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Tax Expenditures and Evaluations - 2005 : 3
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Table 2
Corporate Income Tax Expenditures^*


	Estimates		Projections¹

	2000	2001	2002	2003	2004	2005	2006	2007

	($ millions)
Charities, Gifts and Contributions
Deductibility of charitable donations²	375	410	270	290	320	340	355	355
Deductibility of gifts of cultural property and ecologically sensitive land³	13	12	27	9	9	9	9	9
Deductibility of gifts to the Crown	S	S	S	S	S	S	S	S
Non-taxation of registered charities	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Non-taxation of other non-profit organizations (other than registered charities)	165	185	175	160	150	145	165	195
Political contribution tax credit	S	S	S	S	S	S	S	S
Culture
Canadian film or video production tax credit	180	175	185	195	205	215	225	240
Non-deductibility of advertising expenses in foreign media⁴	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Federal-Provincial Financing Arrangements
Income tax exemption for provincial and municipal corporations	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Transfer of income tax room to provinces⁵	1,160	1,145	1,065	1,210	1,375	1,480	1,540	1,550
Logging tax credit	35	17	23	18	19	20	20	21
General Business and Investment
Accelerated write-off of capital assets and resource-related expenditures	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Deferral through capital gains rollovers⁶	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Taxation of capital gains upon realization⁷	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Partial inclusion of capital gains⁸	2,340	4,095	1,990	2,010	2,045	2,125	2,240	2,345
Expensing of advertising costs⁹	57	63	40	40	40	40	40	40


	Estimates		Projections¹

	2000	2001	2002	2003	2004	2005	2006	2007

	($ millions)
Atlantic investment tax credit¹⁰
Earned and claimed in current year	82	105	89	100	105	110	115	120
Earned in current year but carried back to prior years	15	18	7	13	13	14	14	14
Claimed in current year but earned in prior years	170	220	220	200	205	210	210	215
Total expenditure	267	343	316	313	323	334	339	349
Scientific research and experimental development investment tax credit¹⁰
Earned and claimed in current year	1,490	1,745	1,785	1,830	1,870	1,915	1,965	2,010
Earned in current year but carried back to prior years	71	86	88	90	92	94	95	100
Claimed in current year but earned in prior years	545	490	505	515	525	540	550	565
Total expenditure	2,106	2,321	2,378	2,435	2,487	2,549	2,610	2,675
Write-off of capital assets before available for use	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Small Business
Deduction of allowable business investment losses¹¹	34	28	26	25	23	23	24	26
Interest on small business financing loans¹²	S	-	-	-	-	-	-	-
Low tax rate for small businesses¹³	3,225	3,185	3,220	3,040	3,010	3,040	3,185	3,210
Accelerated rate reduction for small businesses¹⁴	-	50	65	35	5	-	-	-
Non-taxation of provincial assistance for venture investments in small business	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
International
Exemption from Canadian income tax of income earned by non-residents from the operation of a ship or aircraft in international traffic	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Exemption from tax for international banking centres	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Exemptions from non-resident withholding tax¹⁵
Dividends	205	275	275	255	265	395	450	470
Interest
On deposits	495	375	170	105	105	110	115	120
On long-term corporate debt	130	195	130	165	165	175	180	190
Other¹⁶	380	220	340	435	330	355	365	385
Rents and royalties
Copyright royalties	23	22	24	30	28	30	32	34
Royalties for the use of, or right to use, other property	20	87	83	79	84	89	94	99
Research and development royalties	3	3	4	3	3	3	4	4
Natural resource royalties	S	S	S	S	S	S	S	S
Rents from real property	S	S	S	S	S	S	S	S
Management fees	48	42	44	49	50	53	56	58
Estate or trust income	33	11	21	6	14	14	15	16
Non-taxation of life insurance companies' world income	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Tax exemption on income of foreign affiliates of Canadian corporations	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.

