative net investment losses incurred after 1987.

Net Income Stabilization Account

Objective: The Net Income Stabilization Account program provides an income averaging mechanism for farmers, and reduces the need for other forms of government assistance to the agriculture industry. The tax-deferral component of the program is an integral aspect of this initiative. (Federal-Provincial Agreement Establishing the Net Income Stabilization Account, 1991.)

Farmers may deposit a percentage of a given year's eligible net sales, up to a limit, to their Net Income Stabilization Account (NISA). No tax deduction is given in respect of these deposits. Some of the deposits are matchable by the federal and provincial governments. Governments also pay a 3-per-cent interest bonus annually on the farmer's deposits, which remain in the account. Governments' contributions and interest accrued in the account are not taxable until withdrawn. All withdrawals from the NISA are taxable except for the contributor's original deposits, which were made with after-tax dollars. Withdrawal entitlements from the NISA are triggered if the current year gross margin (net sales less eligible expenses) is less than the average gross margin from previous years (up to five), or if net income is below $10,000 (or $20,000 for family net income if the family held only one account).

The federal tax expenditure is a function of three components: the deferral of tax on government contributions to the account; the deferral of tax on the investment income accrued in the account; and the income inclusion of these amounts when withdrawn from the account. The deferrals have the effect of increasing tax expenditures, while withdrawals have the opposite effect. The estimates provided in the table are made on a current cash-flow basis – that is, they measure the impact on revenues in each of the years under consideration.

Deferral of Income From Destruction of Livestock

Objective: This deferral was introduced to allow farmers operating on a cash basis adequate time to replace their herds, destroyed under statutory authority, without imposing a tax burden in the year of livestock destruction. (Budget Papers, 1976.)

If the taxpayer elects, when there has been a statutory forced destruction of livestock, the income received from the forced destruction can be deemed to be income in the following year. The deferral is also available when the herd has been reduced by at least 15 per cent in a drought year. This provision allows for a deferral of income to the following year when the livestock is replaced. Under the benchmark tax system, income is taxable when it accrues.

The estimates are based on data provided by Agriculture and Agri-Food Canada.

Deferral of Income From Grain Sold Through Cash Purchase Tickets

Objective: By permitting the deferral of the reporting of income on grain sales, this measure facilitates the orderly delivery of grain to elevators, ensuring that Canada meets its grain export commitments. (Budget Papers, 1974.)

Farmers may make deliveries of grain before the year-end and be paid with a ticket that may be cashed only in the following year. The payment for deliveries of grain is included in income only when the ticket is cashed, thereby providing a deferral of taxes. Under the benchmark tax system, income would be taxed on an accrual basis.

The estimates are based on data provided by the Canadian Wheat Board. Since tax expenditures are estimated on a cash-flow basis, an increase in the balance of uncashed grain tickets represents additional income that is being deferred and results in a positive estimate of the tax expenditure. A decrease in the balance of uncashed grain tickets indicates that less income is being deferred and results in a negative tax expenditure.

Deferral Through 10-Year Capital Gain Reserve

Objective: This provision, while limiting tax deferral opportunities, recognizes that where proceeds are receivable over time, fully taxing gains in the year of sale could result in significant liquidity problems for taxpayers. The longer period of deferral for gains on the sale of farm property was introduced to ease the transfer of these assets between family members. (Explanatory Notes for Act to Amend the Income Tax Act, December 1982.)

If proceeds from a sale of a farm property to a child, grandchild or great-grandchild are not all receivable in the year of sale, realization of a portion of the capital gain may be deferred until the year in which the proceeds become receivable. However, a minimum of 10 per cent of the gain must be brought into income each year, creating a maximum 10-year reserve period. For most other assets, the maximum reserve period is five years.

Deferral of Capital Gains Through Intergenerational Rollovers of Family Farms

Objective: This measure allows for continuity in the management of family farms in Canada by permitting property used principally in a family farming business to pass from generation to generation on a tax-deferred basis. (Budget Supplementary Information, 1973.)

Sales or gifts of assets to children, grandchildren or great-grandchildren typically give rise to taxable capital gains to the extent that the fair market value exceeds the adjusted cost base of the property. However, capital gains on intergenerational transfers of farm property are deferred in certain circumstances until the property is disposed of outside the immediate family.

No data are available.

Exemption From Making Quarterly Tax Instalments

Objective: This measure ensures consistency in the tax treatment of farmers reporting income on a cash-flow basis. (Budget Speech, 1943.)

Taxpayers earning business income must normally pay quarterly income tax instalments. However, individuals engaged in farming and fishing pay two-thirds of their estimated tax payable at the end of the taxation year and the remainder on or before April 30 of the following year.

No data are available.

Cash Basis Accounting

Objective: This treatment recognizes that requiring all farmers and fishers to adopt the accrual method of income reporting could result in accounting and liquidity problems. (Report of the Royal Commission on Taxation, 1966, vol. 4., Proposals for Tax Reform, 1969.)

Individuals engaged in farming and fishing may elect to include revenues when received, rather than when earned, and deduct expenses when paid rather than when the related revenue is reported. This treatment allows a deferral of income inclusion and a current deduction for prepaid expenses. Under the benchmark tax structure, income is taxable when it accrues, and expenses are deductible in the period to which they relate.

No data are available.

Flexibility in Inventory Accounting

Objective: This measure ensures that farmers operating on a cash basis are able to avoid creating losses that would be subject to the time limitation if carried forward. (Budget Supplementary Information, 1973.)

Farmers using the cash basis method of accounting are allowed to depart from it with regard to their inventory. A discretionary amount, not exceeding the fair market value of farm inventory on hand at year-end, may be added back to income each year. This amount must then be deducted from income in the following year. The effect of this provision is to allow farmers to avoid creating losses, which would be subject to the time limitation if carried forward. The value of the tax expenditure is thus the amount of tax relief associated with the losses that would otherwise have been subject to the time limitations.

No data are available.

Federal-Provincial Financing Arrangements

Quebec Abatement

Objective: This provision reflects the election by the Province of Quebec to receive part of the federal program contribution in the form of a tax abatement. (Federal-Provincial Fiscal Revision Act, 1964. Federal-Provincial Fiscal Arrangements Act, Part VI.)

Under the contracting-out arrangements that were offered to provinces in the mid-1960s for certain federal transfer programs, provinces could elect to receive part of the federal contribution in the form of a tax abatement. Quebec was the only province to elect this arrangement at the time and this has resulted in a 16.5-percentage-point abatement of federal tax for Quebec residents. The 16.5 percentage points are the total of both the 13.5 percentage points of personal income tax abated as an Alternative Payment for Standing Programs and 3 personal income tax percentage points abated for the discontinued Youth Allowance Program.

Transfers of Income Tax Room to Provinces

Objective: This provision reflects transfers in 1967 and 1977 by the federal government of tax points to all provinces in place of certain direct cash transfers. The tax point transfer assists provinces in providing services in the areas of post-secondary education, hospital insurance and medicare programs. (Federal-Provincial Fiscal Arrangements Act, Part V.)

