T E ax xpenditures

T E ax xpenditures
Government of Canada
Tax
Expenditures
1998
Department of Finance
Canada
Ministère des Finances
Canada
© Her Majesty the Queen in Right of Canada (1998)
All rights reserved
All requests for permission to reproduce this work or any part thereof
shall be addressed to Public Works
and Government Services Canada.
Price: $10
Available from the Finance Canada Distribution Centre
300 Laurier Avenue West, Ottawa K1A 0G5
Tel: (613) 995-2855
Fax: (613) 996-0518
Cette publication est également disponible en français.
Cat No.: F1-27/1998E
ISBN 0-660-17514-2
TABLE
OF
CONTENTS
Chapter 1
Interpreting Tax Expenditures: A Guide ......................................................
5
Chapter 2
Estimates and Projections .........................................................................
9
Chapter 3
Framework and Methodology .................................................................... 33
Chapter 4
Description of Personal Income Tax Provisions .......................................... 51
Chapter 5
Description of Corporate Income Tax Provisions ........................................ 79
Chapter 6
Description of the Goods and Services Tax Provisions ...............................111
Chapter 7
Objectives of Tax Expenditures ..................................................................123
Chapter 1
INTERPRETING TAX EXPENDITURES: A GUIDE
What is a Tax Expenditure?
Governments have a variety of economic and social objectives. One
instrument to achieve these objectives is public spending. It has often been
argued that governments have the flexibility to use tax concessions, as a
substitute for direct public spending, to achieve the same objectives. Such tax
concessions are generally referred to as tax expenditures.
Tax Expenditures Versus Tax Concessions
While all tax expenditures are tax concessions, it does not follow that all tax
concessions are tax expenditures.
To estimate tax expenditures, one needs to determine whether a tax
concession is a substitute for spending. There are a number of considerations
in this regard that need to be taken into account.
■
Although a tax concession is generally considered to be a deviation from a
benchmark tax structure, no consensus exists as to what constitutes a
benchmark tax structure. Hence, there is no general agreement on
whether or not a specific item is a tax concession. For example, is the
lowest, 17-per-cent personal income tax rate in Canada a tax concession
or is it part of the underlying tax structure? For the purpose of this report,
this rate is considered a part of the underlying structure of the tax system.
■
Difficulties also arise when trying to determine whether a tax concession is
a substitute for direct spending. For example, the dividend tax credit
simply offsets the tax paid at the corporate level to avoid double taxation,
and hence should not be classified as a tax expenditure.
Naturally, given these difficulties, there is a large element of subjectivity in
defining tax expenditures. As a result, international comparisons of tax
expenditures are not very useful.
The Canadian Approach
The Canadian approach seeks to provide as much information as possible to
the reader, without getting into a controversy as to whether or not an item is a
tax expenditure. Consequently, any deviation from a narrowly defined tax
structure is reported. This allows the reader to decide whether or not a
particular tax concession qualifies as a tax expenditure. This information on
deviations from the tax system is reported in two parts: one includes a list of
all items that could be considered to be tax expenditures under a very broad
(and perhaps unrealistic) definition. All other deviations from the tax system are
reported as memorandum items.
5
Chapter 1
International Comparisons
Relative to other countries, Canada has taken a broad approach to reporting
tax expenditures.
In the United Kingdom, tax concessions are reported under three categories.
The first category, structural relief, incorporates both tax concessions that are
a fundamental part of the tax structure and those which simplify administration
and compliance. In contrast, the second category, tax expenditures, consists
of tax concessions which are considered alternatives to direct spending.
The third category comprises those tax reliefs which contain elements of both
structural reliefs and tax expenditures and, thus, cannot be classified explicitly
as either structural reliefs or tax expenditures. Thus, all tax concessions are
reported, but direction is given to the reader as to the appropriate
classification of each.
In the United States, the method of reporting tax expenditures is slightly
different. The United States reports tax expenditures against two different tax
structures: normal and reference law. The normal tax structure reflects a
comprehensive income tax system. Under the normal tax structure, any
deviation from the basic tax structure is reported as a tax expenditure.
