Archived - Tax Expenditures and Evaluations 2014: part 1

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The Department of Finance first reported on federal tax expenditures in December 1979, and has published estimates and projections of tax expenditures for personal and corporate income taxes as well as for the Goods and Services Tax (GST) since 1994. Beginning in 2000, the tax expenditure report has been separated into two documents. This document, Tax Expenditures and Evaluations, is published annually. It provides estimates and projections for broadly defined tax expenditures as well as evaluations and analytical papers addressing specific tax measures. This year’s edition includes an evaluation of the Charitable Donation Tax Credit as well as a study of interprovincial tax planning by corporate groups in Canada.

The second document, Tax Expenditures: Notes to the Estimates/Projections, is a reference document which presents the objective of each tax expenditure and explains how the estimates and projections are calculated. This document is published periodically and the 2010 edition is available on the Department of Finance website.

The principal function of the tax system is to raise the revenues necessary to fund government expenditures. The tax system can also be used directly to achieve public policy objectives through the application of special measures such as low tax rates, exemptions, deductions, deferrals and credits. 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 part of the benchmark tax system and hence about what should be considered a tax expenditure.

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 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.

A more detailed discussion of how the estimates and projections of the tax expenditures are calculated is available in the 2010 edition of Tax Expenditures: Notes to the Estimates/Projections.

Care must be taken in interpreting the estimates and projections of tax expenditures presented in this document 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 in some cases, as the behaviour of beneficiaries of tax expenditures, 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 varying 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.
• 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.

New tax measures were introduced and others modified in Budget 2014. Changes affecting estimates and projections of tax expenditures are described below.

Adoption Expense Tax Credit

The Adoption Expense Tax Credit is a 15% non-refundable tax credit that allows adoptive parents to claim eligible adoption expenses relating to the completed adoption of a child under the age of 18, up to a maximum of $11,774 in expenses per child for 2014. To provide further tax recognition of adoption-related expenses such as adoption agency fees and legal fees, Budget 2014 increased the maximum amount of eligible expenses to $15,000 per child. This measure applies to adoptions finalized after 2013. Normal indexation will apply to the new maximum amount for taxation years after 2014.

Children’s Fitness Tax Credit

As announced on October 9, 2014, the Government enhanced the Children’s Fitness Tax Credit by increasing the maximum amount that may be claimed under the credit to $1,000 from $500, and by making the credit refundable. The doubling of the maximum amount is effective for the 2014 and subsequent taxation years, and the credit will be made refundable effective for the 2015 and subsequent taxation years.

Donations of Ecologically Sensitive Land

The Ecological Gifts Program provides a way for Canadians with ecologically sensitive land to contribute to the protection of Canada’s environmental heritage. Under this program, certain donations of ecologically sensitive land, or easements, covenants and servitudes on such land, are eligible for special tax assistance. Individual donors are eligible for a Charitable Donation Tax Credit, while corporate donors are eligible for a Charitable Donation Deduction. As with other charitable donations, amounts not claimed for a year may be carried forward for up to five years. In addition, capital gains associated with the donation of ecologically sensitive land are exempt from tax. To permit donors to take greater advantage of tax assistance and thereby encourage larger donations, Budget 2014 extended to ten years the carry-forward period for donations of ecologically sensitive land, or easements, covenants and servitudes on such land. This measure applies to donations made on or after February 11, 2014.

Donations of Certified Cultural Property

For the purpose of calculating a Charitable Donation Tax Credit (for individuals) or a Charitable Donation Deduction (for corporations), the value of a gift of property is deemed to be no greater than its cost to the donor if, generally, the donor acquired the property as part of a tax shelter gifting arrangement or held the property for a short period. Gifts of certified cultural property are exempt from this rule and also benefit from a capital gains exemption. As a result, Canadians are encouraged to donate culturally significant property to designated institutions and public authorities to help preserve Canada’s national heritage.