In 1967, the federal government transferred four tax points of personal income tax collections and one percentage point of the corporate tax to all provinces in place of certain direct cash transfers under the cost-shared program for post-secondary education. With the 1972 income tax reform, the transferred tax points were equivalent to 4.357 tax points of personal income tax. In 1977, an additional 9.413 percentage points of personal income tax were provided to the provinces in respect of post-secondary education, hospital insurance and medicare programs.

General Business and Investment

$100,000 Lifetime Capital Gains Exemption

Objective: This exemption was introduced to encourage risk taking and investment. The exemption was eliminated for gains accrued after February 22, 1994, to make the taxation of capital gains fairer, simpler and more sustainable. (Budget Papers, 1985. Tax Reform 1987: The White Paper, 1987. Tax Measures: Supplementary Information, 1994.)

The 1994 budget eliminated the $100,000 lifetime capital gains exemption (LCGE) for gains accrued after February 22, 1994. Accrued gains prior to that date were grandfathered. Individuals who had not disposed of their assets on that date were allowed to elect to claim the $100,000 LCGE on their 1994 tax return for gains accrued up to February 22, 1994. They were deemed to have disposed of their assets for an amount not exceeding their fair market value on that date.

The LCGE allowed individuals to exempt up to $100,000 in realized capital gains over their lifetime. The exemption was available only to the extent that the gains exceeded cumulative net investment losses incurred after 1987. The costs of tax expenditures associated with capital gains realized on exempt qualified farm property and exempt qualified small business shares are listed separately, even though some of these gains would qualify for the $100,000 LCGE.

The 1992 budget had already eliminated the exemption for real estate gains accruing after February 1992 on property not used in an active business.

Partial Inclusion of Capital Gains

Objective: The reduced rate of inclusion for capital gains provides incentives to Canadians to save and invest, and to ensure that Canada's treatment of capital gains is broadly comparable to that of other countries. (Proposals for Tax Reform, 1969. Tax Reform 1987: The White Paper, 1987.)

Only a portion of net realized capital gains are included in income. The amount of the tax expenditure is the additional tax that would have been collected had the full amount of the capital gains been included in income. The 2000 budget proposed to reduce the capital gains inclusion rate from three-quarters to two-thirds effective February 28, 2000.

Deduction of Limited Partnership Losses

Objective: This provision allows for the deductibility of business losses for limited partnerships in a manner consistent with other forms of business organizations. (Budget Papers, 1986.)

A limited partner is able to deduct losses against other income up to the amount of investment at risk whereas a shareholder is normally not permitted to deduct corporate losses against personal income. Unused losses may be carried back three years or forward seven years. Limited partnership losses arise from a range of investments, from real

estate investments to certified film productions. It is estimated that 15 per cent of this tax expenditure for years before 1995 is attributable to capital cost allowance claimed on Canadian films.

Investment Tax Credits

Objective: These incentives were introduced to stimulate investments in productive facilities, and to generate growth and employment in specified regions. (Budget Supplementary Information, 1975. Budget Papers, 1977 and 1978.)

Tax credits are available for investments in scientific research and experimental development, exploration activities and certain regions. The tax credits range from 15 per cent to 45 per cent. The estimates treat the full investment tax credit as a tax expenditure even though tax credits reduce the capital cost of assets for capital cost allowance purposes and the adjusted cost base for capital gains purposes.

Deferral Through Five-Year Capital Gain Reserve

Objective: This provision, while limiting the tax deferral opportunities, recognizes that where proceeds are receivable over time, fully taxing gains in the year of sale could result in significant liquidity problems for taxpayers. (Explanatory Notes for Act to Amend the Income Tax Act, December 1982.)

If proceeds from a sale of capital property are not all receivable in the year of the sale, realization of a portion of the capital gain may be deferred until the year in which the proceeds are received. A minimum of 20 per cent of the gain must be brought into income each year, creating a maximum five-year reserve period.

Deferral Through Capital Gains Rollovers

Objective: Rollover provisions are provided in some situations in which it would be unfair to collect a capital gains tax even though the taxpayer has sold or otherwise disposed of an asset at a profit. (Proposals for Tax Reform, 1969.)

In certain circumstances, taxpayers may defer the reporting of capital gains for tax purposes. General business rollover provisions may be categorized into three groups:

Involuntary dispositions

Capital gains resulting from an involuntary disposition (e.g. insurance proceeds received for an asset destroyed in a fire) may be deferred if the funds are reinvested in a replacement asset within a specified period. The capital gain is taxable upon disposition of the replacement property.

Voluntary dispositions

Capital gains resulting from the voluntary disposition of land and buildings by businesses may be deferred if replacement properties are purchased soon thereafter (e.g., a business changing location). The rollover is generally not available for properties used to generate rental income.

Transfers to a corporation for consideration including shares

Individuals may transfer an asset to a corporation controlled by them or their spouses and elect to roll over any resulting capital gain or recaptured depreciation into the corporation instead of paying tax in the year of sale.

No data are available.

Deferral Through Use of Billed-Basis Accounting by Professionals

Objective: This treatment recognizes the inherent difficulty in valuing unbilled time and work in progress. (Summary of 1971 Tax Reform Legislation, 1971.)

Under accrual accounting, costs must be matched with their associated revenues. In computing their income for tax purposes, however, professionals are allowed to elect either an accrual or a billed-basis accounting method. Under the latter method, the costs of work in progress can be written off as incurred even though the associated revenues are not brought into income until the bill is paid or becomes receivable. This treatment gives rise to a deferral of tax.

No data are available.

Deduction of Accelerated Tax Depreciation

Objective: Accelerated rates of capital cost allowance are allowed for various types of property to encourage investment in these assets. (The Corporate Income Tax System: A Direction for Change, May 1985.)

The depreciation allowable for tax purposes is called capital cost allowance. It may differ from true economic depreciation. A tax deferral may thus be created when the tax deductions in the early years of the life of an asset exceed the actual depreciation in the value of the asset. The difference is captured upon subsequent disposition of the asset.

$1,000 Capital Gains Exemption on Personal-Use Property

Objective: This exemption was introduced to minimize record keeping and simplify administration with respect to the purchase and disposal of personal-use items. (Summary of 1971 Tax Reform Legislation, 1971).

Personal-use property is held primarily for the use and enjoyment of the owner rather than as an investment. In calculating the capital gain on personal-use property, if the proceeds of disposition are less than $1,000, no capital gain needs to be reported. If the proceeds exceed this amount, the adjusted cost base (ACB) will be deemed to be a minimum of $1,000, thus reducing the capital gain in situations where the true ACB is less than $1,000.

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.

No data are available.

$200 Capital Gains Exemption on Foreign Exchange Transactions

Objective: This exemption was introduced to minimize record keeping and simplify administration with respect to modest foreign exchange transactions. This provision is analogous to the exemption on personal-use property. (Section 39(2), Income Tax Act.)

The first $200 of net capital gains on foreign exchange transactions is exempt from tax.

No data are available.

Taxation of Capital Gains Upon Realization

Objective: This treatment recognizes that, in many cases, it is difficult to estimate with accuracy the value of unsold assets, and that taxing the accrued gains on assets that have not been sold would be administratively complex and could create significant liquidity problems for taxpayers. (Report of the Royal Commission on Taxation, 1966, vol. 3.)