The reference law baseline, however, more closely reflects existing tax law.
Under reference law, tax expenditures are limited to those deviations from
the tax structure that serve program functions.
Caveats
Care must be taken in interpreting the estimates and projections of tax
expenditures in the tables for the following reasons.
■
Tax expenditures are values of tax revenues forgone to achieve a variety of
economic and social objectives. Whether or not the magnitudes of tax
expenditures are appropriate depends upon an evaluation of the social
and economic policies that generated them. The values reported in the
tables provide no information towards such an evaluation.
■
Estimates of various tax expenditure items cannot be added together –
this is because the cost of each tax expenditure is estimated separately,
assuming that all other tax provisions remain unchanged.
■
The estimates assume all other factors remain unchanged (i.e. there is no
allowance for behavioural changes, consequential government policy
changes or changes in aggregate economic activity in response to the
change in the tax expenditure).
■
In addition to these considerations, the projections are subject to forecast
error and are “best efforts” which have no greater degree of reliability than
the variables that explain them.
6
INTERPRETING TAX EXPENDITURES: A GUIDE
What’s New in the 1998 Report?
■
For the first time, the specific objectives of each tax concession are
included in Chapter 7. The objectives were obtained from budget
documents, speeches and other government sources, and represent
the original intention of each tax concession and the general goals
each was expected to fulfil.
■
Estimates and projections for the changes to both the tax expenditures
and memorandum items proposed in the 1998 budget have been added.
These include:
Personal Income Tax Measures
General income tax relief
Increasing tax-free income for low-income Canadians
(supplementary low-income credit) – memorandum item
Canadian Opportunities Strategy
Tax relief for interest on student loans
(student loan interest credit)
Support for families
New tax credit for caregivers
Strengthening communities and the voluntary sector
Emergency volunteers
(replaces non-taxation of allowances to volunteer firefighters)
Business Income Tax Measures
Countervailing and anti-dumping duties
Earthquake reserves
Sales Tax Measures
Respite care
Measures affecting charities (charities operating bottle returns) –
memorandum item
7
Chapter 1
■
The 1998 budget also proposed several changes which would affect
existing tax expenditures. For example, the limits for the child care
expense deduction were increased by $2,000 to $7,000 for children
under 7 or disabled and by $1,000 to $4,000 for older children.
In addition, premiums paid by the self-employed for private health service
plans were made deductible. These proposed changes have been
incorporated into the projections for these measures.
■
As usual, other minor changes have been made to provide information
that was not previously available and to update or otherwise improve the
descriptions of certain measures.
What is in the Report?
■
Chapter 2 presents estimates of tax expenditures and
memorandum items.
■
Chapter 3 provides the methodology used to derive these estimates.
■
Chapters 4 (personal income tax), 5 (corporate income tax) and 6 (GST)
provide simplified descriptions of each tax expenditure as well as
information on the data sources and methodology used in constructing
the estimates.
■
Chapter 7 sets out the stated objectives for all tax expenditures contained
in this report. This responds to a request from the Auditor General in his
April 1998 report.
8
Chapter 2
ESTIMATES
AND
PROJECTIONS
Tables 1 to 3 provide tax expenditure values for personal income tax,
corporate income tax and the goods and services tax (GST) for the years
1993 to 2000. In the case of personal income tax, tax expenditures are
grouped according to functional categories. This grouping into functional
categories is not intended as a policy justification for the specific provisions
nor is it the case that all tax measures fall neatly into one of the categories.
The categories are provided solely for organizational purposes.
All estimates are reported in millions of dollars. The letter “S” indicates that the
cost is less than $2.5 million while “n.a.” signifies that data were not available.
The inclusion in the report of items for which estimates are not available is
warranted given that the report is designed to provide information on the type
of assistance delivered through the tax system even if it is not always possible
to provide a quantitative estimate. Work is continuing to obtain quantitative
estimates where possible. For example, the corporate income tax entries
dealing with advertising costs were “n.a.” in last year’s report. In this year’s
publication, dollar values are reported for these tax expenditures.
