Tax Expenditure Estimates and Projections

Introduction

Part 2 presents the estimates of the fiscal cost of federal tax expenditures for the years 2018 to 2025. 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. To increase transparency in government reporting on support to the fossil fuel sector, a second table grouping tax expenditures that provide such support is also presented. These estimates are followed by a third 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.

Tax Expenditures Supporting the Fossil Fuel Sector

Canada has routinely published estimates of its tax expenditures for over two decades, including those that favour the fossil fuel sector.

In July of 2023, the Government of Canada released the Inefficient Fossil Fuel Subsidies Government of Canada Self‑Review Assessment Framework (the "Framework) and the Inefficient Fossil Fuel Subsidies Government of Canada Guidelines (the "Guidelines"). The purpose of the Inefficient Fossil Fuel Subsidies Assessment Framework is to provide a transparent methodology for assessing whether federal measures, including tax expenditures, constitute inefficient fossil fuel subsidies, and ensuring that new measures do not constitute inefficient fossil fuel subsidies as outlined in the Guidelines.

Consistent with the Framework and Guidelines, Canada has been phasing out tax measures that are inefficient fossil fuel subsidies.  Nine tax measures supporting the fossil fuel sector have been phased out or rationalized.

The data in the following table presents information about the revenue forgone for fossil fuel production or exploration, for each tax expenditure that provides support specifically to that sector. For example, "Flow-through share deductions" are an authorized tax shelter arrangement that are available to corporations in the mining and renewable energy sectors and were previously available to companies in the oil and gas sector. The revenue forgone presented in the table below for "Flow-through share deductions for oil and gas and coal mining" represents a subset of the amounts listed in the main table, and represents only the portion that can be attributed to fossil fuel exploration and development. In contrast, "Reclassification of expenses under flow-through shares", which is a measure that has been phased out, was only available to corporations in the oil and gas sector. The amounts presented below in this case are the same as those presented in the main table. By construction, it would therefore not be accurate to sum the amounts presented below with those presented in the main table, as these are duplicative.

The measures in the table below relate to the nine measures supporting the fossil fuel sector that have been phased out or rationalized in line with the Government's commitment on inefficient fossil fuel subsidies. Some of the nine measures are combined^{Footnote 1} and the table does not include the Budget 2011 reduction in the deduction rates for intangible capital expenses in oil sands projects, to align with rates in the conventional oil and gas sector, which is part of the benchmark tax system (and therefore not a tax expenditure). In addition, the table includes the earned depletion for oil and gas and coal mining which was phased out in 1990.

Changes to Tax Expenditures Since the 2023 Edition

New tax measures were introduced and others modified since the last edition of this report. Changes affecting tax expenditures in this report are described below. As this report considers tax expenditures as of December 31, 2023, changes announced in Budget 2024 are not listed below or taken into account in the estimates and projections.

Personal Income Tax

Goods and Services Tax/Harmonized Sales Tax Credit

Budget 2023 introduced the Grocery Rebate, which provided temporary support to low- and modest-income Canadians equivalent to twice the amount they received for January 2023 under the Goods and Services Tax/Harmonized Sales Tax Credit. The extra amount was paid out as a one-time, lump-sum payment starting on July 5, 2023, through the Goods and Services Tax/Harmonized Sales Tax Credit system.

Registered Disability Savings Plans—Qualifying Family Members

Budget 2023 extended by three years (i.e., until the end of 2026), 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 whose ability to enter into an RDSP contract is in doubt and who does not have a legal representative.

Budget 2023 also broadened the definition of a "qualifying family member" to include a brother or sister of the beneficiary who is 18 years of age or older. This will enable a sibling, in addition to parents and spouses and common-law partners, to use the temporary federal measure to establish an RDSP for an eligible beneficiary.

Critical Mineral Exploration Tax Credit for Flow-Through Share Investors

Budget 2023 proposed to expand the eligibility of the Critical Mineral Exploration Tax Credit (CMETC) and access to flow-through shares to lithium from brines. Individual flow-through share investors will be able to use the CMETC to reduce federal tax otherwise payable and to apply Canadian Exploration Expenses and Canadian Development Expenses renounced as part of flow-through share agreements against their taxable income.

The expansion of the eligibility for the CMETC would apply to flow-through share agreements entered into, and eligible expenses made, after March 28, 2023.

Deduction for Tradespeople's Tool Expenses

Budget 2023 doubled the maximum employment deduction for tradespeople's tool expenses from $500 to $1,000, effective for the 2023 and subsequent taxation years. As a consequence, the threshold for recognition of apprentice vehicle mechanics' tool expenses has changed. Apprentice vehicle mechanics may deduct extraordinary tool costs that exceed either the combined value of the deduction for tradespeople's tool expenses (which has increased from $500 to $1,000) and the Canada Employment Credit ($1,368 in 2023) or 5% of their income from employment as an apprentice mechanic, whichever is greater.