Capital gains are taxed upon the disposition of property and not on an accrual basis. This treatment results in a tax deferral. Under the benchmark tax system, capital gains would be fully included in income as they accrue.

No data are available.

Health

Non-Taxation of Business-Paid Health and Dental Benefits

Objective: This provision improves access to supplementary health and dental benefits. (Budget Plan, 1998.)

Employer-paid benefits for private health and dental plans are not taxable. The 1998 budget provided for the deduction from business income of premiums paid for the coverage of self-employed persons, subject to certain restrictions. The estimates are based on data from Statistics Canada and from an annual survey, Health Insurance Benefits in Canada, conducted by the Canadian Life and Health Insurance Association.

Disability Tax Credit

Objective: This credit improves tax fairness by recognizing the effect of a severe and prolonged disability on an individual's ability to pay tax. (Budget Plan, 1997.)

Canadians who are markedly restricted by disabilities in the carrying on of the basic activities of daily living are entitled to a tax credit. For 1999, the credit was 17 per cent of $4,233. Any unused amount of the credit may be transferred to a supporting person.

The 2000 budget proposed to fully index this tax credit to the rate of inflation, effective January 1, 2000, which will raise the credit amount to $4,293 for the 2000 taxation year. The budget proposed to broaden eligibility for the credit to include individuals with severe and prolonged disabilities requiring extensive therapy essential to sustain their vital functions. In addition, the transfer rules for the credit will be broadened to allow the transfer of unused amounts to an expanded list of supporting relatives, making it consistent with the medical expense tax credit rules (such as a brother, sister, aunt, uncle, niece or nephew).

The 2000 budget also proposed a supplement to the disability tax credit for children under 18 years of age of up to 17 per cent of $2,941 to better recognize caregivers of children with severe disabilities. The $2,941 supplement amount is reduced by the amount of child care expenses and attendant care expenses claimed, in respect of the child, exceeding $2,000. The supplement is reduced to zero when child care and attendant care expenses reach $4,941.

Medical Expense Tax Credit

Objective: This credit recognizes the effect of above-average medical expenses on the ability of an individual to pay tax. (Budget Speech, 1942. Budget Plan, 1997.)

Taxpayers are entitled to a 17-per-cent credit for eligible medical expenses incurred by the taxpayer, the taxpayer's spouse or by dependants. The credit is available in respect of expenses that exceed the lesser of $1,614 or 3 per cent of net income. The 1998 budget allowed supporting persons to claim the medical expense tax credit for training courses related to the care of dependent relatives with physical or mental infirmities. The 1999 budget extended the medical expense tax credit to include certain costs of group homes for persons with disabilities, certain therapies for persons with disabilities and tutoring and talking books for persons with learning disabilities. The 2000 budget proposed to fully index the personal income tax system, including the $1,614 threshold which will increase to $1,637 for the 2000 taxation year. The 2000 budget also proposed to expand the list of expenses eligible for the medical expense tax credit to include the incremental cost of modifications made to new homes to assist individuals with severe mobility impairments.

Medical Expense Supplement for Earners

Objective: This measure improves incentives for disabled Canadians to participate in the labour force by providing an alternative to disability-related supports under provincial social assistance arrangements. (Budget Plan, 1997.)

The 1997 budget created a refundable medical expense tax credit for low-income working Canadians with high medical expenses.

The refundable credit supplements the assistance that is provided through the existing medical expense tax credit. From 1997 to 1999, the maximum refundable credit was the lesser of $500 and 25 per cent of eligible medical expenses. It was available to those individuals earning over $2,500, and was reduced by 5 per cent of net family income in excess of $16,069 in 1997 and 1998, and in excess of $17,419 in 1999. The 2000 budget proposed to fully index the $500 supplement, the minimum earnings threshold and the family net income threshold by the rate of inflation, effective January 1, 2000. Full indexation will increase the supplement to $507, the minimum earnings threshold to $2,535, and the family net income threshold to $17,664 for the 2000 taxation year.

Income Maintenance and Retirement

The non-taxation of income-tested programs such as the Guaranteed Income Supplement and provincial social assistance presents conceptual difficulties. The problems arise because, in many respects, these programs operate like an income tax in that eligibility for benefits is phased out after a certain income level. In this regard, excluding such benefits from income tax might not be considered a tax expenditure since they are subject to their own "tax." On the other hand, a broadly based benchmark tax system would include such amounts in income. Given the comprehensive approach taken in this document, these items are considered to be tax expenditures.

Non-Taxation of Guaranteed Income Supplement and Spouse's Allowance Benefits

Objective: This treatment recognizes that these income-tested payments provide a basic level of support to elderly Canadians with little income other than the Old Age Security pension. (Budget Speech, 1971.)

The Guaranteed Income Supplement (GIS) is an income-tested benefit payable to Old Age Security (OAS) pensioners. Spouses of OAS recipients (or widows/widowers) aged 60 to 64 may be eligible for the spouse's allowance (SPA). Benefits under both the GIS and SPA programs are non-taxable. Although GIS and SPA benefits must be included in income, an offsetting deduction from net income is provided. This approach effectively exempts such payments from taxation while continuing to have them affect income-tested credits.

The estimates are based on data from Human Resources Development Canada and the personal income tax simulation model developed by the Department of Finance Canada from tax data.

Non-Taxation of Social Assistance Benefits

Objective: This treatment recognizes the nature of social assistance as a payment of last resort. (Budget Papers, 1981.)

Social assistance benefits must be included in income. However, an offsetting deduction from net income is provided. This approach effectively exempts such benefits from taxation while continuing to have them affect income-tested credits.

The estimates are based on data from Human Resources Development Canada and the personal income tax model developed by the Department of Finance Canada from tax data.

Non-Taxation of Workers' Compensation Benefits

Objective: Workers' compensation benefits have been non-taxable since the first Workers' Compensation Boards were established in 1915. Prior to 1982, workers' compensation payments were excluded from income. The 1981 budget included these payments in income and provided a matching deduction. (Budget Papers, 1981.)

Workers' compensation benefits must be included in income. However, an offsetting deduction from net income is provided. This approach effectively exempts such benefits from taxation while continuing to have them affect income-tested credits.

Non-Taxation of Certain Amounts Received as Damages in Respect of Personal Injury or Death

Objective: By exempting from tax funds and annuities resulting from personal injury, this provision recognizes that amounts received as personal injury damages represent, to a large extent, compensation for a capital loss suffered by the injured taxpayer. (Budget Supplementary Information, 1972.)

Amounts received in respect of damages for personal injury or death and awards paid pursuant to the authority of criminal injury compensation laws are not taxable. In addition, investment income earned on personal injury awards is excluded from income until the end of the year in which the person reaches the age of 21.

The values reported in the tables understate the tax expenditure since they are based on awards paid by provinces' Criminal Injuries Compensation Boards only. No data were available for compensation awards paid by other sources, or regarding the investment income earned on awards by individuals under age 22.

Non-Taxation of Veterans' Allowances, Civilian War Pensions and Allowances, and Other Service Pensions (Including Those From Allied Countries)

Objective: This treatment recognizes that these benefits provide a basic level of support to veterans of Canada's military engagements and their families. (Budget Speech, 1942.)