9
10
1
n.a.
Deduction for artists and musicians
Non-taxation of capital gains on gifts of
cultural property
43
–
Student loan interest credit6
–
–
205
43
185
n.a.
n.a.
n.a.
n.a.
S
12
49
1994
Estimates
–
–
215
44
195
n.a.
n.a.
n.a.
n.a.
S
48
50
1995
–
–
255
58
220
n.a.
n.a.
n.a.
n.a.
S
–
51
–
–
270
105
275
n.a.
n.a.
n.a.
n.a.
S
–
52
1997
($ millions)
1996
120
10
285
200
290
n.a.
n.a.
n.a.
n.a.
S
–
52
1998
Projections
135
25
300
205
310
n.a.
n.a.
n.a.
n.a.
S
–
53
1999
* The elimination of a tax expenditure would not necessarily yield the full tax revenues shown in the table. See pages 45-47 for a discussion of the
reasons for this.
–
Carry-forward of tuition and education credits5
Education and tuition fee credits transferred4
190
3
Education credit
175
Tuition fee credit2
Education
n.a.
n.a.
Assistance for artists
n.a.
S
16
48
1993
Write-off of Canadian art purchased by
unincorporated business
Deduction for certain contributions by individuals
who have taken vows of perpetual poverty
Flow-through of CCA on Canadian films
Deduction for clergy residence
Culture and recreation
Table 1
Personal income tax expenditures*
150
40
315
205
335
n.a.
n.a.
n.a.
n.a.
S
–
54
2000
Chapter 2
Infirm dependant credit12
Equivalent-to-spouse credit
Spousal credit
12
455
1,205
n.a.
Family
n.a.
n.a.
Employee benefit plans
Non-taxation of certain non-monetary
employment benefits
10
470
1,190
n.a.
n.a.
n.a.
Deferral of salary through leave of absence/
sabbatical plans
n.a.
56
30
155
–
4
2
n.a.
57
33
190
–
4
3
n.a.
S
6
1994
Estimates
Non-taxation of strike pay11
Employee stock options
10
Overseas employment credit
Northern residents deductions9
Deduction for emergency service volunteers8
Non-taxation of allowances to volunteer firefighters
Deduction of home relocation loans
Employment
8
S
n.a.
Deduction of teachers’ exchange fund contributions
Registered education savings plans7
7
Exemption on first $500 of scholarship,fellowship
and bursary income
1993
Personal income tax expenditures (cont’d.)
6
470
1,200
n.a.
n.a.
n.a.
n.a.
74
31
125
–
4
3
n.a.
S
6
1995
7
460
1,190
n.a.
n.a.
n.a.
n.a.
120
38
125
–
4
2
n.a.
S
6
58
465
1,200
n.a.
n.a.
n.a.
n.a.
125
34
130
–
4
2
n.a.
S
6
1997
($ millions)
1996
58
465
1,205
n.a.
n.a.
n.a.
n.a.
130
34
130
14
–
2
n.a.
S
6
1998
Projections
58
470
1,215
n.a.
n.a.
n.a.
n.a.
135
34
130
14
–
2
n.a.
S
6
1999
58
475
1,220
n.a.
n.a.
n.a.
n.a.
140
34
130
14
–
2
n.a.
S
6
2000
ESTIMATES AND PROJECTIONS
11
12
n.a.
Taxable withdrawals
17
n.a.
n.a.
n.a.
Cash basis accounting
Flexibility in inventory accounting
2,140
8,870
Quebec abatement
Transfers of income tax room to provinces
Federal-provincial financing arrangements
n.a.
Exemption from making quarterly tax instalments
-5
-10
Deferral of capital gain through intergenerational
roll-overs of family farms
Deferral through 10-year capital gain reserve
Deferral of income from grain sold through
cash purchase tickets17, 18
S
n.a.
Deferral of tax on bonus and interest income
Deferral of income from destruction of livestock
n.a.
405
n.a.