The donation of certified cultural property could be a target for abuse by tax shelter promoters because of the combination of its favourable tax treatment, inherent uncertainties in appraising the value of art and artifacts, and the exemption from the rule that deems the value of a gift to be no greater than its cost to the donor in certain circumstances. Budget 2014 removed, for certified cultural property acquired as part of a tax shelter gifting arrangement, the exemption from the rule that deems the value of a gift to be no greater than its cost to the donor. Other donations of certified cultural property are not affected by this measure. This measure applies to donations made on or after February 11, 2014.

Medical Expense Tax Credit

The Medical Expense Tax Credit recognizes the effect of above-average medical and disability-related expenses on a taxpayer’s ability to pay income tax. The credit provides federal income tax relief equal to 15% of eligible medical and disability-related expenses in excess of a threshold that is the lesser of 3% of the taxpayer’s net income and an indexed dollar amount ($2,171 in 2014). Budget 2014 expanded the list of eligible expenses under the credit to include costs associated with service animals specifically trained to assist individuals with severe diabetes, such as diabetes alert dogs, as well as costs for the design of an individualized therapy plan. These measures apply to expenses incurred after 2013.

Search and Rescue Volunteers Tax Credit

In recognition of the important role played by search and rescue volunteers in contributing to the security and safety of Canadians, Budget 2014 introduced a Search and Rescue Volunteers Tax Credit to allow eligible ground, air and marine search and rescue volunteers to claim a 15% non-refundable tax credit based on an amount of $3,000. This measure applies to the 2014 and subsequent taxation years.

Tax Deferral for Farmers

Farmers who dispose of breeding livestock due to drought, flood or excess moisture conditions existing in prescribed regions in a given year are permitted to defer up to 90% of the sale proceeds from inclusion in their taxable income until the year following the sale, or a later year if the conditions persist. This allows farmers to use the sale proceeds to fund the acquisition of replacement livestock. The inclusion in taxable income in the year of replacement will be largely offset by the cost of the replacement livestock.

The tax deferral is targeted at breeding livestock because its sale is akin to disposing of long-term productive assets. Budget 2014 extended this tax deferral to bees, and to all types of horses that are over 12 months of age, that are kept for breeding. This measure applies to the 2014 and subsequent taxation years.

Family Package

On October 30, 2014, the Government proposed new measures that would provide tax relief or deliver benefits to Canadian families.¹ The proposed measures include:

• The Family Tax Cut, a federal tax credit that would allow a higher-income spouse to, in effect, transfer up to $50,000 of taxable income to a spouse in a lower tax bracket. The credit would provide tax relief—capped at $2,000—for couples with children under the age of 18, effective for the 2014 and subsequent taxation years. Tax relief would be calculated on the basis of the difference in tax before and after the effective transfer of income.
• An enhancement of the Universal Child Care Benefit that would provide an increased benefit of $160 per month for children under the age of 6 (up from $100 per month) and a new benefit of $60 per month for children aged 6 through 17, effective January 1, 2015. Enhanced payments for the Universal Child Care Benefit would take effect as of January 2015 and would begin to be reflected in monthly payments to recipients in July 2015. The July 2015 payment would include up to six months of benefits to cover the January to June 2015 period. It is proposed that the treatment of the existing Universal Child Care Benefit for tax and income-tested benefit purposes be extended to the enhanced Universal Child Care Benefit. This measure would affect the tax expenditure in respect of the inclusion of the Universal Child Care Benefit in the income of an eligible dependant for the 2015 and subsequent taxation years.
• The repeal of the Child Tax Credit for the 2015 and subsequent taxation years since it is proposed that the enhanced Universal Child Care Benefit replace the existing Child Tax Credit. Introduced in Budget 2007, the Child Tax Credit is a non-refundable tax credit based on a fixed amount per child under the age of 18 years ($2,255 in 2014, which amounts to tax relief of up to $338 per child).
• A $1,000 increase in the maximum dollar amounts that can be claimed under the Child Care Expense Deduction, effective for the 2015 taxation year. This means that the maximum amount would increase to $8,000 from $7,000 per child under age 7, to $5,000 from $4,000 for each child aged 7 through 16 (and infirm dependent children over age 16), and to $11,000 from $10,000 for children who are eligible for the Disability Tax Credit.