These amounts are not included in income for tax purposes.

The estimates are based on Public Accounts data.

Non-Taxation of Veterans' Disability Pensions and Support for Dependants

Objective: This treatment recognizes that these benefits provide a basic level of support to veterans of Canada's military engagements and their families. (Budget Speech, 1942.)

These amounts are not included in income for tax purposes.

The estimates for this item are based on Public Accounts data.

Treatment of Alimony and Maintenance Payments

Objective: The tax treatment of child support was changed following the 1996 Budget. The new tax rules work in tandem with the Federal Child Support Guidelines to ensure that children receive the financial support they deserve. As of May 1, 1997, child support paid under orders or agreements made on or after that date is no longer taxable to the recipient nor deductible by the payor. (Budget Plan, 1996.)

Payments by a taxpayer to a divorced or separated spouse are deductible to the payer and taxable in the hands of the recipient for agreements or awards made prior to May 1, 1997.

This treatment represented a tax expenditure because it departed from the benchmark system established for the purposes of this report. Under this benchmark tax system, deductions are permitted only for expenses incurred in order to earn income, and amounts received from other individuals are not included in the income of the recipient.

As of May 1, 1997, child support paid pursuant to a written agreement or court order made on or after that day is not deductible to the payer nor included in the income of the recipient. Child support paid pursuant to a court order or written agreement made before that date continues to be deductible to the payer and included in the income of the recipient, unless the agreement is varied. The tax changes do not apply to spousal support. Spousal support payments remain deductible by the payer and are included in the income of the recipient.

The estimates for this item are computed as the value of the deduction to the payer, less the tax collected from the recipient.

Age Credit

Objective: This provision was introduced to reduce the tax burden borne by elderly Canadians. (Budget Highlights, 1972.)

Individual taxpayers aged 65 and over are entitled to claim a tax credit of up to 17 per cent of $3,482. Unused portions may be transferred to a spouse. The age credit became subject to an income test in 1994, which was phased-in over two years. For 1995 and future years, the age amount was reduced by 15 per cent of net income in excess of $25,921 (for 1994, the reduction was one-half of this amount). The 2000 budget proposed to fully index by the rate of inflation both the age credit amount and the net income threshold at which it is reduced, effective January 1, 2000. Full indexation will increase the age credit amount to $3,531 and the net income threshold at which the credit amount is reduced to $26,284 for the 2000 taxation year.

Pension Income Credit

Objective: This provision was introduced to provide additional protection against inflation for the retirement income of elderly Canadians. (Budget Speech, November 1974.)

A 17-per-cent tax credit is available on up to $1,000 of certain pension income. The unused portion of the credit may be transferred to a spouse.

Saskatchewan Pension Plan

Objective: This measure was introduced to ensure consistency in the tax treatment of Canadians saving for their retirement, whether they save through a private or a provincially sponsored registered plan. (Budget Papers, 1987.)

Contributions to the Saskatchewan Pension Plan are deductible up to the lesser of $600 or the amount of unused registered retirement savings plan room in a particular year.

Registered Retirement Savings Plans/Registered Pension Plans

Objective: These measures were introduced to encourage Canadians to save throughout their working lives in order to avoid a serious disruption of their living standards upon retirement. (Pension Reform: Improvements in Tax Assistance for Retirement Saving, Department of Finance, 1989.)

The federal revenue forgone due to the provisions pertaining to registered retirement savings plans (RRSPs), registered pension plans (RPPs) and deferred profit-sharing plans (DPSPs) is a function of three components: the deductibility of contributions to such plans; the non-taxation of investment income accrued within such plans; and the income inclusion of RPP/RRSP withdrawals, which reduces the cost resulting from the previous two components. Individuals benefit from a deferral of tax on amounts contributed and on investment income. Also, there is an absolute tax saving to the extent that the tax rate on withdrawals is below that faced at the time of contributions. That is, many contributors are in a higher tax bracket during their working lives than when they are retired.

The estimates provided in the table are made on a current cash-flow basis – that is, they measure the impact of this tax measure on revenues in the years under consideration. The Auditor General has recommended that the estimates for RPPs and RRSPs be provided on a present-value basis as well as on the current cash-flow basis. Work is proceeding on developing such estimates, although they are not yet ready to be included in this year's report.

In 1991, a new system of comprehensive limits on tax-assisted retirement saving took effect. Under this system, saving in RRSPs, RPPs and DPSPs is governed by a comprehensive limit of 18 per cent of earnings up to a dollar amount. In more detail, the limits are as follows.

• For defined benefit pension plans, the limits are the same as in 1990 – i.e., no fixed limits on employee contributions while employer contributions are restricted to the amounts necessary to fully fund the promised benefits. Annual pension benefits under these pension plans are limited to the lesser of $1,722 and 2 per cent of earnings for each year of pensionable service.
• For RRSPs, contributions are limited to 18 per cent of earned income for the preceding taxation year up to a dollar maximum ($14,500 for 1995 and $13,500 from 1996 to 2003), minus a pension adjustment (PA). The PA is based on RPP or DPSP benefits earned by plan members in the previous taxation year. For a money purchase RPP or a DPSP, the PA is simply the total contribution made by or on behalf of a plan member in the year. For a defined benefit RPP, the PA is a measure of the benefits earned in the year, calculated according to a prescribed formula.

In 1992, the federal government introduced the Home Buyers' Plan (HBP) as a temporary measure. It allowed individuals to withdraw up to $20,000 from their RRSPs on a tax-free basis to purchase a home. Amounts withdrawn under the HBP are to be repaid to the individual's RRSP on an interest-free basis over a period of 15 years. Amounts that are not repaid are included in the individual's income for tax purposes. In 1994, this measure was made permanent, but restricted to first-time home buyers only. The 1998 budget allowed persons eligible for the disability tax credit to participate in the HBP more than once in the individual's lifetime. The funds must be used to purchase a home that is more accessible for, or better suited for, the care of the individual.

The 1998 budget also allowed individuals to make tax-free RRSP withdrawals for lifelong learning, subject to certain restrictions. Individuals have to repay these amounts over a fixed period of time. In many ways, this program parallels the HBP.

The tax expenditure costs of both the HBP and the lifelong learning program are reflected in the RRSP tax expenditure estimates through the amount of tax forgone on contributions and investment income.

It should be noted that the RRSP/RPP estimates do not reflect a mature system because contributions currently exceed withdrawals. Assuming that the same tax rate applies to contributions and withdrawals, if contributions equalled withdrawals, only the non-taxation of investment income would contribute to the net cost of the tax expenditure.

As time goes by and more retired individuals have had the opportunity to contribute to RRSPs throughout their lifetime, the gap between contributions and withdrawals will shrink and possibly even become negative. The upward bias in the current cash-flow estimates can therefore be expected to decline.

The estimates may not reflect the benefit to a particular individual in any given year because the individual is typically either a contributor or withdrawer at a point in time but not both. In order to estimate the benefit to a particular individual, one could calculate the difference in disposable income between a situation in which an individual invests in an RRSP/RPP and one in which the individual invests in a non-sheltered savings instrument.