5,275
–
Net Income Stabilization Account (NISA)
Deferral of tax on government contributions16
15
$500,000 lifetime capital gains exemption for
farm property14
Farming and fishing
Deferral of capital gain through transfer to spouse
Child tax benefit
13
Caregiver credit6
1993
Personal income tax expenditures (cont’d.)
9,090
2,185
n.a
n.a
n.a
n.a
14
31
S
-15
8
43
470
n.a.
5,240
–
1994
Estimates
9,745
2,320
n.a
n.a
n.a
n.a
8
19
S
-15
14
31
275
n.a.
5,230
–
1995
10,240
2,410
n.a
n.a
n.a
n.a
5
6
S
-33
18
110
320
n.a.
5,185
10,975
2,580
n.a
n.a
n.a
n.a
5
19
S
-36
21
92
295
n.a.
5,240
–
1997
($ millions)
–
1996
11,560
2,715
n.a
n.a
n.a
n.a
5
19
S
-28
37
78
295
n.a.
5,525
120
1998
Projections
12,155
2,840
n.a
n.a
n.a
n.a
5
19
S
-28
48
78
295
n.a.
6,000
125
1999
12,725
2,955
n.a
n.a
n.a
n.a
5
19
S
-28
57
78
295
n.a.
6,395
125
2000
Chapter 2
225
680
Non-taxation of guaranteed income supplement
and spouse’s allowance benefits
Non-taxation of social assistance benefits26
Income maintenance and retirement
–
Medical expense credit25
Medical expense supplement for earners5
270
260
Disability credit
Non-taxation of business-paid health
and dental benefits24
1,200
n.a.
Taxation of capital gains upon realization
Health
n.a.
n.a.
n.a.
Deduction of accelerated tax depreciation23
$200 capital gain on foreign exchange transactions
n.a.
Deferral through billed-basis accounting
by professionals
$1,000 capital gain on personal-use property
n.a.
Deferral through capital gains roll-overs
-33
125
Investment tax credit17, 22
Deferral through five-year capital gain reserve
215
Deduction of limited partnership losses17, 21
17
385
1,170
Partial inclusion of capital gains
$100,000 lifetime capital gains exemption19, 20
General business and investment
1993
Personal income tax expenditures (cont’d.)
13
705
260
–
260
275
1,270
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
-27
70
295
385
8,815
1994
Estimates
635
285
–
305
270
1,440
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
-6
54
195
405
35
1995
–
620
285
–
330
265
1,485
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
-22
42
180
315
595
290
40
390
270
1,515
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
-22
55
210
325
–
1997
($ millions)
1996
595
295
40
420
270
1,590
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
-22
55
210
335
–
1998
Projections
595
305
40
450
275
1,650
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
-22
55
210
345
–
1999
595
310
40
475
280
1,695
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
-22
55
210
355
–
2000
ESTIMATES AND PROJECTIONS
14
4,490
3,325
-930
Non-taxation of investment income32
Taxation of withdrawals
S
305
1,370
Deduction for contributions
Registered retirement savings plans
Saskatchewan Pension Plan
Pension income credit
Age credit31
140
220
Treatment of alimony and maintenance payments30
6
165
18
610
Non-taxation of veterans’ disability pension
and support for dependants
Non-taxation of veterans’ allowances, civilian war
pensions and allowances and other service
pensions (including those from Allied countries)29
Non-taxation of employer-paid premiums
for group term life insurance of up to $25,00028
Non-taxation of amounts received as damages
in respect of personal injury or death
Non-taxation of workers’ compensation
benefits17, 27
1993
Personal income tax expenditures (cont’d.)
-1,620
3,565
4,785
S
325
1,290
260
140
6
87
20
585
1994
Estimates
-1,750
3,850
5,290
S
350
1,270
250
140
4
–
20
635
1995
-1,895
3,885
5,820
S
360
1,295
260
140
3
–
19
625
-2,055
3,740
6,400
S
370
1,335
250
140
S
–
19
625
1997
($ millions)
1996
-2,230
4,415
7,040
S
380
1,410
250
140
S
–
19
625
1998
Projections
-2,420
5,445
7,745
S
385
1,445
250
140
S
–
19
625
1999
-2,625
6,160
8,520
S
390
1,475
250
140
S
–
19
625
2000
Chapter 2
32
Non-taxation of investment income
on life insurance policies34
1,790
2,385
Partial inclusion rate
Full inclusion rate
Non-taxation of capital gains on
principal residences39
Other items
5
58
Labour-sponsored venture capital
corporations credit37, 38
Deferral through 10-year capital gain reserve17
100
Deduction of allowable business
investment losses17, 36
$500,000 lifetime capital gains exemption
for small business shares17, 35
1,170
n.a.
