Archived - Tax Expenditures and Evaluations 2007 : 1

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Preface

Since 2000 the tax expenditure report has been separated into two documents. This document, Tax Expenditures and Evaluations, is published on an annual basis. It provides estimates and projections for broadly defined tax expenditures as well as evaluations and descriptive papers addressing specific tax measures. This year’s edition includes an analytical paper entitled "Corporate Income Taxes and Investment: Evidence From the 2001–2004 Rate Reductions."

The companion document, Tax Expenditures: Notes to the Estimates/Projections, was published in 2004. It is a reference document for readers who wish to know more about how the estimates and projections are calculated and who want descriptions of, or information on the objectives of, particular tax expenditures. New tax expenditures are described in the relevant section of this document.

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Part 1
Tax Expenditures:
Estimates and Projections

Introduction

The principal function of the tax system is to raise the revenues necessary to fund government expenditures that reflect society’s priorities. The tax system can also be used directly to achieve public policy objectives through the application of special tax rates, exemptions, deductions, rebates, deferrals and credits that affect the level and distribution of tax. These measures are often described as "tax expenditures" because they achieve policy objectives at the cost of lower tax revenue.

To identify and estimate tax expenditures, it is necessary to establish a "benchmark" tax structure that applies the relevant tax rates to a broadly defined tax base—e.g. personal income, business income or consumption. Tax expenditures are then defined as deviations from this benchmark. Reasonable differences of opinion exist about what should be considered a normal part of the tax system and hence about what should be considered a tax expenditure. For example, a deduction for expenses incurred in earning income is generally considered as part of the benchmark and thus not as a tax expenditure. But in some cases the deduction may confer some personal benefit, making its classification ambiguous.

This report takes a broad approach and includes estimates and projections of the revenue loss associated with all but the most fundamental structural elements of the tax system, such as the progressive personal income tax rate structure. This includes not only measures that may reasonably be regarded as tax expenditures but also other measures that may be considered part of the benchmark tax system. The latter are listed separately under "memorandum items." For instance, the dividend tax credit is listed under this heading because its purpose is to reduce or eliminate the double taxation of income earned by corporations and distributed to individuals through dividends. Also included under this heading are measures for which there may be some debate over whether they should be considered tax expenditures, or where data limitations do not permit a separation of the tax expenditure and benchmark components of the measure. This approach provides information on a full range of measures.

Caveats

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

• The estimates and projections are intended to indicate the potential revenue gain that would be realized by removing individual tax measures. They are developed assuming that the underlying tax base would not be affected by removal of the measure. However, this is an assumption that is unlikely to be true in practice as the behaviour of economic agents, overall economic activity and other government policies could change along with the specific tax provision.
• The cost of each tax measure is determined separately, assuming that all other tax provisions remain unchanged. Many of the tax expenditures do, however, interact with each other such that the impact of several tax provisions at once cannot generally be calculated by adding up the estimates and projections for each provision.
• The federal and provincial income tax systems interact with each other to various degrees. As a result, changes to tax expenditures in the federal system may have consequences for provincial tax revenues. In this publication, however, any such provincial effects are not taken into account—that is, the tax expenditure estimates and projections address strictly the federal tax system and federal tax revenue.
• In the case of the harmonized sales tax in effect in Nova Scotia, New Brunswick, and Newfoundland and Labrador, only the federal cost of the tax expenditures is reported.

The tax expenditure estimates and projections presented in this document are developed using the latest available taxation data. Revisions to the underlying data as well as improvements to the methodology can result in substantial changes to the value of a given tax expenditure in successive publications. In addition, estimates and projections for some tax measures, such as the partial inclusion of capital gains, are particularly sensitive to economic parameters and hence may also differ significantly from one publication to the next.

What’s New in the 2007 Report

A number of new tax measures were introduced and others modified in Budget 2007 and the 2007 Economic Statement. The changes introduced are described below.