	Estimates		Projections¹

	2000	2001	2002	2003	2004	2005	2006	2007

	($ millions)
Sectoral Measures
Farming
Cash-basis accounting	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Deferral of income from destruction of livestock	S	S	S	S	5	3	S	S
Deferral of income from grain sold through cash purchase tickets¹⁷	S	-15	15	S	S	S	S	S
Flexibility in inventory accounting	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Agricultural cooperatives¹⁸	-	-	-	-	-	-	30	30
Resource
Corporate mineral exploration tax credit¹⁹	-	-	-	26	32	58	55	64
Deductibility of contributions to a qualifying environmental trust	S	S	S	S	S	S	S	S
Earned depletion²⁰	40	43	21	34	37	39	35	32
Net impact of the resource allowance and the non-deductibility of Crown royalties and mining taxes²¹	415	295	435	595	615	640	300	-
Tax rate on resource income²²	-	-60	-215	-395	-575	-515	-255	-
Transitional arrangement for the Alberta Royalty Tax Credit	-	-	-	S	S	S	S	S
Other Sectors
Exemption from branch tax for transportation, communications, and iron ore mining corporations	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Film or video production services tax credit²³	62	80	75	120	125	130	135	145
Low tax rate for credit unions²⁴	53	75	79	69	65	70	72	73
Manufacturing and processing allowance²⁵	2,045	1,380	1,060	640	115	-	-	-
Surtax on the profits of tobacco manufacturers²⁶	-40	-80	-75	-75	-75	-75	-75	-75
Temporary tax on the capital of large deposit-taking institutions²⁷	-49	-	-	-	-	-	-	-

	Estimates		Projections¹

	2000	2001	2002	2003	2004	2005	2006	2007

	($ millions)
Other Measures
Deductibility of countervailing and anti-dumping duties	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Deductibility of earthquake reserves	6	7	5	5	5	5	6	6
Deferral through use of billed-basis accounting by professional corporations	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Holdback on progress payments to contractors²⁸	30	25	40	40	40	40	40	40
Interest credited to life insurance policies²⁹	90	66	68	76	78	81	83	86
Non-taxation of certain federal Crown corporations	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Memorandum Items
Mechanisms for the Integration of Personal and Corporate Income Tax
Investment corporation deduction³⁰	S	S	S	S	S	5	6	7
Refundable capital gains for investment corporations and mutual fund corporations³¹	690	520	35	60	305	320	335	350
Refundable taxes on investment income of private corporations³²
Additional Part I taxes³³	-615	-655	-690	-925	-1,200	-1,455	-1,620	-1,715
Part IV tax	-1,735	-2,110	-1,990	-2,225	-2,425	-2,555	-2,715	-2,845
Dividend refund	3,245	4,150	3,900	3,745	4,095	4,330	4,610	4,855
Net expenditure	895	1,385	1,220	595	470	320	275	295
Expenses Incurred to Earn Income
Deduction for intangible assets	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Deductibility of provincial royalties (joint venture payments) for the Syncrude project (remission order)³⁴	n.a.	n.a.	n.a.	n.a.	n.a.	-	-	-
Loss Offset Provisions
Capital loss carry-overs
Net capital losses carried back³⁵	190	420	730	180	125	85	85	85
Net capital losses applied to current year	475	445	230	205	205	215	225	235
Farm and fishing loss carry-overs	18	18	19	19	19	19	20	21
Non-capital loss carry-overs
Non-capital losses carried back	1,760	2,840	1,390	1,500	1,390	1,440	1,535	1,670
Non-capital losses applied to current year	4,790	3,480	3,625	3,670	3,875	3,765	3,790	3,790
Other
Aviation fuel excise tax rebate³⁶	n.a.	-	-	-	-	-	-	-
Non-resident-owned investment corporation (NRO) refund³⁷	280	280	415	125	-	-	-	-
Partial deduction of meals and entertainment expenses³⁸	355	340	345	340	340	355	375	390
Patronage dividend deduction³⁹	190	240	390	365	385	410	425	430

