Archived - Report on Federal Tax Expenditures - Concepts, Estimates and Evaluations 2016: part 2

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Part 2 presents the estimates of the fiscal cost of federal tax expenditures for the years 2010 to 2017. It presents estimates for a wide range of tax expenditures, measures that are not considered tax expenditures (i.e., measures that are considered part of the benchmark tax system) and refundable tax credits that are classified as transfer payments. The estimates are followed by a second table that presents background statistics on total tax revenues by tax base, as well as some other useful statistics, such as the number of filers and tax paid by income tax bracket. Finally, key changes that have been made to tax expenditures since the last edition are described.

New tax measures were introduced and others modified since the last edition of this report. In addition to tax measures for which legislation is already in force, this report also considers announced measures that have a coming-into-force date in the 2016 taxation year or earlier, even if the enacting legislation of the measure has not received Royal Assent by the time of production of this report. Changes affecting estimates and projections of tax expenditures are described below.

Changes to Tax Rates and Tax Brackets

On December 7, 2015, the Government proposed to reduce the 22% personal income tax rate to 20.5%, and to create a new top tax rate of 33% for taxable income above $200,000, effective for 2016.^[1] These new rates are reflected in the benchmark tax rate structure for 2016 and subsequent years, consequently affecting the estimated value of many personal income tax expenditures for those years.

Charitable Donation Tax Credit

On December 7, 2015, the Government proposed to amend the Charitable Donation Tax Credit to allow donors with taxable income greater than $200,000 to claim a 33% tax credit on any donations greater than $200 that are made from income that is subject to the 33% marginal tax rate. Donations that exceed the amount of a donor's taxable income above $200,000 will be subject to the 29% credit rate. This change will be effective for the 2016 and subsequent taxation years.^[2]

The Charitable Donation Tax Credit is a non-refundable tax credit on donations to registered charities, registered Canadian amateur athletic associations and other qualified donees. The value of the credit is calculated by applying the lowest personal income tax rate (15% in 2015) to the first $200 of total donations in a year and the highest personal income tax rate (29% in 2015) to donations in excess of $200. The credit is available for donations up to 75% of an individual's net income and any unused donations can be carried forward for up to five years.

Home Accessibility Tax Credit

To help seniors and persons with disabilities with the costs of ensuring their homes remain safe, secure and accessible, Budget 2015 introduced a new, permanent Home Accessibility Tax Credit. This credit will allow eligible individuals to claim up to $10,000 of eligible home renovation expenditures per year, providing up to $1,500 in tax relief. Eligible expenditures are for improvements that allow a senior or a person who is eligible for the Disability Tax Credit to be more mobile, safe and functional within their home. Examples of eligible expenditures include costs associated with the purchase and installation of wheelchair ramps, walk-in bathtubs, wheel-in showers and grab bars. This measure applies in respect of eligible expenditures for work performed and paid for and/or goods acquired on or after January 1, 2016.

Lifetime Capital Gains Exemption for Qualified Farm or Fishing Property

The Lifetime Capital Gains Exemption (LCGE) for farm or fishing property provides an incentive to invest in the development of productive farm and fishing businesses, and helps farm and fishing business owners to accumulate capital for retirement. Budget 2015 increased the LCGE applicable to capital gains realized on the disposition of qualified farm or fishing property to $1 million. This measure applies to dispositions of qualified farm or fishing property that occur on or after April 21, 2015. For taxation years after 2015, the LCGE for qualified farm or fishing property will be maintained at $1 million until the indexed LCGE applicable to capital gains realized on the disposition of qualified small business shares ($824,176 in 2016) exceeds $1 million. At that time, the same LCGE limit, indexed to inflation, will once again apply to the three types of property.

Registered Disability Savings Plans— Legal Representation

Budget 2015 extended, until the end of 2018, the temporary federal measure that allows a qualifying family member to become the plan holder of a Registered Disability Savings Plan (RDSP) for an adult individual who might not be able to enter into a contract.