Registered Education Savings Plan Educational Assistance Payments

Budget 2023 raised the limits on certain withdrawals of Educational Assistance Payments (EAPs) from Registered Education Savings Plans (RESPs). EAPs consist of government grants and bonds as well as income earned in the RESP account. For students enrolled in a qualifying educational program (i.e., in a program of at least three consecutive weeks' duration requiring at least 10 hours per week of courses or work in the program), the limit on withdrawals of EAPs in the first 13 weeks of study was raised to $8,000 from $5,000. For students enrolled in a specified educational program (i.e., in a program of at least three consecutive weeks' duration requiring at least 12 hours per month of courses or work in the program), the limit on withdrawals of EAPs was raised to $4,000 from $2,500 per 13-week period of study.

Corporate Income Tax

Flow-through Share Deductions 

Budget 2023 proposed to expand the access to flow-through shares to lithium from brines. Corporate flow-through share investors will be able to apply Canadian Exploration Expenses and Canadian Development Expenses renounced as part of flow-through share agreements against their taxable income.

The ability to issue flow-through shares would apply to eligible expenses made after March 28, 2023.

Clean Technology Investment Tax Credit

The 2022 Fall Economic Statement proposed a refundable tax credit for the capital cost of investments in certain clean technologies. A 30-per-cent refundable credit will be available to businesses investing in eligible technologies.

As outlined in Budget 2023, businesses will have to adhere to certain labour requirements, including ensuring that workers are paid prevailing wages and that apprenticeship opportunities are being created, in order to qualify for the 30-per-cent rate. If the labour requirements are not met, investments would receive a 20-per-cent tax credit rate.

Budget 2023 proposed to expand the list of eligible technologies to include geothermal energy systems that generate electrical energy or heat energy, or both electrical and heat energy, that are eligible for Class 43.1 of Schedule II of the Income Tax Regulations. The labour requirements apply to covered work that is performed on or after November 28, 2023, the date that a Notice of Ways and Means Motion for the enabling legislation of these labour requirements was first tabled in the House of Commons.

The credit would be available for investments made on or after March 28, 2023. Budget 2023 also proposed to modify the phase-out schedule of the Clean Technology Investment Tax Credit announced in the 2022 Fall Economic Statement. Rather than starting the phase-out in 2032, the full credit rate will remain at 30% for property that becomes available for use in 2032 and 2033 and will be reduced to 15% in 2034. The credit will be unavailable after 2034.

The 2023 Fall Economic Statement proposed to expand eligibility for the Clean Technology Investment Tax Credit to include certain systems that generate electricity, heat or both electricity and heat from waste biomass that are acquired and become available for use on or after November 21st, 2023.

Carbon Capture, Utilization, and Storage (CCUS) Investment Tax Credit.

Budget 2023 introduced enhancements to the CCUS Investment Tax Credit, which expand the list of eligible CCUS equipment and approved jurisdictions for dedicated geological storage.

Specifically, it is proposed that the CCUS Investment Tax Credit announced in Budget 2022 include the following design features:

• Eligible equipment be expanded to include dual use heat and/or power equipment and water use equipment. Dual use power or heat production equipment would be eligible only if the energy balance is expected to be primarily used (i.e., more than 50%) to support the CCUS process or hydrogen production that is eligible for the proposed Clean Hydrogen Investment Tax Credit and on a pro-rated basis in proportion to the expected energy balance or material balance supporting the CCUS process over the first 20 years of the project.
• Approved jurisdictions for dedicated geological storage be expanded to include British Columbia.
• Projects storing CO2 in concrete would be required to have their concrete storage process validated by a third-party, based on an International Organization for Standardization (ISO) standard, prior to claiming the investment tax credit.
• A recovery calculation for the investment tax credit in respect of refurbishment property would be included. Total eligible refurbishment costs over the first 20 years of the project would be limited to a maximum of 10% of the total pre-operational costs that were eligible for the CCUS Investment Tax Credit. Projects would not be eligible for Refurbishment ITCs on costs incurred after the end of the 20‑year period.

Labour requirements, including ensuring that workers are paid prevailing wages and that apprenticeship opportunities are being created, would apply to the tax credit, which if not met, would reduce the credit rate by 10 percentage points. The labour requirements apply to covered work that is performed on or after November 28, 2023, the date that a Notice of Ways and Means Motion for the enabling legislation of these labour requirements was first tabled in the House of Commons.

Tax on Repurchases of Equity

The 2022 Fall Economic Statement announced the government's intention to introduce a 2% tax on share buybacks by public corporations in Canada. Budget 2023 announced that the tax would apply as of January 1, 2024 to the annual net value of repurchases of equity by public corporations and certain publicly traded trusts and partnerships in Canada. A business would not be subject to the tax in a year if its gross repurchases of equity were less than $1 million.