Notes: ¹ Unless otherwise indicated in the footnotes, changes in the projections from those in last year's edition of this document as well as variations from year to year result from changes in the explanatory economic variables upon which the projections are based. These changes and variations also reflect the availability of new data. Projections for 2002 and subsequent years reflect the impact of the reduction in the general corporate income tax rate to 25% on January 1, 2002, 23% on January 1, 2003 and 21% on January 1, 2004. The corporate surtax raised these rates by 1.12 percentage points. ² Donations in 2000 and 2001 were significantly higher than the historical average. Donations in the projection period are expected to return to their historical average. ³ Gifts in 2002 were significantly higher than the historical average. Gifts in 2003 and subsequent years are expected to return to their historical average. ⁴ This treatment should result in a negative tax expenditure since the deduction of an expense incurred to earn income is denied. Under the benchmark tax system, advertising expenses in foreign media incurred to gain or produce income from a business or property would be deductible whether targeted at foreign or domestic markets. ⁵ The drop in 2002 is explained by a significant reduction in corporate taxable income in that year. ⁶ This is a tax expenditure because under the benchmark system capital gains would be taxed on an accrual basis. ⁷ The tax deferral associated with taxation of capital gains upon disposition of property, rather than on an accrual basis, represents a deviation from the benchmark tax system and is therefore a tax expenditure. ⁸ The 2000 budget reduced the capital gains inclusion rate from three-quarters to two-thirds, effective February 28, 2000. The October 2000 Economic Statement and Budget Update further reduced the capital gains inclusion rate from two-thirds to one-half, effective October 18, 2000. The increase in this tax expenditure for 2001 reflects increased capital gains and the reduction in the capital gains inclusion rate, partially offset by a lower corporate income tax rate. The decline in 2002 reflects a projected decrease in capital gains as well as the reduction in the corporate income tax rate. ⁹ The amount of this tax expenditure can fluctuate significantly from year to year depending primarily upon advertising expenses claimed. Therefore, it is projected at its historical average. ¹⁰ In previous years, data limitations prevented the split between the scientific research and experimental development and Atlantic investment tax credit of investment tax credits earned in the current year but carried back to prior years and those claimed in the current year but earned in prior years. ¹¹ The amount of this tax expenditure can fluctuate from year to year depending upon the amount of current year losses and the availability of income against which to apply these losses. ¹² This measure was effective between February 25, 1992, and the end of 1994. The five-year maximum term for small business financing loans means, however, that the measure continued to create a tax expenditure up to 1999. Further, many firms reporting income in the 2000 taxation year earned a portion of that income in the 1999 calendar year, before the tax expenditure was eliminated. ¹³ The reduction in the tax expenditure from 2002 to 2004 results from reductions in the benchmark rate. Projections for 2003 and subsequent years reflect the impact of the 2003 budget's increase in the amount of income eligible for the small business deduction, and the 2004 budget's acceleration of this increase. ¹⁴ This measure was announced in the 2000 budget and became effective January 1, 2001. On that date the general federal corporate income tax rate on income between $200,000 and $300,000 earned by a Canadian-controlled private corporation from an active business carried on in Canada was reduced to 21%. The lower rate on the general income of small businesses and the change in the general federal corporate income tax rate effective January 1, 2001, only partially affect the estimate for tax year 2001 since many firms reporting income in the 2001 tax year earned a portion of that income in the 2000 calendar year, before the rate reductions were introduced. Subsequent declines in the tax expenditure are a result of the reduction in the general corporate income tax rate and the increase, announced in the 2003 budget, in the amount of income eligible for the small business deduction. This measure was effectively eliminated on January 1, 2004, when the general corporate income tax rate was reduced to 21%. Some tax expenditure occurs in 2004, however, as many firms reporting income in the 2004 tax year earned a portion of that income in the 2003 calendar year. The changes in the estimates for this year relative to last year are due to the availability of new data. ¹⁵ Estimates and projections were computed on the basis of an analysis of payments to non-residents and withholding tax collections available for 2000 to 2003. The variations in 2001, 2002 and 2003 reflect changes in the payments and exemptions as observed from newly available data. ¹⁶ This category includes interest paid to non-resident persons or organizations that would be exempt from income tax in Canada were they residents in Canada. Also included is interest paid under certain securities-lending arrangements exempt under subparagraph 212(1)(b)(xii) of the Income Tax Act, and interest exempt under certain other domestic and treaty provisions. ¹⁷ Projections are calculated using a historical average growth rate. 