Data used to estimate the value of these measures were taken from the personal income tax model and from Statistics Canada publications Trusteed Pension Funds (Cat. 74-201) and Pension Plans in Canada (Cat. 74-401).

Deferred Profit-Sharing Plans

Objective: This treatment was introduced to allow for additional retirement savings, and to foster co-operation between employers and their workers by encouraging employees to participate in their employer's business. (Budget Speech, 1960.)

Employers may make tax-deductible contributions to a deferred profit-sharing plan on behalf of their employees. These amounts are taxable in the hands of the employees when withdrawals are made from the plan. The employer's contribution cannot exceed one-half of the money purchase registered pension plan (RPP) dollar limit for the year ($7,750 in 1995, $6,750 from 1996 to 2002) or 18 per cent of the employee's earnings. The amount is included in the pension adjustment (PA) for the taxpayer. The taxpayer's total PA (for both RPP and DPSP contributions) cannot exceed the money purchase RPP dollar limit for the year ($15,500 for 1995, $13,500 for 1996 to 2002).

No data are available.

Non-Taxation of RCMP Pensions/Compensation in Respect of Injury, Disability or Death

Objective: This treatment recognizes that these benefits represent, to a large extent, compensation to Canada's national police force and their families for a capital loss suffered by members of this police force injured in the course of their duties. (Section 81(1)(I), Income Tax Act.)

Pension payments and other compensation received in respect of an injury, disability or death associated with service in the Royal Canadian Mounted Police are non-taxable.

No data are available.

Non-Taxation of up to $10,000 of Death Benefits

Objective: This provision was introduced to alleviate the hardship faced by dependants upon the death of a supporting individual. (Budget Speech, 1959.)

Up to $10,000 of death benefits paid by an employer to the spouse of a deceased employee is non-taxable.

No data are available.

Non-Taxation of Investment Income on Life Insurance Policies

Objective: For administrative convenience, insurance companies rather than policy holders are taxed on investment income earned on certain life insurance policies.

The investment income earned on some life insurance policies is not taxed as income to the policyholder. Instead, for reasons of administrative convenience, insurance companies are subject to tax on such earnings.

Small Business

$500,000 Lifetime Capital Gains Exemption for Small Business Shares

Objective: This measure was introduced to bolster risk taking and investment in small businesses, allow small business owners to accumulate funds for retirement and facilitate intergenerational transfers. (Budget Papers, 1985. The Lifetime Capital Gains Exemption: An Evaluation, Department of Finance, 1995.)

A $500,000 lifetime capital gains exemption is available for gains in respect of the disposition of qualified small business shares. The $500,000 limit is available only to the extent that the basic $100,000 lifetime capital gains exemption (where applicable) and the $500,000 lifetime capital gains exemption on qualified farm property have not been used, and to the extent that the gains exceed cumulative net investment losses incurred after 1987.

Deduction of Allowable Business Investment Losses

Objective: This measure recognizes that small businesses often have difficulty obtaining adequate financing, and provides special assistance for risky investments in such businesses. (Budget Papers, 1985.)

Under the benchmark system, capital losses arising from the disposition of shares and debts are generally deductible only against capital gains. However, a portion of capital losses in respect of shares or debts of a small business corporation (allowable business investment losses) may be used to offset other income. The 2000 budget proposed that this proportion be reduced from three-quarters to two-thirds, effective February 28, 2000, as a consequence of the reduction in the capital gains inclusion rate. Unused allowable business investment losses may be carried back three years and forward seven years. After seven years, the loss reverts to an ordinary capital loss and may be carried forward indefinitely.

The estimated tax expenditure is the amount of tax relief provided by allowing these losses to be deducted from other income in the year. The tax expenditure is overestimated since it does not reflect the future reduction in tax revenues that would occur if those losses were instead deducted from future capital gains.

Labour-Sponsored Venture Capital Corporations Credit

Objective: This measure was introduced to foster entrepreneurship by encouraging investment by individuals in labour-sponsored venture capital organizations, set up to maintain or create jobs and stimulate the economy. (Budget Papers, 1985.)

A tax credit is provided to individuals for the acquisition of shares of labour-sponsored venture capital corporations. For shares acquired before March 6, 1996, the rate of the federal credit was 20 per cent to a maximum credit of $1,000. For shares acquired after March 5, 1996 for the 1996 taxation year and for the 1997 taxation year, the rate of the federal tax credit was 15 per cent, to a maximum credit of $525. For 1998 and subsequent years, the rate of the federal tax credit is 15 per cent, to a maximum credit of $750.

Deferral Through 10-Year Capital Gain Reserve

Objective: This provision, while limiting the tax deferral opportunities, recognizes that where proceeds are receivable over time, fully taxing gains in the year of sale could result in significant liquidity problems for taxpayers. The longer period of deferral for gains on the sale of small business shares was introduced to ease the transfer of these assets between family members. (Explanatory Notes for Act to Amend the Income Tax Act, December 1982.)

If proceeds from the sale of small business shares to children, grandchildren or great-grandchildren are not all receivable in the year of sale, recognition of a portion of the capital gain realized may be deferred until the year in which the proceeds become receivable. However, a minimum of 10 per cent of the gain must be brought into income each year creating a maximum 10-year reserve period. This contrasts with the treatment of most other property, where the maximum reserve period is five years.

Rollovers of Investments in Small Businesses

Objective: To improve access to capital for small business corporations, the 2000 Budget proposed to permit individuals a rollover of capital gains on the disposition of small business investments where the proceeds of disposition are used to make other small business investments. (Budget Plan 2000.)

The 2000 budget proposed that individuals be permitted to defer the tax on a capital gain arising from the disposition of a qualified small business investment, to the extent the proceeds are reinvested in another qualified small business. An eligible small business investment consists of shares issued from treasury in an active Canadian-controlled private corporation with assets not exceeding $2.5 million. The reinvestment must take place within a specified period. The deferral applies to the capital gain on investments of up to $500,000. The proposal applies to dispositions and reinvestments of qualified small business investments on or after February 28, 2000.

No data are available.

Other Items

Non-Taxation of Capital Gains on Principal Residences

Objective: This exemption recognizes that principal homes are generally purchased to provide basic shelter and not as an investment. The exemption also increases flexibility in the housing market by allowing families to more easily move from one principal residence to another in response to their changing circumstances. (Summary of 1971 Tax Reform Legislation, 1971. 1981 Budget Information Kit.)

Capital gains realized on the disposition of a taxpayer's principal residence are non-taxable. The capital gains were determined using Multiple Listing Service housing prices, adjusted to include expenditures on capital repairs and major additions and renovations, obtained from Statistics Canada's Consumer Expenditure Survey. The holding period for principal residences was derived from 1981 census data.

Estimates for this item are provided for partial and full inclusion rates for capital gains.

Non-Taxation of Income From the Office of the Governor General

Objective: This exemption ensures that the income from the Office of the Governor General, who is a direct representative of the Crown, is not subject to tax. (The exemption was introduced in the 1917 Income War Tax Act.)

This income is exempt from personal income taxation.

The estimates are based on Public Account data.

