Archived - Report on Federal Tax Expenditures - Concepts, Estimates and Evaluations 2018: part : part 2

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Part 2 presents the estimates of the fiscal cost of federal tax expenditures for the years 2012 to 2019. 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 set of tables that present 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. Proposed changes affecting tax expenditures in this report are described below. As this report considers tax expenditures as of December 31, 2017, changes announced in Budget 2018 are not listed below or taken into account in the estimates and projections.

Canada Caregiver Credit

The Canada Caregiver Credit was introduced in Budget 2017 and replaced the previous system of credits that included the Caregiver Credit, Infirm Dependant Credit and Family Caregiver Tax Credit, each of which had differing base amounts, dependant income thresholds and eligibility rules. The Canada Caregiver Credit amount is:

• $6,883 in respect of infirm dependants who are parents, grandparents, brothers, sisters, aunts, uncles, nieces, nephews, or adult children of the claimant or of the claimant’s spouse or common-law partner.
• $2,150 in respect of:
  • an infirm dependent spouse or common-law partner for whom the individual claims the spouse or common-law partner amount;
  • an infirm dependant for whom the individual claims an eligible dependant credit; or
  • an infirm child who is under the age of 18 years at the end of the tax year.

The Canada Caregiver Credit is reduced dollar-for-dollar by the dependant’s net income above $16,163 (in 2017). Some differences with the previous system of credits are that the dependant is not required to live with the caregiver in order for the caregiver to claim the credit and the credit is not available in respect of non-infirm seniors who reside with their adult children.

Canada Child Benefit

The Canada Child Benefit provides support to families with children under 18 up to a maximum benefit of $6,400 per child under the age of 6 and $5,400 per child aged 6 through 17, for the 2017-18 benefit year. The 2017 Fall Economic Statement announced that the maximum benefit amounts and phase-out thresholds will be indexed to inflation as of the 2018-19 benefit year, rather than as of the 2020-21 benefit year.

Disability Tax Credit

The Disability Tax Credit is a 15% non-refundable tax credit for non-itemizable disability-related costs. To be eligible for the Disability Tax Credit, an individual must have a severe and prolonged impairment in physical or mental functions and the effects of the impairment must be such that the individual is markedly restricted in their ability to perform a basic activity of daily living or would be if not for life sustaining therapy, as certified by an eligible medical practitioner.

Budget 2017 added nurse practitioners to the list of medical practitioners that can certify the impacts of impairments for Disability Tax Credit applicants, effective for Disability Tax Credit certifications made on or after March 22, 2017.

Medical Expense Tax Credit

The Medical Expense Tax Credit is a 15% non-refundable tax credit for certain itemizable, above-average medical or disability-related expenses. Budget 2017 clarified that individuals who require medical intervention in order to conceive a child are eligible to claim the same expenses that would generally be eligible for individuals on account of medical infertility, effective for the 2017 and subsequent taxation 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 5, 2017, the Government announced an extension of the credit for an additional year, to flow-through share agreements entered into on or before March 31, 2018. Under the one-year “look-back” rule, funds raised with the benefit of the credit in 2018, for example, can be spent on eligible exploration up to the end of 2019.

Non-taxation of allowances for members of legislative assemblies and certain municipal officers

Members of legislative assemblies and certain municipal officers may receive non-accountable allowances for work expenses that are not included in computing income for tax purposes. The excluded amount is limited to half of the official’s salary or other remuneration received in that capacity in the year.

Budget 2017 announced that non-accountable allowances paid to these officials will be included in income for 2019 and subsequent taxation years.

Non-taxation of benefits in respect of home relocation loans

Where a person receives a loan because of their employment, and the interest rate on the loan is below a prescribed rate, that person is deemed to have received a taxable benefit. The amount of the taxable benefit is determined by reference to the difference between these two rates.

Prior to 2018, a deduction was available for the value of any portion of the benefit that was in respect of an eligible home relocation loan. Budget 2017 announced the elimination of this deduction in respect of benefits arising in the 2018 and subsequent taxation years.

Non-taxation of capital gains on donations of ecologically sensitive land

A zero inclusion rate applies to capital gains arising from a donation of ecologically sensitive land to a public conservation charity or certain other qualified donees, if the fair market value of the land is certified by the Minister of the Environment. Budget 2017 proposed to remove private foundations as eligible recipients of donations of ecologically sensitive land, and to introduce a number of administrative measures designed to better protect such gifts and to broaden slightly the types of gifts which qualify (i.e., certain personal servitudes in Quebec).