Personal Income Tax

Personal Income Tax Rates

The 2007 Economic Statement reduced the lowest personal income tax rate, on incomes up to $37,178, to 15 per cent from 15.5 per cent. This rate applies effective January 1, 2007, with the upper income limit for application indexed for taxation years subsequent to 2007. The rate will also generally be used to calculate non-refundable tax credits and the alternative minimum tax for the 2007 and subsequent taxation years.

Basic Personal Amount

The 2007 Economic Statement increased the basic personal amount to $9,600 for 2007 and 2008, with a further increase to $10,100 in 2009.

Spousal and Other Amounts

Budget 2007 announced an increase in the amount upon which the spouse or common-law partner and eligible dependant credits are calculated to match the basic personal amount, with a corresponding elimination of the threshold above which the dependant’s net income must be taken into account. These changes took effect beginning in 2007. For the 2008 and subsequent taxation years, these personal credit amounts will be increased in accordance with any changes legislated for the basic personal amount.

Child Tax Credit

Objective: To reduce the tax burden on families.

Budget 2007 introduced a new non-refundable child tax credit for parents based on an amount of $2,000 (indexed) for each child under the age of 18 years at the end of a taxation year. The tax credit is calculated by reference to the lowest personal income tax rate for the taxation year (i.e. 15 per cent in 2007). This new tax credit took effect beginning in 2007.

Registered Education Savings Plans

Budget 2007 announced changes that will encourage greater savings in registered education savings plans (RESPs):

• Eliminating the $4,000 limit on annual RESP contributions.
• Increasing the lifetime limit on RESP contributions to $50,000 from $42,000.
• Increasing the maximum annual amount of Canada Education Savings Grant that can be paid in any year to $500 from $400 (and to $1,000 from $800 if there is unused grant room from low contributions made in previous years).

As well, Budget 2007 improved access to RESP assistance for part-time post-secondary students by allowing these students to access up to $2,500 of their income and grants for each 13-week semester of study. Students are required to spend at least 12 hours per month on courses, in a course lasting at least 3 consecutive weeks. Previously, students were required to spend at least 10 hours per week on courses, in a course lasting at least 3 consecutive weeks.

Full Exemption for Elementary and Secondary School
Scholarships and Bursaries

Budget 2006 fully exempted from federal income tax scholarship, fellowship and bursary income received by post-secondary students. Budget 2007 extended this treatment to elementary and secondary school students.

Public Transit Tax Credit

Budget 2007 extended the public transit tax credit to electronic fare cards and weekly passes when used on an ongoing basis. The cost of an electronic fare card is eligible for the credit if the cost relates to the use of public transit for at least 32 one-way trips during an uninterrupted period not exceeding 31 days. Weekly passes are eligible where the combination of these purchases provides an individual with the right to at least 20 days of unlimited transit use within a 28-day period.

Working Income Tax Benefit

Objective: To improve incentives to work for low-income Canadians and to lower the welfare wall.

Budget 2007 implemented a $550-million Working Income Tax Benefit (WITB). The WITB is a refundable tax credit that will supplement the earnings of low-income workers to encourage labour force participation. It will be generally available to individuals aged 19 and older, not attending full-time school.

Effective in the 2007 taxation year, the WITB will provide up to $1,000 for couples and single parents and up to $500 for single individuals. In addition, a supplement of up to $250 per year will be available for low-income working Canadians with disabilities who are eligible for the disability tax credit. For the 2008 and future taxation years, families will be able to apply for advance payment of one-half of their estimated annual entitlements.

Provincial and territorial governments can propose specific changes to the design of the WITB to the extent that they are consistent with the following principles:

• They build on actions taken by the province or territory to improve work incentives for low-income individuals and families.
• They are cost-neutral to the federal government.
• They provide for a minimum benefit level for all WITB recipients.
• They preserve harmonization of the WITB with existing federal programs.