The RDSP is a tax-assisted savings vehicle introduced in Budget 2007 to help to ensure the long-term financial security of Canadians with severe disabilities. Since becoming available in 2008, some adults with disabilities have experienced difficulties in establishing an RDSP because their capacity to enter into a contract is in doubt. In some provinces and territories, the only way an RDSP can be opened in such cases is for the individual to be declared legally incompetent and to have someone named as their legal guardian—a potentially lengthy and expensive process that could have significant repercussions for the individual.

To address this issue, Budget 2012 allowed—on a temporary basis until the end of 2016—a qualifying family member (i.e., a beneficiary's parent, spouse or common-law partner) to become the plan holder of the RDSP for an adult individual who may lack the capacity to enter into a contract. In recognition of the need for time to develop a solution that is suitable for a jurisdiction's needs, Budget 2015 extended the temporary measure introduced in Budget 2012 by two years, to apply to the end of 2018.

Minimum Withdrawal Factors for Registered Retirement Income Funds

Budget 2015 adjusted the Registered Retirement Income Fund (RRIF) minimum withdrawal factors that apply in respect of ages 71 to 94, on the basis of a 5% nominal rate of return and 2% indexing. These assumptions are more consistent with long-term historical real rates of return on a portfolio of investments and expected inflation. The new, lower RRIF factors will permit holders to preserve more of their RRIF savings in order to provide income at older ages, while continuing to ensure that the tax deferral provided on Registered Retirement Savings Plan/RRIF savings serves a retirement income purpose.

Tax-Free Savings Account

On December 7, 2015, the Government proposed to reduce the Tax-Free Savings Account (TFSA) annual contribution limit to $5,500 and reinstate indexation effective for 2016.^[3] The TFSA is a flexible, registered general-purpose savings vehicle that allows Canadian residents aged 18 or older to earn tax-free investment income. The TFSA was introduced in 2009 with an annual contribution limit of $5,000, indexed to inflation in $500 increments. Due to indexation, on January 1, 2013, the TFSA annual contribution limit increased to $5,500. Budget 2015 increased the TFSA annual contribution limit to $10,000, with the limit no longer indexed to inflation, effective for 2015 and subsequent years.

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. On March 1, 2015, the Government announced that it would extend eligibility for the credit for an additional year to flow-through share agreements entered into on or before March 31, 2016. Under the one-year "look-back" rule, funds raised with the benefit of the credit in 2016, for example, can be spent on eligible exploration up to the end of 2017.

Non-Taxation of Veterans' Benefits

In March 2015, two new tax-free benefits for Canada's veterans and their families were announced:

• The Family Caregiver Relief Benefit provides eligible veterans with an annual tax-free grant of $7,238. This benefit provides informal caregivers relief while ensuring veterans continue to get the support they need. The tax expenditure associated with the non-taxation of this benefit is included in the measure "Non-taxation of certain veterans' benefits".
• The Critical Injury Benefit provides a $70,000 tax-free award for Canadian Armed Forces members and veterans who, since April 2006, experienced a severe and traumatic injury or developed an acute disease caused by a sudden and single event which resulted in an immediate and severe impairment and interference in quality of life. The tax expenditure associated with the non-taxation of this award is included in the measure "Non-taxation of veterans' Disability Awards and Critical Injury Benefits".

Patronage Dividends Paid as Shares by Agricultural Co-operatives

To support the capitalization of agricultural co-operatives, Budget 2005 introduced a temporary measure to provide a tax deferral that applies to patronage dividends paid to members by an eligible agricultural co-operative in the form of eligible shares. To be eligible for this tax deferral, a share must be issued after 2005 and before 2016. Budget 2015 announced the extension of this measure to eligible shares issued before 2021.