Non-taxation of capital gains on principal residences

The non-taxation of capital gains on principal residences allows homeowners disposing of their principal residence to be exempt from capital gains taxation on the disposition. The exemption is intended for Canadian resident individuals and trusts.

On October 3, 2016, the Government announced amendments to the non-taxation of capital gains on principal residences (often referred to as the principal residence exemption) rules, specifically:

• An individual who was not resident in Canada in the year the individual acquired a residence will not—on a disposition of the property after October 2, 2016—be able to claim the exemption for the acquisition year;
• Trusts will be eligible to designate a property as a principal residence for a tax year that begins after 2016 only if certain additional eligibility criteria are met;
• The Canada Revenue Agency (CRA) will require a taxpayer to report the disposition of a property for which the exemption is claimed; and
• The CRA was provided with authority to assess taxpayers beyond the normal assessment limitation period for a tax year in cases where the disposition of a real estate property is not reported in the taxpayer’s tax return.

Non-taxation of income earned by military and police deployed to international operational missions

Eligible members of the Canadian Armed Forces (CAF) and police officers may claim a deduction against taxable income in respect of income earned while deployed on international high- and moderate-risk operational missions. The maximum amount that an individual may deduct in a taxation year cannot exceed the highest level of pay earned by a non-commissioned member of the CAF.

On May 18, 2017, the Government announced the extension of the deduction to all members of the CAF and police officers for the period over which they are deployed on any international operational mission, regardless of the risk associated with the mission. In addition, it was announced that the maximum amount that an individual may deduct in a taxation year increased to the highest level of pay earned by a Lieutenant-Colonel (General Services Officer) of the CAF. These changes apply to the 2017 and subsequent taxation years.

Public Transit Tax Credit

Prior to July 1, 2017, a non-refundable tax credit was available at the lowest personal income tax rate for the cost of monthly public transit passes or passes of longer duration. Budget 2017 announced the elimination of this credit, effective for transit use after June 30, 2017.

Tax treatment of Canada Pension Plan and Quebec Pension Plan contributions and benefits

A federal tax credit is provided on employee contributions to the Canada Pension Plan. As part of the 2016 agreement to enhance the Canada Pension Plan, a tax deduction will be provided on employee contributions associated with the enhanced portion of the Canada Pension Plan (contributions to the enhanced portion of the Canada Pension Plan will commence in 2019). A tax credit will continue to apply to employee contributions to the base Canada Pension Plan.

Tuition Tax Credit

The tuition tax credit is a 15% non-refundable tax credit in respect of eligible fees for tuition and licensing examinations paid by an individual enrolled at a post-secondary educational institution or in an educational program intended to develop or improve skills in an occupation offered by an educational institution certified by Employment and Social Development Canada.

Budget 2017 expanded the range of courses eligible for the credit to include occupational skills courses that are undertaken at a post-secondary institution in Canada, and allowed the full amount of bursaries received for such courses to qualify for the scholarship exemption (where conditions are otherwise met). These changes took effect as of the 2017 tax year.

Working Income Tax Benefit

The Working Income Tax Benefit (WITB) is a refundable tax credit that supplements the earnings of low-income workers. The refundable credit is equal to 25% of each dollar of earned income in excess of $3,000 to a maximum credit of $1,043 for single individuals without dependants and $1,894 for families (couples and single parents) in 2017. The WITB is phased out at a rate of 15% of each dollar of adjusted net income above thresholds of $11,838 for single individuals without dependants and $16,348 for families in 2017.

As part of the 2016 agreement to enhance the Canada Pension Plan, the WITB will be enhanced, effective for the 2019 taxation year. The 2017 Fall Economic Statement announced that the WITB will be further enhanced in 2019, over and above changes associated with the Canada Pension Plan enhancement, and that the details of the design of this incremental enhancement will be provided in Budget 2018.

Accelerated capital cost allowance for clean energy generation equipment

Budget 2017 expanded the accelerated capital cost allowance under classes 43.1 and 43.2, which provide accelerated tax depreciation for clean energy generation and energy conservation equipment, to include a broader range of geothermal projects and expenses. The measure applies in respect of new property acquired for use after March 21, 2017.

Accelerated deductibility of Canadian Renewable and Conservation Expenses

Budget 2017 expanded the range of geothermal energy project expenses that are eligible as Canadian Renewable and Conservation Expenses, which can be fully deducted in the year incurred. The measure applies in respect of new property acquired for use after March 21, 2017.

