Report on Federal Tax Expenditures - Concepts, Estimates and Evaluations 2019: part 2

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Part 2 presents the estimates of the fiscal cost of federal tax expenditures for the years 2013 to 2020. 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, 2018, changes announced in Budget 2019 are not listed below or taken into account in the estimates and projections.

The Working Income Tax Benefit (WITB) is a refundable tax credit that supplements the earnings of low-income workers. Budget 2018 introduced the new Canada Workers Benefit (CWB), which will replace the WITB beginning in 2019. The CWB is a more generous and more accessible benefit that will supplement the earnings of low-income workers and encourage more people to join or stay in the workforce. The maximum benefit under the CWB will be increased by up to $170 relative to the WITB, and the income level at which the benefit is phased out completely will also be higher. The enhanced benefit will equal 26% of each dollar of earned income in excess of $3,000 to a maximum credit of $1,355 for single individuals without dependants and $2,335 for families (couples and single parents) in 2019. The CWB will be phased out at a rate of 12% of each dollar of adjusted net income above thresholds of $12,820 for single individuals without dependants and $17,025 for families in 2019. In addition, enhancements to the new CWB will ensure that all tax filers eligible for the benefit will receive it, even if they do not claim it.

Indexation of the Canada Child Benefit

As of July 2018, the maximum benefit amounts and phase-out thresholds of the Canada Child Benefit, which provides support to families with children under 18, are indexed to inflation. As a result, the maximum benefit amounts provided under the Canada Child Benefit were increased to $6,496 from $6,400 per child under the age of 6, and to $5,481 from $5,400 per child aged 6 through 17, for the 2018-19 benefit year.

Retroactive Eligibility of Foreign-Born Status Indians

Budget 2016 established eligibility for the Canada Child Benefit to include foreign-born status Indians residing legally in Canada who are neither Canadian citizens nor permanent residents, where all other eligibility requirements are met, consistent with other federal benefits. These individuals were not eligible under the previous system of child benefits. As of July 2018, such individuals are retroactively eligible for the Canada Child Tax Benefit, the National Child Benefit supplement and the Universal Child Care Benefit, where all other eligibility requirements are met.

This measure applies from the 2005 taxation year to June 30, 2016.

The Medical Expense Tax Credit is a 15% non-refundable tax credit for certain itemizable, above-average medical or disability-related expenses. Budget 2018 announced an expansion of the credit to recognize costs incurred in respect of an animal specifically trained to perform tasks for a patient with a severe mental impairment in order to assist them in coping with their impairment (e.g., a psychiatric service dog trained to assist with post-traumatic stress disorder).

This measure applies in respect of eligible expenses incurred after 2017.

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 2018 announced an extension of the credit for an additional year, to flow-through share agreements entered into on or before March 31, 2019. Subsequently, as part of the 2018 Fall Economic Statement, the Government announced its intention to extend the credit for an additional five years, until March 31, 2024. Under the one-year "look-back" rule, funds raised with the benefit of the credit in 2024, for example, can be spent on eligible exploration up to the end of 2025.

As part of the Canada Pension Plan (CPP) Enhancement announced in 2016, the Income Tax Act was amended to provide a tax deduction on employee contributions to the enhanced portion of the CPP. To provide consistent income tax treatment of contributions to the CPP and the Quebec Pension Plan (QPP), Budget 2018 announced that a tax deduction will be provided on employee contributions to the enhanced portion of the QPP. A tax credit will continue to be provided on employee contributions to the base CPP and QPP. Contributions to the enhanced portion of the CPP and QPP will commence in 2019.

Budget 2018 extended the accelerated capital cost allowance for clean energy equipment under Class 43.2, which provides accelerated tax depreciation for clean energy generation and energy conservation equipment, to property acquired before 2025.

The 2018 Fall Economic Statement announced the Government's intention to introduce full expensing for clean energy equipment. This measure provides an enhanced first-year allowance for property currently eligible for the accelerated capital cost allowance for clean energy equipment under Class 43.1 or 43.2, with limited restrictions, if it is acquired after November 20, 2018 and becomes available for use before 2028. The enhanced allowance will initially provide a 100-per-cent deduction, with a phase-out for property that becomes available for use after 2023. The half-year rule will effectively be suspended for property eligible for this measure.

The 2018 Fall Economic Statement announced the Government's intention to introduce full expensing for manufacturing and processing machinery and equipment. This measure provides an enhanced first-year allowance for property currently eligible for the accelerated capital cost allowance for manufacturing and processing machinery and equipment under Class 53, with limited restrictions, if it is acquired after November 20, 2018 and becomes available for use before 2028. The enhanced allowance provides a 100-per-cent deduction, with a phase-out for property that becomes available for use after 2023. The half-year rule will effectively be suspended for property eligible for this measure.

The 2018 Fall Economic Statement announced the Government's intention to introduce the Accelerated Investment Incentive, which will provide an enhanced first-year deduction for tax depreciation equal to up to three times the amount that would otherwise apply in the year an asset is put in use. The Accelerated Investment Incentive will apply to all capital property, with limited restrictions. The Accelerated Investment Incentive is available for property acquired after November 20, 2018 and that becomes available for use before 2028, subject to a phase-out for property that becomes available for use after 2023.

Budget 2018 announced limits on the ability of businesses with more than $50,000 in passive income in a year to benefit from the preferential small business rate. For tax years beginning after 2018, the measure reduces the small business deduction limit, using a straight-line basis, by $5 for every $1 of investment income exceeding the $50,000 threshold, such that the business limit will be reduced to zero at $150,000 of investment income.

Budget 2018 announced that Canadian-controlled private corporations would no longer be able to obtain refunds of taxes paid on investment income while distributing dividends from income taxed at the general corporate rate. Existing Refundable Dividend Tax on Hand balances, subject to certain limitations, are not affected by the measure. This measure applies with respect to tax years beginning after 2018.

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