Assistance for Prospectors and Grubstakers

Objective: This treatment was introduced to encourage the development of Canada's natural resources by allowing prospectors and grubstakers to transfer their property claims or interests to a corporation in exchange for shares in that corporation on a tax-deferred basis. (Budget Supplementary Information, May 1974.)

Where a prospector or grubstaker disposes of mining property to a corporation in exchange for shares in that corporation, the tax liability is deferred until the subsequent disposition of the shares. At that time, only a portion of the amount for which the mining property was transferred to the corporation need be included in income. The 2000 budget proposed that the taxable portion of the amount be reduced from three-quarters to two-thirds, effective February 28, 2000.

Charitable Donations Credit

Objective: This incentive is designed to support the important work of the charitable sector in meeting the needs of Canadians. (Report of the Royal Commission on Taxation, 1966, vol. 3. Budget Plan, 1996. Budget Plan, 1997.)

A tax credit is available for charitable donations. The credit is 17 per cent on the first $200 of total donations and 29 per cent on donations in excess of $200. Prior to 1997, tax credits arising from gifts to the Crown could be used to reduce taxes on up to 100 per cent of income. Donations to non-Crown charities were eligible for this credit up to 20 per cent of net income in 1995 and up to 50 per cent of net income in 1996. The 1997 budget set the income limit for donations to 75 per cent for donations to all charities. The limit is increased by 25 per cent of the amount of taxable capital gains arising from the donations of appreciated capital property and 25 per cent of any capital cost allowance (CCA) recapture arising from the donation of depreciable capital property.

Provision was made in 1996 and maintained in the 1997 measures to ensure that no short-term tax liability would arise from the realization of capital gains on donations of appreciated assets. This treatment was extended in the 1997 budget to any CCA recapture arising from the donation of depreciable capital property. Donations in excess of the limit may be carried forward for up to five years. The percentage of income restriction does not apply to certain gifts of cultural property nor, beginning in 1995, to donations of ecologically sensitive lands.

In the 1997 tax year, the Canada Customs and Revenue Agency (then Revenue Canada) ceased to differentiate gifts to the Crown from donations to other charities since they are now treated equivalently in the Income Tax Act. For that reason, gifts to the Crown are no longer identified separately.

Reduced Inclusion Rate for Capital Gains Arising From Donations of Ecologically Sensitive Land

Objective: This measure was introduced to enhance the incentives for the protection of Canada's ecologically sensitive land, including areas containing habitat for species at risk. (Budget Plan, 2000.)

The 2000 budget proposed to reduce by one-half the income inclusion in respect of capital gains arising from gifts of ecologically sensitive land. This reduces the capital gains income inclusion rate from two-thirds to one-third, effective February 28, 2000.

No data are available.

Reduced Inclusion Rate for Capital Gains Arising From Certain Charitable Donations

Objective: This measure was introduced to facilitate the transfer of certain publicly traded securities to charities to help them respond to the needs of Canadians, and to provide a level of tax assistance for donations of eligible appreciated capital property that is comparable to that in the United States. (Budget Plan, 1997.)

The 1997 budget reduced by half the inclusion rate on capital gains arising from certain donations by individuals or corporations to charities (other than private charitable foundations) where the donation is made between February 18, 1997 and the end of the year 2001. The 2000 budget proposed to reduce the capital gains inclusion rate from three-quarters to two-thirds, effective February 28, 2000. Consequently, the reduced inclusion rate for capital gains arising from certain donations is 37¹/₂ per cent between February 18, 1997 and February 27, 2000 and 33¹/₃ per cent beginning February 28, 2000. Eligible securities qualifying for this treatment are those for which a current value can readily be obtained, generally securities that are traded publicly on a prescribed stock exchange. The 2000 budget proposed to provide parallel treatment of gifts of shares acquired through employee stock option plans.

Political Contribution Tax Credit

Objective: This provision is intended to ensure that registered political parties have a broad base of financial support. (Report of the Royal Commission on Taxation, 1966, vol. 3.)

A non-refundable tax credit is available for contributions to registered federal political parties or candidates. The credit is earned at a rate of 75 per cent on the first $100 contributed, 50 per cent on the next $450 contributed and 33¹/₃ per cent on the next $600 contributed. The maximum credit is $500 and is available when the taxpayer has contributed $1,150.

This measure constitutes a tax expenditure because political contributions are not incurred to earn income.

Special Tax Computation for Certain Retroactive Lump-Sum Payments

Objective: This provision is intended to ensure that governments do not unduly benefit as a result of amounts being received in a lump sum. (Budget Plan 1999.)

The 1999 budget permitted taxpayers receiving qualifying retroactive lump-sum payments to use a special mechanism to compute the tax on those payments. To be eligible for the special tax calculation, the right to receive the income must have existed in a prior year. In addition, the principal portion of the lump-sum payment must be at least $3,000, and must have been received in any year after 1994. The tax under the special mechanism is the federal tax that would have been payable if the principal portion of the retroactive lump-sum payment had been taxed in the year to which it relates, plus interest to reflect the delay in receiving the tax.

The tax expenditure under this item is equal to the difference between the tax that would be owed on the principal portion of eligible retroactive lump-sum payments if they were taxed in the year received, and the tax computed under the special mechanism. There is no tax expenditure associated with the interest element of any lump-sum payment because it is fully included in income for the year in which it is received.

Non-Taxation of Income of Indians on Reserves

Objective: This exemption reflects provisions under section 87 of the Indian Act.

Section 87 of the Indian Act exempts the personal property of a status Indian and Indian bands from taxation if such personal property is situated on a reserve. Courts have held that the term "personal property" includes income. Determining whether income is situated on a reserve requires an examination of the factors that connect it to a reserve. With respect to employment income, for example, a key factor is the location (on or off a reserve) at which the employment duties were performed.

No data are available.

Non-Taxation of Gifts and Bequests

Objective: This exemption recognizes the difficulties associated with the valuation and reporting of the many small gifts of a routine nature exchanged between individuals and families. (Report of the Royal Commission on Taxation, 1966, vol. 3.)

Gifts and bequests are not included in the income of the recipient for tax purposes.

No data are available.

Memorandum Items

Non-Taxation of Lottery and Gambling Winnings

Objective: Proceeds from the sale of lottery tickets are an important source of funds for provincial governments, charities and other not-for-profit organizations. As a result, there is already a considerable element of taxation to lottery and gambling proceeds. The federal government has vacated this area in favour of the provinces.

Lottery and gambling winnings are excluded from income for tax purposes.

The estimate for the non-taxation of winnings in government lotteries is based on information provided by Statistics Canada. Values for the non-taxation of winnings from horse racing are estimated using data provided by Agriculture and Agri-Food Canada. The values do not include winnings from other types of gambling, such as bingo and casino winnings where no accurate data are available.

The tax expenditure estimate assumes that the total amount of lottery and horse racing winnings would be included in income and subject to tax. This would likely not be the case because there would be large administrative costs in taxing thousands of small prizes, in particular instant win lotteries. A threshold below which winnings would be non-taxable would result in substantially lower revenues. It should also be noted that 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 a considerable element of taxation to lottery and gambling proceeds. This estimate is therefore included as a memorandum item only.

Non-Taxation of Specified Incidental Expenses

Objective: This provision recognizes the additional costs incurred by certain public officials in the course of their public duties. (Budget Speech, 1946.)