Non-taxation of up to $10,000 of death benefit
Small business
n.a.
n.a.
Deferred profit-sharing plans
n.a.
-4,930
8,610
5,205
Non-taxation of RCMP pensions/compensation
in respect of injury, disability or death33
Taxation of withdrawals
Non-taxation of investment income
Registered pension plans
Deduction for contributions
1993
Personal income tax expenditures (cont’d.)
2,390
1,795
4
110
77
1,725
n.a.
n.a.
n.a.
n.a.
-4,010
9,540
4,890
1994
Estimates
1,445
1,085
-2
235
79
590
n.a.
n.a.
n.a.
n.a.
-4,520
10,040
4,925
1995
1997
1,660
1,245
2
90
62
475
n.a.
n.a.
n.a.
n.a.
-4,970
9,455
5,070
1,885
1,415
2
85
70
620
n.a.
n.a.
n.a.
n.a.
-5,455
8,490
5,225
($ millions)
1996
1,905
1,425
2
85
70
620
n.a.
n.a.
n.a.
n.a.
-6,465
9,315
5,380
1998
Projections
1,930
1,450
2
85
70
620
n.a.
n.a.
n.a.
n.a.
-6,015
10,655
5,540
1999
1,995
1,495
2
85
70
620
n.a.
n.a.
n.a.
n.a.
-7,275
11,165
5,710
2000
ESTIMATES AND PROJECTIONS
15
16
S
n.a.
n.a.
Non-taxation of income of Indians on reserves
Non-taxation of gifts and bequests
50
110
Deduction of farm losses for part-time farmers
540
Deduction of meals and entertainment expenses45
66
S
Deduction of carrying charges incurred
to earn income17, 44
Moving expense deduction
17
Attendant care expense deduction
Child care expense deduction
305
8
48
110
540
64
S
305
8
6
6
Non-taxation of specified incidental expenses
Non-taxation of allowances for diplomats and
other government employees posted abroad
43
960
n.a.
n.a.
9
21
–
900
S
S
1994
Estimates
910
Non-taxation of lottery and gambling winnings42
Memorandum items
20
14
–
Political contribution credit17
Gifts to the Crown credit
41
Reduced inclusion rate for capital gains arising
from certain charitable donations5
880
Assistance for prospectors and grubstakers
Charitable donations credit40
S
Non-taxation of income from the Office
of the Governor General
1993
Personal income tax expenditures (cont’d.)
52
97
645
61
S
395
9
6
1,155
n.a.
n.a.
10
34
–
940
S
S
1995
54
120
575
61
S
415
9
6
1,185
n.a.
n.a.
10
30
–
980
S
S
52
105
590
63
S
435
9
6
1,235
n.a.
n.a.
10
30
90
1,040
S
S
1997
($ millions)
1996
52
105
590
63
S
520
9
6
1,290
n.a.
n.a.
10
30
95
1,070
S
S
1998
Projections
52
105
590
63
S
525
9
6
1,340
n.a.
n.a.
10
30
100
1,105
S
S
1999
52
105
590
63
S
535
9
6
1,390
n.a.
n.a.
10
30
105
1,135
S
S
2000
Chapter 2
465
Deduction of union and professional dues
2,510
Non-taxation of employer-paid premiums
Basic personal credit
Non-taxation of capital dividends
n.a.
17,325
17,130
n.a.