Preferential Tax Rate for Small Businesses

A preferential tax rate for small businesses has been in effect since 1972. It is currently set at 11% and generally applies to the first $500,000 per year of qualifying active income. The $500,000 income limit begins to be reduced when a Canadian-controlled private corporation's taxable capital reaches $10 million, and is eliminated when taxable capital reaches $15 million. Budget 2015 announced that the preferential small business tax rate will be reduced to 9% by 2019. This 2-percentage-point reduction will be phased in as follows:

• 10.5% effective January 1, 2016;
• 10% effective January 1, 2017;
• 9.5% effective January 1, 2018; and
• 9% effective January 1, 2019.

In conjunction with the reduction in the small business tax rate, Budget 2015 also adjusted the gross-up factor and dividend tax credit rate applicable to non-eligible dividends (generally dividends distributed from corporate income taxed at the small business tax rate) to ensure the appropriate tax treatment of dividend income.

Accelerated Capital Cost Allowance for Manufacturing or Processing Machinery and Equipment

In 2007, the Government introduced an accelerated capital cost allowance to encourage investment in machinery and equipment used in manufacturing and processing. This measure, which provided a 50% straight-line depreciation rate, expired at the end of 2015. Budget 2015 announced the provision of an accelerated capital cost allowance at a rate of 50% on a declining-balance basis for eligible assets acquired after 2015 and before 2026 primarily for use in Canada for the manufacturing and processing of goods for sale or lease.

Accelerated Deductibility of Some Canadian Exploration Expenses

Canadian Exploration Expenses are fully deductible in the year incurred and may be carried forward indefinitely for use in future years. In addition to the expenses associated with the physical exploration for a resource, eligible expenses can include the cost of certain environmental studies and community consultations that are carried out for the purpose of facilitating the physical exploration. In the past, environmental studies and community consultations required to pursue an exploration project were not always eligible for treatment as Canadian Exploration Expenses. On March 1, 2015, the Government announced that it would modify the tax rules to ensure that the costs of environmental studies and community consultations that are required in order to obtain an exploration permit will be eligible for treatment as Canadian Exploration Expenses.^[4] The change would apply to expenses incurred after February 2015.

Accelerated Capital Cost Allowance for Liquefied Natural Gas Facilities

Equipment and structures used for natural gas liquefaction have generally been eligible for capital cost allowance (CCA) at a rate of 8 % (Class 47). Non-residential buildings, at a facility that liquefies natural gas, have been eligible for a CCA rate of 6% (4% under Class 1 plus an additional 2% allowance for non-residential buildings). On February 19, 2015, the Government announced the provision of accelerated CCA treatment for such assets used in facilities that liquefy natural gas. The accelerated CCA is provided by means of two additional allowances: an additional 22% allowance (that brings the CCA rate up to 30%) for Class 47 property used in Canada in connection with natural gas liquefaction; and an additional allowance that brings the CCA rate up to 10% for buildings that are part of facilities that are used to liquefy natural gas. These changes apply to property acquired after February 19, 2015 and before 2025.

Refundable Taxes on Investment Income of Private Corporations

Given that corporate tax rates are generally lower than personal tax rates, special refundable taxes are imposed on investment income of private corporations in order to limit the ability of individuals to defer taxation by holding investments in a private corporation. On December 7, 2015, the Government proposed to increase these refundable taxes (and the related dividend refund rate) effective January 1, 2016 in order to reflect the new 33% top personal income tax rate applicable as of that date.^[5]

Zero-Rating of Feminine Hygiene Products

GST/HST relief for feminine hygiene products was proposed by way of a Notice of Ways and Means Motion tabled in Parliament on May 28, 2015.^[6] The Motion proposed that effective July 1, 2015, sanitary napkins, tampons, sanitary belts, menstrual cups and other similar products that are marketed exclusively for feminine hygiene purposes would be zero-rated.

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

² At the time of production of this report, this change was still subject to Parliamentary approval.

³ At the time of production of this report, these changes were still subject to Parliamentary approval.

⁴ At the time of production of this report, this change was still subject to Parliamentary approval.

⁵ At the time of production of this report, this change was still subject to Parliamentary approval.

⁶ At the time of production of this report, this change was still subject to Parliamentary approval.

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