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 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. The tax expenditure estimates and projections are volatile over time since a small number of corporations are affected in a very specific sector. Estimates and projections are based on data obtained from Statistics Canada. ¹⁸ This measure will apply only to patronage dividends paid after 2005. See the "What's New in the 2005 Report" section at the beginning of this document for further details. ¹⁹ This tax credit was introduced in the 2003 budget and applies to 2003 and subsequent tax years. It was phased in starting at 5% in 2003, 7% in 2004 and 10% in subsequent years. ²⁰ Additions to earned depletion pools were eliminated as of January 1, 1990. Determination of the tax expenditure reflects the projected use of existing earned depletion pools. ²¹ The tax expenditure is calculated as the revenue cost of the resource allowance net of non-deductible Crown royalties and provincial mining taxes. Over a five-year period beginning in 2003, the resource allowance is being phased out and a deduction for Crown royalties and mining taxes phased in so that, by 2007, the tax expenditure is effectively reduced to zero. See the technical paper "Improving the Income Taxation of the Resource Sector in Canada," Department of Finance Canada, March 2003, for further details. The large increases relative to last year reflect the availability of new data and higher oil and gas prices. ²² Budget 2003 announced an extension to resource income of the lower general corporate tax rate, to be phased in over five years beginning in 2003. By 2007, when the resource rate equals the general rate, the tax expenditure amount will be reduced to zero. See the technical paper "Improving the Income Taxation of the Resource Sector in Canada," Department of Finance Canada, March 2003. The increases relative to last year reflect the availability of new data and higher oil and gas prices. ²³ Projections for 2003 and subsequent years reflect the impact of the 2003 budget increase in the rate of the credit from 11% to 16%. ²⁴ The tax expenditure is higher in 2001 and 2002 due to higher taxable income of credit unions. After 2002, projections are lower due to reductions in the general corporate income tax rate. ²⁵ Although this tax expenditure was eliminated on January 1, 2004, when the general corporate income tax rate was reduced to 21%, many firms reporting income in the 2004 taxation year earned a portion of that income in the 2003 calendar year. ²⁶ The increase in this tax expenditure from 2000 to 2002 partly results from the increase in the tobacco manufacturers' surtax from 40% to 50% of the Part I tax on profits from tobacco manufacturing, effective April 6, 2001. ²⁷ This measure expired on October 31, 2000. ²⁸ The amount of this tax expenditure can fluctuate significantly from year to year depending primarily upon the level of construction activity. Therefore, it is projected at its historical average. ²⁹ The tax expenditure is lower in 2001 and 2002 because of personal income tax reductions. The increase in subsequent years is due to higher investment income. ³⁰ This measure allows a public corporation that qualifies as an investment corporation to benefit from elements of the integration system, which are usually available only to private corporations. ³¹ The substantially lower levels in 2002 and 2003 are due to a decline in capital gains distributions. ³² Refundable tax provisions of the corporate income tax system provide some integration of the corporate and personal income tax regimes. For more information about these measures, please refer to the document Tax Expenditures: Notes to the Estimates/Projections (2004) available on the Department of Finance Canada website at www.fin.gc.ca. ³³ This item includes the additional 6⅔% refundable tax on investment income as well as, for years after 2000, the Part I tax paid on investment income in excess of the benchmark rate. The increase after 2001 results from the increase in the difference between the Part I tax on investment income and the benchmark rate. ³⁴ The cost of the Syncrude Remission Order ("Order Respecting the Remission of Income Tax for the Syncrude Project" P.C. 1976-1026, May 6, 1976 [C.R.C. 1978 Vol. VII, c. 794]) is published annually in the Public Accounts of Canada (ISBN 0-660-177792-7). The order expired on December 31, 2003. ³⁵ The increases in 2001 and 2002 reflect, for the most part, the capital losses recorded in these two years resulting from declines in the market value of technology stocks. ³⁶ This measure, which was effective for calendar years 1997 to 2000, provided an excise tax rebate on the aviation fuel used by airline companies. The rebate was limited to $20 million per year per associated group of companies. In order to receive a rebate, a company had to agree to reduce its income tax losses by $10 for every $1 of rebate. ³⁷ Figures for 2000 to 2003 are estimates. This measure was repealed in 2000. To allow for an orderly restructuring of their operations, however, existing NROs were entitled to retain their status until the end of their last tax year that began before 2003. The sharp decline in 2003 relative to last year's estimate reflects much lower than projected total refunds. ³⁸ Fifty per cent of these expenses are deductible for income tax purposes, given that a portion of meal and entertainment expenses is incurred to earn income and is therefore a legitimate business expense, while the remaining portion reflects personal consumption. The estimates and projections provided reflect the additional tax revenue that would be received if no deduction were allowed. ³⁹ Patronage dividends are somewhat discretionary and vary from year to year. The projections are higher after 2001 due to larger patronage dividend distributions.