–
645
220
1,360
1,055
2,655
1,300
465
540
77
S
74
87
9
1994
Estimates
–
635
Dividend gross-up and credit
Supplementary low-income credit6, 48
185
1,270
Non-taxation of employer-paid premiums
Foreign tax credit47
985
Canada and Quebec Pension Plan credit
Canada and Quebec Pension Plans
1,230
Employment insurance contribution credit
Employment insurance
490
Deduction of other employment expenses
78
S
Logging tax credit
Deduction of resource-related expenditures
73
Non-capital loss carry-overs17
46
89
11
Capital loss carry-overs17
Farm and fishing loss carry-overs
17
1993
Personal income tax expenditures (cont’d.)
n.a.
17,650
–
730
280
1,465
1,135
2,710
1,320
505
540
78
S
86
89
10
1995
8
n.a.
17,820
–
815
295
1,530
1,190
2,580
1,255
505
575
170
S
75
87
n.a.
18,245
–
865
340
1,510
1,300
2,630
1,280
515
600
110
S
75
87
9
1997
($ millions)
1996
n.a.
18,830
140
930
375
1,655
1,525
2,625
1,275
525
620
110
S
75
87
9
1998
Projections
n.a.
19,395
300
995
410
1,940
1,755
2,725
1,325
535
650
110
S
75
87
9
1999
n.a.
19,735
315
1,055
450
2,230
2,050
2,695
1,310
545
670
110
S
75
87
9
2000
ESTIMATES AND PROJECTIONS
17
18
The increase in this tax expenditure in 1995 reflects increases in the average amount of capital cost allowance (CCA) claimed and the number of individuals claiming
CCA in that year. The flow-through of CCA on Canadian films is not available for taxation years later than 1995, and is replaced by a tax credit to producers.
The 1997 budget proposed to extend this credit to most mandatory ancillary fees imposed by post-secondary institutions, beginning in 1997.
The 1996 budget increased this credit from $80 to $100 per month, beginning in 1996. The 1997 budget proposed to increase this credit to $150 per month for
1997, and $200 per month thereafter. The 1998 budget proposed to allow part-time students to claim a part-time education amount of $60 per month.
The 1996 budget increased from $4,000 to $5,000 the limit on the transfer of these amounts, beginning in 1996.
This measure was proposed in the 1997 budget.
This measure was proposed in the 1998 budget.
Very little information is available. In light of the increasing importance of registered education savings plans (RESPs), the 1997 budget indicated that Revenue
Canada will require additional information from RESP trustees, including the amount of the funds accumulated in these plans. The 1996, 1997 and 1998 budgets
reported estimates of the revenue cost of changes to RESPs that were based on conservative assumptions about the impact of the measures on take-up.
The 1998 budget proposed to replace the $500 tax-free allowance for volunteer firefighters with a deduction of up to $1,000 for emergency service volunteers.
The tax expenditure estimate for the emergency service volunteer deduction includes claims by firefighters after 1997.
The lower level of the tax expenditure after 1993 reflects the fact that residents of communities no longer eligible for benefits following the reform of northern
benefits were eligible for two-thirds benefits in 1993, one-third benefits in 1994, and none thereafter.
The increase in this tax expenditure in 1996 reflects a 30-per-cent increase in the number of claimants, and a 25-per-cent increase in the average claim in that
year, based on preliminary information.
Statistics Canada no longer collects data on strike pay in Canada.
Effective in 1993 with the introduction of the child tax benefit, the dependant credit can no longer be claimed for children under age 17. The decline in this tax
expenditure for 1995 reflects a 35-per-cent decrease in the number of claimants in that year. The 1996 budget increased the maximum credit per dependant
from $270 to $400.
The 1996 budget increased this tax benefit. The 1997 and 1998 budgets proposed additional enrichments to this provision (see Chapter 4). Payments made
between January and December of the year are reported.
The decline in this tax expenditure in 1995 reflects a 20-per-cent decrease in the number of claimants, and a 25-per-cent decrease in the average
claim in that year.
The data used to determine the Net Income Stabilization Account tax expenditures for 1993, published in the 1995 report, were incomplete. Since all of the data
required are still not available, the tax expenditure for 1993 cannot be estimated.