Registered Disability Savings Plan

Objective: To help parents and others save for the long-term financial security of a child with a severe disability.

Budget 2007 introduced a new Registered Disability Savings Plan (RDSP). RDSPs will be available commencing in 2008 and will be based generally on the existing RESP design. An individual eligible for the disability tax credit (DTC), their parent or other legal representative will be allowed to establish an RDSP. The DTC-eligible individual will be the plan beneficiary.

Parents, beneficiaries and others wishing to save will be able to contribute to an RDSP. Contributions to an RDSP for a beneficiary will be limited to a lifetime maximum of $200,000. Contributions will be permitted up until the end of the year in which a beneficiary attains 59 years of age.

Annual RDSP contributions will attract Canada Disability Savings Grants (CDSGs) at matching rates of 100, 200 or 300 per cent, depending on family income and the amount contributed, up to a maximum lifetime CDSG limit of $70,000. Canada Disability Savings Bonds (CDSBs) of up to $1,000 per year will be provided to RDSPs established by low- and modest-income families, up to a maximum lifetime CDSB limit of $20,000, and will not be contingent on contributions. An RDSP will be eligible to receive CDSGs and CDSBs up until the end of the year in which the plan beneficiary attains 49 years of age.

Contributions to an RDSP will not be deductible and will not be included in income when paid out of an RDSP. The investment income earned in the plan will accumulate tax-free. CDSGs, CDSBs and investment income earned in the plan will be included in the beneficiary’s income for tax purposes when paid out of an RDSP. Only the plan beneficiary, or the beneficiary’s legal representative, will be permitted to receive payments from an RDSP. Payments from an RDSP will be required to commence by the end of the year in which the beneficiary attains 60 years of age.

Children’s Fitness Tax Credit—Enhancements for Children With Disabilities

Budget 2007 increased the age limit for children eligible for the disability tax credit (DTC) from under 16 to under 18 years of age at the beginning of the year for the purposes of the children’s fitness tax credit.

A separate $500 non-refundable amount for DTC-eligible children has been introduced, subject to spending a minimum of $100 on registration or membership fees for a prescribed program of physical activity. This additional amount provides general recognition of the extra costs that children with disabilities encounter in becoming involved in programs of physical activity, notably with regard to specialized equipment, transportation and attendant care.

As well, for DTC-eligible children, the requirements for a program to be a prescribed program of physical activity have been relaxed to cover a broader range of programs more suited to the challenges experienced by these children.

Eliminating Capital Gains Tax on Charitable Donations
to Private Foundations

Budget 2007 eliminated taxation of capital gains arising from donations of publicly listed securities to private foundations.

In addition, when an arm’s length employee acquires a publicly listed security under an option granted by the employer and donates the security to a public charity within 30 days, the employee may be eligible for a special deduction, the general effect of which is to exempt the associated employment benefit from tax. Budget 2007 extends this provision to qualifying donations to private foundations.

This zero inclusion rate for gains and income in respect of publicly listed securities applies to gifts made on or after March 19, 2007.

Mineral Exploration Tax Credit for Flow-Through Share Investors

In October 2000, a 15-per-cent tax credit was introduced to help moderate the impact of a global downturn in mineral exploration on mining communities by promoting exploration. This tax incentive, available to individuals investing in flow-through shares used to finance exploration, was scheduled to expire at the end of March 2007, after three extensions.

Budget 2007 extended eligibility of the mineral exploration tax credit to flow-through share agreements entered into on or before March 31, 2008. The one-year "look-back" rule will allow funds raised with the benefit of the credit in 2008, for example, to be spent on eligible exploration activity up until the end of 2009.

Increasing the Lifetime Capital Gains Exemption

Budget 2007 increased the lifetime capital gains exemption to $750,000 from $500,000. This new limit applies to dispositions on or after March 19, 2007, of qualified farm and fishing property and qualified small business corporation shares.