No changes to the Canada Child Tax Benefit have been proposed as part of this announcement. Eligible families will continue to receive monthly Canada Child Tax Benefit payments.

Mineral Exploration Tax Credit for Flow-Through Share Investors

The Mineral Exploration Tax Credit is a reduction in tax, available to individuals who invest in flow-through shares, equal to 15% of specified mineral exploration expenses incurred in Canada and transferred to flow-through share investors. The credit was introduced on a temporary basis in 2000 and has generally been extended on an annual basis since then. Budget 2014 extended eligibility for the credit for an additional year to flow-through share agreements entered into on or before March 31, 2015. Under the one-year “look-back” rule, funds raised with the benefit of the credit in 2015, for example, can be spent on eligible exploration up to the end of 2016.

Exemption for Hospital Parking

On January 24, 2014, the Government announced Goods and Services Tax/Harmonized Sales Tax (GST/HST) relief for hospital parking for patients and visitors in order to help reduce the cost burden on patients accessing the health care they need and to support their families and friends.

Designing Training for Individuals With a Disorder or Disability

Budget 2014 expanded the current GST/HST exemption for training specially designed to help individuals cope with a disorder or disability to include services of designing such training, such as developing a training plan or an individualized therapy plan. The cost associated with this relief is included in the category “Exemption for health care services.”

Acupuncturists’ and Naturopathic Doctors’ Services

Budget 2014 added acupuncturists and naturopathic doctors to the list of health care practitioners whose professional services are exempt from the GST/HST. The cost associated with this relief is included in the category “Exemption for health care services.”

Eyewear Specially Designed to Electronically Enhance the Vision of Individuals With Vision Impairment

Budget 2014 added eyewear specially designed to treat or correct a defect of vision by electronic means to the list of medical and assistive devices that are zero-rated under the GST/HST. The cost associated with this relief is included in the category “Zero-rating of medical devices.”

Tables 1 to 3 provide tax expenditure values for personal income tax, corporate income tax and the GST for the years 2009 to 2014. Values for the years 2009 to 2012 are generally based on tax data supplied by the Canada Revenue Agency, or are calculated from data supplied by Statistics Canada and other government departments and agencies. Values for the 2013 and 2014 projections are usually determined from the historical relationship between a tax expenditure and relevant economic variables. These economic variables are generally based on the forecast presented in the November 12, 2014 Update of Economic and Fiscal Projections. See Chapter 1 of the 2010 edition of Tax Expenditures: Notes to the Estimates/Projections for additional details on the methodology.

Tax expenditures in each table 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 absolute value of the tax expenditure is less than $2.5 million, “n.a.” signifies that data are not available to support a meaningful estimate or projection, a dash means that the tax expenditure is not in effect, and the letter “X” indicates that the estimate or projection is not published for confidentiality reasons. The inclusion in the report of items for which estimates and projections are not available reflects the intention 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.

Changes in the estimates and projections from those in last year’s report, as well as variations from year to year, may result from a number of factors, including legislative changes, changes in the economic variables affecting the tax expenditures, the availability of new data, and methodological improvements. Legislative changes affecting the estimates and projections are described in Tax Expenditures: Notes to the Estimates/Projections, in the “What’s New in the 2014 Report” section of this publication and in the notes to the tables.

Broad-based changes to the tax system may affect tax expenditure estimates and projections to the extent that these changes modify the effective tax rates otherwise faced by taxpayers under the benchmark tax system. A reduction (increase) in the effective tax rate under the benchmark tax system will generally result in lower (higher) tax expenditure estimates and projections. During the period covered by this publication, the recent reductions in the general corporate income tax rate (from 19% to 18% on January 1, 2010, 16.5% on January 1, 2011, and 15% on January 1, 2012) had the effect of reducing the estimates and projections for most corporate income tax expenditures, with a few exceptions such as investment tax credits.

¹ At the time of production of this report, these measures were still subject to Parliamentary approval.

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