The high level of this tax expenditure in 1996 reflects special start-up payments to farmers in Saskatchewan in that year.
This tax expenditure is highly volatile. It is projected at its historical average.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Notes
Chapter 2
The amounts reported in previous years for this tax expenditure were based upon total sales, including sales by farming corporations. As the deferral of tax on
these sales represents a corporate income tax expenditure, the previously published estimates for this expenditure have been revised. The personal income tax
expenditure associated with this measure is now estimated as $ -12 million for 1991 and $ -8 million for 1992. Please see Table 2 of this report for estimates of
the value of the associated corporate income tax expenditure for this item.
The large increase in this tax expenditure in 1994 reflects the special election to claim the exemption for eligible capital gains accrued up to February 22, 1994 on
1994 tax returns.
The lifetime capital gains exemption for general property is not available for taxation years later than 1994. The tax expenditure for 1995 reflects late and adjusted
elections filed in that year with respect to gains accrued up to February 22, 1994.
The high value of this tax expenditure in 1994 reflects a 40-per-cent increase in the average loss claim in that year. The decline in the value of this tax expenditure
in 1995 reflects a 40-per-cent decline in the number of claimants in that year.
The high value of this tax expenditure in 1993 reflects a temporary small business investment tax credit. The tax credit was provided for investments in eligible
machinery and equipment made after December 2, 1992 and before 1994.
This tax expenditure includes the deduction of scientific research and experimental development expenditures. Accurate data are not available to estimate this
tax expenditure with precision.
The 1998 budget proposed to allow unincorporated owner-operators to deduct premiums for supplementary health care coverage against their business income
to a maximum amount, beginning in 1998.
The 1997 budget proposed a broadening of this credit to cover additional expenses, beginning in 1997.
The decline in this tax expenditure in 1996 reflects preliminary information, suggesting lower levels in future years.
The increase in this tax expenditure in 1995 reflects a 10-per-cent increase in the number of claimants in that year.
These amounts became taxable after July 1, 1994.
The expected decrease in this tax expenditure is in line with the historical trend.
The 1996 budget eliminated the income inclusion for recipients of child support payments, and disallowed the deduction to payers, for agreements made after
April 30, 1997.
These amounts became income-tested in 1994.
Projected values for this tax expenditure are lower than those provided in last year’s publication due to lower than expected interest rates in those years.
The amounts reported in previous years for this tax expenditure included taxable amounts and did not cover all non-taxable RCMP pensions. This tax
expenditure cannot be estimated with precision.
Although this measure does provide tax relief for individuals, it is implemented through the corporate tax system. See the corporate income tax expenditure
section of this report for an estimate of the value of this tax expenditure.
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
ESTIMATES AND PROJECTIONS
19
The high value of this tax expenditure in 1994 reflects a 30-per-cent increase in the average claim in that year. The decline in this tax expenditure in 1995 reflects
a 50-per-cent decline in the number of claimants, and a 15-per-cent decline in the average claim in that year. The decline in this tax expenditure in 1996 reflects a
further 25-per-cent decline in the average claim, partially offset by a 10-per-cent increase in the number of claims in that year, based on preliminary information.
The decline in the value of this tax expenditure in 1996 reflects a 10-per-cent decline in the number of claimants, and a 15-per-cent decline in the average claim
in that year, based on preliminary figures.
The 1996 budget reduced this credit from 20 per cent to 15 per cent, and the purchase amount eligible for credit from $5,000 to $3,500 per year, for purchases
made after March 5, 1996.
The high value of this tax expenditure in 1995 reflects record sales of shares of labour-sponsored venture capital corporations for that year. The decline in the
value of this expenditure in 1996 reflects a 30-per-cent decline in the number of claimants, and a 45-per-cent decline in the average claim in that year, based on
preliminary figures.
The decline in this tax expenditure in 1995 reflects declines in home values and home sales in that year. Overall, this tax expenditure is expected to remain below
its 1994 value, reflecting projected home values and sales.
The 1994 budget lowered the threshold at which charitable donations begin to earn the 29-per-cent credit from $250 to $200. The 1996 and 1997 budgets
proposed additional enrichments to this credit (see Chapter 4).