Accelerated deductibility of some Canadian Exploration Expenses

Budget 2017 announced modifications to the tax treatment of successful oil and gas exploratory drilling. Consistent with the usual treatment of enduring assets, expenses incurred after 2018 that are associated with oil and gas discovery wells will be treated as Canadian Development Expenses, which are deducted gradually over time, rather than as an immediate deductible Canadian Exploration Expense (CEE), unless and until they are deemed unsuccessful. CEE treatment will continue to be available for exploration expenses such as early stage geophysical and geochemical surveying, as immediate deductibility is generally an efficient and reasonable tax treatment in these cases.

Additional deduction for gifts of medicine

Budget 2017 announced the elimination of the additional deduction for gifts of medicine made on or after March 22, 2017. This measure allowed corporations that donated medicine from their inventory to an eligible charity to claim an additional deduction equal to the lesser of the cost of the donated medicine and 50% of the amount by which the fair market value of the donated medicine exceeded its cost.

This measure does not affect the general income tax deductibility of donations made by corporations to registered charities, including donations of medicine.

Deferral through use of billed-basis accounting by professionals and professional corporations

In computing income for tax purposes, individuals and corporations carrying on the practice of certain professions (i.e., accounting, legal, medical doctor, dental, chiropractic or veterinary professional practice) can either use an accrual accounting method by default, or elect to use a billed-basis accounting method. Budget 2017 proposed to eliminate the ability of designated professionals to elect to use billed-basis accounting, effective for taxation years that begin on or after March 22, 2017. A five-year transitional period to phase in the inclusion of work in progress into income was subsequently proposed on September 8, 2017.

Exemption for insurers of farming and fishing property

Insurers of farming and fishing property benefit from a tax exemption based upon the proportion of their gross premium income, and that of their affiliated insurers, that is earned from the insurance of property used in farming of fishing (including residences of farmers and fishers). Prescribed insurers are provided preferential access to this tax exemption, by not having to take into account the gross premium income of affiliated insurers when determining their eligibility for the tax exemption.

Budget 2017 announced the elimination of the tax exemption for insurers of farming and fishing property for taxation years that begin after 2018.

Investment Tax Credit for Child Care Spaces

The Investment Tax Credit for Child Care Spaces provided a 25% non-refundable tax credit on costs incurred to build or expand child care spaces in licensed child care facilities. The maximum value of the credit was $10,000 per space created.

Budget 2017 announced the elimination of the Investment Tax Credit for Child Care Spaces in respect of expenditures incurred on or after March 22, 2017. To provide transitional relief, the credit remains available in respect of eligible expenditures incurred before 2020, pursuant to a written agreement entered into before March 22, 2017.

Preferential tax rate for small businesses

The first $500,000 of annual income earned by a Canadian-controlled private corporation from an active business carried on in Canada is generally taxed at a preferential corporate income tax rate. On October 16, 2017, the Government announced that the preferential tax rate would be lowered from 10.5% to 10% as of January 1, 2018, and subsequently to 9% as of January 1, 2019. In order to preserve the integration of the personal and corporate income tax systems, the 2017 Fall Economic Statement announced that the gross-up factor applicable to non-eligible dividends will be adjusted from 17% to 16% effective January 1, 2018, and to 15% effective January 1, 2019. The corresponding Dividend Tax Credit rate will also be adjusted, moving from 10.5% to 10% effective January 1, 2018, and to 9% effective January 1, 2019.

Reclassification of expenses under flow-through shares

Budget 2017 announced that small oil and gas corporations incurring development expenses will no longer be able to reclassify the first $1 million of Canadian Development Expenses as immediately deductible Canadian Exploration Expenses when they are renounced to flow-through share investors. This will generally apply to expenses incurred after 2018.

Surtax on the profits of tobacco manufacturers

Budget 2017 announced the elimination of the surtax on domestic tobacco manufacturers, effective after March 22, 2017. That tax applied at a rate of 10.5% on profits arising from the manufacture of tobacco or tobacco products in Canada. In order to maintain the intended tax burden of the manufacturers’ surtax on tobacco products, Budget 2017 also announced adjustments to tobacco excise duty rates.

Foreign Convention and Tour Incentive Program

Budget 2017 announced the repeal of the Goods and Services Tax/Harmonized Sales Tax rebate payable to non-resident tourists and tour operators in respect of the accommodation portion of eligible tour packages under the Foreign Convention and Tour Incentive Program. The repeal generally applies in respect of supplies of tour packages or accommodations made after March 22, 2017. As a transitional measure, the rebate was available in respect of a supply of a tour package or accommodations made after March 22, 2017 but before January 1, 2018, if all of the consideration for the supply was paid before January 1, 2018.

¹ Effective for the 2016 and subsequent tax years, the rate applying to the second personal income tax bracket was reduced to 20.5%, and a fifth bracket was added to tax income over $200,000 at a rate of 33%.

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