Members of Parliament (MPs), members of legislative assemblies (MLAs), senators and some other public officials (such as elected municipal officials and judges) receive flat allowances for expenses incidental to their duties. These amounts are not included in income for tax purposes. This provision is a memorandum item because it is not possible to distinguish the proportion of these allowances that is used for personal consumption and that which is for work-related expenses.

Data are available only for the non-taxable allowances provided to MPs, MLAs and senators. This information is found in the publications Canadian Legislatures and The Canadian Parliamentary Guide.

Non-Taxation of Allowances for Diplomats and Other Government Employees Posted Abroad

Objective: This provision recognizes the additional costs incurred by diplomats and other government personnel employed outside Canada. (Section 6(1)(b)(iii), Income Tax Act.)

Diplomats and other government employees posted abroad receive an allowance to cover the additional costs associated with living outside Canada. These allowances are not taxable.

Information on total allowances was obtained from the Treasury Board of Canada Secretariat.

Child Care Expense Deduction

Objective: This provision recognizes the child care costs incurred by single parents and two-earner families in the course of earning business or employment income, pursuing education or performing research. (Budget Papers, 1992. Budget Plan, 1998.)

Child care expenses incurred for the purpose of earning business or employment income, taking an occupational training course or carrying on research for which a grant is received are deductible, up to a limit. Prior to 1998, the deduction could not exceed the lesser of $5,000 per child under age 7 or having a disability and $3,000 per child between 7 and 14 years of age or being infirm (16 years after 1995); two-thirds of earned income for the year; and the actual amount of child care expenses incurred. After 1995, the two-thirds earned income limit does not apply to single parent students.

The spouse with the lower income must generally claim the deduction. However, the higher-income parent may claim a deduction if the lower-income parent is infirm, confined to a bed or a wheelchair, in prison, or attending a designated educational institution on a full-time basis.

The 1998 budget increased the deduction limits by $2,000 to $7,000 per child under age 7 or having a disability and by $1,000 to $4,000 per child between 7 and 16 years of age or being infirm. The 1998 budget also allowed child care expenses incurred by an individual in order to pursue part-time education to be claimed, subject to certain limits. The 2000 budget enhanced the child care expense deduction for families with a child having a disability by increasing the deduction limit to $10,000 from $7,000 for a child eligible for the disability tax credit.

Attendant Care Expense Deduction

Objective: This provision recognizes the costs incurred by disabled taxpayers for care by an attendant required to enable the taxpayer to earn business or employment income. In so doing, the provision increases equity between the able-bodied earners and those who incur additional expenses owing to a disability. (Budget Papers, 1989.)

A disabled individual can deduct the cost of unreimbursed care provided by an attendant, if such an expense is required to enable the individual to work. For taxation years 1994 to 1997, the deduction cannot exceed the lesser of $5,000 and two-thirds of earned income for the year. The 1997 budget eliminated the $5,000 limit on attendant care expenses. The 2000 budget proposed to expand the attendant care deduction to include individuals attending a designated educational institution or a secondary school.

Moving Expense Deduction

Objective: This provision facilitates labour mobility by allowing taxpayers greater flexibility in pursuing new employment and business opportunities anywhere in Canada. (Budget Speech, 1971. Budget Plan, 1998.)

Most reasonable moving expenses incurred to earn employment or self-employment income at a new location (e.g., transportation, meals and temporary accommodation, cost of selling a former residence) are deductible from earnings or business income received after the move if the taxpayer moves at least 40 kilometres closer to the new place of employment or study. The deduction has to be claimed in the year or in the following year if it exceeds earnings at the new location in the year of the move. Prior to 1998, most moving expense reimbursements provided by employers were not included in income. The 1998 budget included certain employer-provided reimbursements in income, and allowed an offsetting deduction to the same extent as permitted for self-paid expenses. The 1998 budget also expanded the definition of relocation costs eligible for deduction.

The estimates do not include non-taxable reimbursements received from employers.

Deduction of Carrying Charges Incurred to Earn Income

Objective: This provision recognizes that carrying charges are incurred for the purpose of earning income.

Interest and other carrying charges, such as investment counselling fees and safety deposit box charges, incurred to earn business or investment income are deductible.

Some might consider the deductibility of such expenses to be a tax expenditure because of the tax deferral arising from the up-front deduction of expenses associated with the earning of income that will not be taxed until possibly received in future years. Others would hold that carrying charges are incurred for the purpose of earning income and therefore represent part of the benchmark income tax system.

Deduction of Meals and Entertainment Expenses

Objective: To reflect the existence of the personal consumption element of meal and entertainment expenses, only 50 per cent of these costs are deductible. (Tax Reform 1987. Budget Papers, 1994.)

Meals and entertainment expenses are considered to be a memorandum item because the amount that should be deductible under a benchmark tax system is debatable. While a portion of these expenditures is incurred in order to earn income, there is an element of personal consumption associated with these expenditures. Consequently, only a partial deduction for these expenses would be permitted under the benchmark tax system.

The deduction is limited to 50 per cent of the cost of food, beverages and entertainment.

The estimates provided reflect the additional tax revenue that would be received if no deduction were allowed (i.e., that there is no business purpose to the expenditure).

Deduction of Farm Losses for Part-Time Farmers

Objective: This provision allows for the limited deductibility of farm losses for part-time farmers to recognize that cash basis accounting can distort the actual financial position of a farming business. (Sections 31, 111(3), Income Tax Act.)

Individuals whose major source of income is not farming are allowed to deduct farm losses against other income up to an annual maximum of $8,750.

Part-time farm losses that are not deductible in the current year may be carried back 3 years and forward 10 years to deduct against farm income. The estimates include the cost of these carry-overs.

Farm and Fishing Loss Carry-overs

Objectives: These measures provide increased cash flows and reduced risks to farms and fisheries in recognition of the cyclical nature of these industries. (Budget Papers, 1983.)

Farm and fishing losses may be carried back 3 years and forward 10 years. Most other business losses may be carried forward only 7 years.

The only data that are available are prior years' losses carried forward to the current year. In this regard, the estimates do not include current year losses carried forward or back to other taxation years, nor do they include future losses carried back to the taxation year in question. The estimates do not include losses carried over by part-time farmers.

Capital Loss Carry-overs

Objective: These provisions support businesses and investors by reducing the risk associated with investment, and provide tax relief for cyclical businesses. (Budget Papers: Supplementary Information, 1983.)

Net capital losses may be carried back three years and forward indefinitely to offset capital gains of other years. The only data that are available are prior years' losses carried forward to the current year to reduce taxes payable. The estimates do not include current year losses carried forward or back to other taxation years, nor do they include future losses carried back to the taxation year in question.

Non-Capital Loss Carry-overs

Objective: These provisions support businesses and investors by reducing the risk associated with investment, and provide tax relief for cyclical businesses. (Budget Papers: Supplementary Information, 1983.)

Non-capital losses may be carried back three years and forward seven years to offset other income. The only data that are available are prior years' losses carried forward to the current year to reduce taxes payable. Thus, the cost estimates may understate the true amount of revenue forgone because they do not include current year losses carried forward or back to other taxation years nor do they include future losses carried back to the taxation year in question.