Table 3
GST Tax Expenditures^*


	Estimates				Projections

	2000	2001	2002	2003	2004	2005	2006	2007

	($ millions)
Aboriginal Self-Government
Refunds for Aboriginal self-government^1,2	S	S	S	S	S	S	S	S
Business
Exemption³ for domestic financial services	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Exemption for ferry, road and bridge tolls⁴	S	S	S	S	S	S	S	S
Exemption and rebate for legal aid services	20	25	25	25	30	30	30	30
Non-taxability of certain importations⁵	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Rebates for foreign visitors⁶	80	85	85	65	75	75	80	85
Small suppliers' threshold	145	160	170	175	190	200	205	215
Zero-rating⁷ of agriculture and fish products and purchases	S	S	S	S	S	S	S	S
Zero-rating of certain purchases made by exporters	S	S	S	S	S	S	S	S
Charities and Non-Profit Organizations
Exemption for certain supplies made by non-profit organizations	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Rebates for registered charities¹	215	240	250	265	280	295	310	325
Rebates for non-profit organizations¹	55	60	60	65	70	70	75	80
Education
Exemption for education services (tuition)⁴	360	375	400	435	460	485	515	545
Rebates for book purchases made by qualifying public institutions	40	40	40	40	45	50	60	75
Rebates for colleges¹	65	80	85	85	90	95	100	105
Rebates for schools¹	350	375	380	380	395	415	440	460
Rebates for universities¹	150	180	205	240	255	265	280	295


	Estimates				Projections

	2000	2001	2002	2003	2004	2005	2006	2007

	($ millions)
Health Care
Exemption for health care services⁴	530	535	570	630	655	695	745	805
Rebates for hospitals¹	340	390	395	425	445	505	540	565
Zero-rating of medical devices⁴	125	140	150	160	170	175	190	200
Zero-rating of prescription drugs⁴	460	500	545	585	615	645	685	730
Households
Exemption for child care and personal services⁴	135	135	135	135	140	150	160	170
GST/HST credit⁸	2,965	3,005	3,070	3,180	3,310	3,420	3,495	3,565
Zero-rating of basic groceries⁴	3,230	3,415	3,565	3,700	3,880	4,090	4,335	4,605
Housing
Exemption for sales of used residential housing and other personal-use real property	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.	n.a.
Exemption for residential rent (long-term)⁴	1,295	1,280	1,320	1,375	1,430	1,510	1,625	1,755
Rebates for new housing⁹	590	640	790	845	970	1,015	945	920
Rebates for new residential rental property¹⁰	25	40	45	50	55	60	55	55
Municipalities
Exemption for municipal transit⁴	90	95	105	105	110	115	120	130
Exemption for water and basic garbage collection services⁴	145	150	160	165	175	180	195	205
Rebates for municipalities^1,11	645	700	725	805	1,475	1,540	1,635	1,710
Memorandum Items
Recognition of Expenses Incurred to Earn Income
Rebates to employees and partners¹²	105	105	110	110	110	110	110	115
Other
Exemption for quick method accounting	190	200	205	220	230	245	255	265
Partial input tax credits for meals and entertainment expenses¹³	115	120	125	130	140	145	150	160

Notes: ¹ The public sector body rebates are based on Canada Revenue Agency administrative data for the years up to and including 2003. The projected values for 2004 onwards are based on the Sales Tax Model of the Department of Finance Canada. ² These refunds are paid to Aboriginal governments that have an agreement providing for a GST/HST refund for goods and services acquired for self-government activities. ³ Final consumers and businesses pay no tax on exempt goods and services. Vendors, however, are not entitled to claim input tax credits to recover the GST/HST paid on inputs to these products. ⁴ The Sales Tax Model used to generate these estimates is based on the 2001 national input-output tables from Statistics Canada and the latest release of the National Income and Expenditure Accounts. ⁵ Certain importations are tax-free including, for example, duty-free personal importations by Canadian travellers. ⁶ The methodology for estimating this tax expenditure was derived as part of the review of the Visitors' Rebate Program conducted during 1997 and has been updated to reflect more recent information. The reduction in rebates for foreign visitors, beginning in 2003, reflects a reduction in the number of foreign visitors to Canada. ⁷ Final consumers and businesses pay no tax on zero-rated goods and services. Vendors of zero-rated products are entitled to claim input tax credits to recover the GST/HST paid on inputs to these products. ⁸ Based on personal income tax data. ⁹ Estimates for the housing rebate are based on information provided by Statistics Canada. ¹⁰ The new residential rental property rebate was introduced in the 2000 budget for new construction or substantial renovations commencing after February 27, 2000. ¹¹ The rebate rate for municipalities increased from 57.14% to 100% effective February 1, 2004. ¹² This item includes the apprentice vehicle mechanics' tools deduction. ¹³ Based on tax expenditure estimates and projections reported for the personal and corporate income tax systems.

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