Rate Reduction for Zero-Emission Technology Manufacturers

Budget 2023 proposed an extension to the availability of the 50% reduction in the general corporate and small business income tax rates for zero-emission technology manufacturers by an additional three years. Hence, the reduced rates will be gradually phased out starting in taxation years that begin in 2032 and fully phased out for taxation years that begin after 2034.

Budget 2023 also proposes to extend eligibility for the reduced rates to include the manufacturing of nuclear energy equipment and the processing and recycling of nuclear fuels and heavy water, effective for taxation years beginning after 2023.

Clean Technology Manufacturing Investment Tax Credit

Budget 2023 proposed a refundable tax credit equal to 30% of the cost of investments in new machinery and equipment used to manufacture or process key clean technologies, and extract, process, or recycle key critical minerals, including:

• Extraction, processing, or recycling of critical minerals essential for clean technology supply chains, specifically: lithium, cobalt, nickel, graphite, copper, and rare earth elements;
• Manufacturing of renewable or nuclear energy equipment;
• Processing or recycling of nuclear fuels and heavy water;
• Manufacturing of grid-scale electrical energy storage equipment;
• Manufacturing of zero-emission vehicles; and,
• Manufacturing or processing of certain upstream components and materials for the above activities, such as cathode materials and batteries used in electric vehicles.

This credit would apply to property that is acquired and becomes available for use on or after January 1, 2024, and would no longer be in effect after 2034, subject to a phase-out starting in 2032.

Clean Hydrogen Investment Tax Credit

Budget 2023 announced the design features of the Clean Hydrogen Investment Tax Credit:

• Refundable investment tax credit on eligible property based on the estimated carbon intensity (CI) of the hydrogen produced (i.e., kilogram (kg) of carbon dioxide equivalent (CO2e) per kg of hydrogen), as measured by Environment and Climate Change Canada's Fuel Life Cycle Assessment (LCA) Model:
  • 40% for a CI < 0.75 kg;
  • 25% for a CI of 0.75 kg to < 2 kg;
  • 15% for a CI of 2 kg to < 4 kg; and,
  • 15% to convert clean hydrogen to ammonia.
• Projects that produce hydrogen from electrolysis or from natural gas, so long as emissions are abated using carbon capture, utilization, and storage, are eligible.

Labour requirements, including ensuring that workers are paid prevailing wages and that apprenticeship opportunities are being created, would apply to the tax credit, which if not met, would reduce the credit rate by 10 percentage points. The labour requirements apply to covered work that is performed on or after November 28, 2023, the date that a Notice of Ways and Means Motion for the enabling legislation of these labour requirements was first tabled in the House of Commons.

The credit would apply to property that is acquired and becomes available for use on or after March 28, 2023, with the credit rate reduced by one half in 2034, before being fully phased out by 2035.

Tax Treatment of Active Business Income of Foreign Affiliates of Canadian Corporations and Deductibility of Expenses Incurred to Invest in Foreign Affiliates

Budget 2023 reaffirmed Canada's intention, announced in Budget 2022, to introduce legislation implementing the Pillar Two global minimum tax. This will ensure that large multinational corporations are subject to a minimum effective tax rate of 15% on their profits wherever they do business. The primary charging rules of the Global Minimum Tax and Domestic Minimum Top-up Tax are effective for fiscal years of multinational corporations that begin on or after December 31, 2023. The Global Minimum Tax imposes a top-up tax on certain Canadian multinational groups in respect of income earned abroad that is taxed at an effective rate of less than 15%. This new tax relates to the measure "Tax treatment of active business income of foreign affiliates of Canadian corporations and deductibility of expenses incurred to invest in foreign affiliates". Similarly, the Domestic Minimum Top-up Tax imposes a top-up tax on income earned in Canada that is taxed at an effective rate of less than 15%. This other tax is considered to be part of the benchmark income tax system.

Canadian Journalism Labour Tax Credit

The 2023 Fall Economic Statement proposed two enhancements to the Canadian journalism labour tax credit. First, to increase the cap on labour expenditures per eligible newsroom employee to $85,000 from $55,000. Second, to temporarily increase the Canadian journalism labour tax credit rate to 35 per cent from 25 per cent for a period of four years. These changes would apply to qualifying labour expenditures incurred on or after January 1, 2023. The credit rate would return to 25 per cent for expenditures incurred on or after January 1, 2027.

Goods and Services Tax

Enhanced Rebate for New Residential Rental Properties

As announced on September 14, 2023, the government is temporarily enhancing the GST Rental Rebate from 36% to 100% and removing the existing rebate phase-out thresholds, for purpose-built rental housing projects. This measure will apply to projects that begin construction after September 13, 2023 and before 2031, and complete construction before 2036.