Logging Tax Credit

Objective: The logging tax credit was introduced as a means of relieving the tax burden on the forest industry. (Budget Speech, 1962.)

The logging tax credit reduces federal taxes payable by the lesser of two-thirds of any logging tax paid to a province and 6²/₃ per cent of income from logging operations in that province.

Deduction of Resource-Related Expenditures

Objective: This provision was introduced to encourage the development of Canada's natural resources. (Budget Speech, 1961.)

Individuals are entitled to deduct certain expenses associated with the exploration for, and development of, Canadian natural resources. These expenses are deductible if the taxpayer either engages directly in these resource activities or provides financing to a resource company which, in turn, "flows through" the tax deductions to the taxpayer.

A tax expenditure arises when a flow-through share investor is able to use deductions for exploration and development more quickly than would otherwise have been possible by the resource company that actually undertook these expenditures. This may be because the taxpayer has otherwise-taxable income in a year and the corporate issuer of the flow-through does not. It may also be the direct result of a special provision for junior oil and gas companies whereby expenses that would otherwise be deductible at 30 per cent can be deducted at 100 per cent when "flowed through" using flow-through shares.

However, the available data do not permit a separation of expenses that are flowed through to investors and those that are incurred directly by the taxpayers. Accordingly, only some portion of resource-related expenditures deducted represents a true tax expenditure. Consequently, the total cost of all these deductions has been calculated, but these amounts are treated as a memorandum item.

Reclassification of Flow-Through Shares

Objective: This provision was introduced in order to facilitate financing and to promote investment in the junior oil and gas sector. (Economic and Fiscal Statement, 1992; Budget Plan 1996.)

The costs incurred by an oil and gas company in exploring for a new reservoir of crude oil or natural gas are generally classified as a Canadian exploration expense (CEE) and are deductible at 100 per cent in the year they are incurred. The costs of drilling production wells into a reservoir after it has been discovered are generally classified as Canadian development expenses (CDEs) and are deductible at 30 per cent on a declining balance.

The 1992 budget introduced a measure that allowed for reclassification of CDEs into CEEs. The first $2 million of CDEs for oil and gas that were renounced by a company to shareholders under a flow-through share agreement could be reclassified as CEEs and deducted by shareholders accordingly – 100 per cent in the first year rather than 30 per cent per year on a declining balance basis. The 1996 budget reduced the limit to $1 million and restricted reclassification to issuing corporations with less than $15 million in taxable capital employed in Canada. These changes were introduced to better focus this incentive on smaller oil and gas companies that have a relatively greater need for assistance in raising new equity capital. The limit on reclassification applies on an annual basis to each company or associated group of companies. Consistent with the treatment of CEEs, eligible expenses incurred in the first 60 days of a year will be treated as having been incurred in the previous year.

This item is a subset of the tax expenditures associated with deductions of resource-related expenditures.

Deduction of Other Employment Expenses

Objective: This provision recognizes that certain expenses must be incurred for the purpose of earning employment income.

Employees generally cannot deduct work-related expenses. However, specific employment expenses (e.g., automobile expenses, cost of meals and lodging for certain transport employees, legal expenses paid to collect salary) are deductible in certain circumstances in the computation of income. This provision is a memorandum item because it is not possible to distinguish the proportion of these expenses that is used for personal consumption and that which is incurred in order to earn income.

Deduction of Union and Professional Dues

Objective: This provision recognizes that these payments are of a mandatory nature and are therefore incurred to earn income. (Budget Speech, 1951.)

Union and professional dues are fully deductible from income. The mandatory nature of these payments leads to their classification as expenses incurred to earn income.

Employment Insurance Contribution Credit/Non-Taxation of Employer-Paid Premiums

Objective: This provision recognizes that these payments are of a mandatory nature and are therefore incurred to earn income.

A 17-per-cent tax credit is provided for employment insurance (EI) contributions. Employer-paid premiums are not included in the employee's income. The mandatory nature of EI contributions leads to their classification as expenses incurred to earn income.

Canada Pension Plan and Quebec Pension Plan Contribution Credit/Non-Taxation
of Employer-Paid Premiums

Objective: This provision recognizes that these payments are of a mandatory nature and are therefore incurred to earn income.

A 17-per-cent tax credit is provided for Canada Pension Plan/Quebec Pension Plan contributions by both employees and the self-employed. Employer-paid premiums are not included in the employee's income. Since CPP/QPP contributions are mandatory, they are classified as expenses incurred to earn income.

Foreign Tax Credit

Objective: This provision was introduced to avoid the double taxation of income that has already been taxed in foreign countries.

In order to avoid double taxation, a tax credit is provided in recognition of income taxes paid in foreign countries.

Dividend Gross-Up and Credit

Objective: These provisions contribute to the integration of the corporate and personal income tax systems in order to reduce the double taxation effect of taxing income at both the corporate and personal level.

Dividends received from taxable Canadian corporations are "grossed up" by a factor of one-quarter and included in income. A tax credit equal to 13.33 per cent of the grossed-up amount is then provided, in recognition of taxes paid at the corporate level. These provisions contribute to the integration of the corporate and personal income tax systems.

Supplementary Low-Income Credit

Objective: This provision provides tax relief to low-income Canadians. (Budget Plan, 1998.)

The 1998 budget introduced a supplement of $500 to the basic personal, spousal and equivalent-to-spouse non-refundable tax credits for low-income taxfilers. The supplementary amount for a single individual was reduced by 4 per cent of income in excess of $6,956. The total amount available to an individual with an eligible dependant was reduced by 4 per cent of the filer's income minus the total of $6,956 and the dependant's adjusted income. The 1999 budget extended the benefit of this credit to all taxpayers through the basic personal and spousal/equivalent-to-spouse credits effective July 1, 1999.

Basic Personal Credit

Objective: This provision contributes to tax fairness by ensuring that no tax is paid on a basic amount of income. (Report of the Royal Commission on Taxation, 1966, vol. 3. Budget Speech, 1998.)

Until 1997, all taxpayers qualified for a basic personal credit equal to 17 per cent of $6,456. The 1998 budget increased the basic personal credit to 17 per cent of $6,956 effective July 1, 1998, and the 1999 budget increased it to 17 per cent of $7,131, effective July 1, 1999. The 2000 budget proposed full indexation effective January 1, 2000, which will increase the credit to 17 per cent of $7,231 for the 2000 taxation year.

Non-Taxation of Capital Dividends

Objective: This treatment contributes to the integration of the corporate and personal income tax systems in order to avoid double taxation.

Private corporations may distribute the exempt one-quarter of any realized capital gains accumulated in their "capital dividend account" to their shareholders in the form of a capital dividend. This dividend is non-taxable. This measure is reported as a memorandum item since it contributes to the integration of the taxation of corporate and personal income.

No data are available.

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Notes

1. The benefit increases for the CCTB base benefit and the NCB supplement for July 2000 include compensation amounts to cover the indexation for the period from January to June 2000. The compensation amounts are: $14 for the base benefit, $11 for the NCB supplement for the first child, $8 for the NCB supplement for the second child and $7 for the third and subsequent children. [return]

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