Increasing the Age Limit for Maturing Registered Pension Plans and Registered Retirement Savings Plans

Budget 2007 increased the age by which an individual must convert a registered retirement savings plan to a registered retirement income fund and begin receiving a pension from a registered pension plan from 69 to 71.

Increased Deductibility of Meal Expenses for Long-Haul Truck Drivers

Objective: To provide better recognition of the significant meal expenses incurred by long-haul truck drivers while on the road.

The deductibility, for personal income tax purposes, of meals consumed on the road by long-haul truck drivers is increasing from 50 per cent to 80 per cent over a five-year phase-in period beginning March 19, 2007. This measure also affects corporate income tax revenues as it applies to employers that pay, or reimburse, such costs incurred by long-haul truck drivers that they employ. The measure affects goods and services tax revenues as well, because the deductible portion is eligible for an input tax credit. Projections for the relevant personal, corporate and goods and services tax expenditures reflect the increased deductibility.

Corporate Income Tax

Investment Tax Credit for Child Care Spaces

Objective: To encourage businesses to create licensed child care spaces for the children of their employees and, potentially, for children in the surrounding community.

In order to encourage businesses to create licensed child care spaces for the children of their employees and, potentially, for children in the surrounding community, Budget 2007 put in place a new investment tax credit for child care spaces, effective March 19, 2007. Eligible businesses receive a non-refundable investment tax credit equal to 25 per cent of eligible expenditures, to a maximum credit of $10,000 per child care space created. Eligible expenditures include the cost or incremental cost of the building in which the child care facility is located, as well as the cost of furniture, appliances, computer equipment, audio-visual equipment, playground structures and playground equipment. Initial start-up costs such as landscaping costs for the children’s playground, architect’s fees, building permit costs and costs to acquire children’s educational materials are also eligible.

Reduction in the General Corporate Income Tax Rate

The general corporate income tax rate will be reduced to 15 per cent by 2012. The rate will be reduced to 19.5 per cent in 2008, 19 per cent in 2009, 18 per cent in 2010, 16.5 per cent in 2011 and 15 per cent in 2012 and thereafter. The rate reductions will apply to income that is taxed at the general corporate income tax rate.

Goods and Services Tax

Reduction in the Goods and Services Tax Rate

The 2007 Economic Statement reduced the goods and services tax rate by 1 percentage point, to 5 per cent, effective January 1, 2008. The tax expenditure estimates reflect this reduction.

Foreign Convention and Tour Incentive Program

As part of a package of specific spending restraint measures announced on September 25, 2006, the Government of Canada proposed the elimination of the Visitor Rebate Program, effective April 1, 2007. Budget 2007 introduced the Foreign Convention and Tour Incentive Program (FCTIP), effective April 1, 2007. The FCTIP provides goods and services tax/harmonized sales tax relief in respect of the accommodation portion of tour packages for non-residents and certain property and services used in the course of conventions held in Canada.

The Tax Expenditures

Tables 1 to 3 provide tax expenditure values for personal income tax, corporate income tax and the goods and services tax for the years 2002 to 2009.

Estimates and projections are developed using the methodology set out in Chapter 1 of Tax Expenditures: Notes to the Estimates/Projections.^[1] The economic variables used to develop the projections are based on the average of private sector forecasts presented in the 2007 Economic Statement.

The tax expenditures are grouped according to functional categories. This grouping is provided solely for presentational purposes and is not intended to reflect underlying policy considerations.

All estimates and projections are reported in millions of dollars. The letter "S" ("small") indicates that the cost is less than $2.5 million, "n.a." signifies that data is not available to support a meaningful estimate/projection, and a dash means that the tax expenditure is not in effect. The inclusion in the report of items for which estimates and projections are not available is warranted given that the report is designed to provide information on measures included in the tax system even if it is not always possible to provide their revenue impacts. Work is continuing to obtain quantitative estimates and projections where possible.
 

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Note:

1. Available on the Department of Finance website at www.fin.gc.ca.

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