The increase in the value of this tax expenditure in 1995 reflects a 10-per-cent increase in the number of claimants, and a 45-per-cent increase in the average
claim in that year.
This estimate assumes that the total amount of lottery and horse racing winnings would be included in income and subject to tax. However, there is some
uncertainty regarding the proper benchmark tax system in this area. For example, if the benchmark system included taxation of winnings, it would also have to
include a deduction for the purchase cost of tickets. A threshold below which winnings would not be taxable may also be necessary, due to the large
administrative cost of taxing very small prizes. In addition, proceeds from the sale of lottery tickets are an important source of funds for provincial governments
and not-for-profit organizations. As a result, there is already an element of taxation to lottery and gambling proceeds. This estimate is therefore included as a
memorandum item only.
The 1996 budget broadened eligibility criteria for claiming this deduction, beginning in 1996. The 1998 budget proposed to increase the maximum claim under
this provision, and to extend it to part-time students, beginning in 1998.
The increase in this tax expenditure in 1995 reflects a 10-per-cent increase in the average claim in that year. The decline in this tax expenditure in 1996 reflects a
15-per-cent decrease in the number of claimants in that year, based on preliminary information.9
The deduction is limited to 50 per cent of eligible amounts incurred after February 1994. Amounts incurred earlier were deductible at 80 per cent.
The increase in this tax expenditure in 1996 reflects a 40-per-cent increase in the number of claimants, and a 55-per-cent increase in the average claim in that
year, based on preliminary information.
The expected increase in this tax expenditure is in line with the historical trend.
The 1998 budget also proposed relief from the general surtax for low- and middle-income taxpayers. This proposal represents a change in the benchmark tax
system, and consequently there is no associated tax expenditure.
35
36
37
38
39
40
41
42
43
44
45
46
47
48
Chapter 2
20
885
105
29
–
84
555
S
–
260
S
–
n.a.
n.a.
n.a.
n.a.
770
65
22
S
94
2,365
1,005
38
1994**
2,145
530
45
19931**
Estimates
365
S
9
930
175
38
–
–
n.a.
n.a.
2,565
1,520
42
1995
1997
395
S
34
980
270
–
–
–
n.a.
n.a.
2,645
1,320
44
420
S
36
1,035
200
–
–
–
n.a.
n.a.
2,835
1,415
47
($ millions)
1996
455
S
37
1,090
100
–
–
–
n.a.
n.a.
2,980
1,485
49
1998
Projections2
485
S
39
1,150
100
–
–
–
n.a.
n.a.
3,050
1,525
51
1999
520
S
40
1,210
100
–
–
–
n.a.
n.a.
3,105
1,550
51
2000
** An industry breakdown of 1993 and 1994 corporate tax expenditures can be obtained on request.
* The elimination of tax expenditure would not necessarily yield the full tax revenues shown in the table. See pages 45-47 for a discussion of the reasons
for this.
Tax credits
Investment tax credits
SR&ED investment tax credit4
Atlantic investment tax credit5
Special investment tax credit6
Cape Breton investment tax credit7
Small business investment tax credit8
ITCs claimed in current year but earned
in prior years9
Political contribution tax credit
Canadian film or video production tax credit10
Low tax rate for small businesses
Low tax rate for manufacturing and processing3
Low tax rate for credit unions
Exemption from branch tax for transportation,
communications, banking and
iron ore mining corporations
Exemption from tax for international banking centres
Tax rate reductions
Table 2
Corporate income tax expenditures*
ESTIMATES AND PROJECTIONS
21
22
85
78
n.a.
Non-deductibility of advertising expenses
in foreign media
Non-taxation of provincial assistance for
venture investments in small business
Accelerated write-off of capital assets and
resource-related expenditures12
n.a.
n.a.
Interest on small business financing loans
Deferrals
S
S
Deductibility of gifts to the Crown
Earned depletion
Deductibility of charitable donations
480
11
-350
Resource allowance
535
Non-deductibility of Crown royalties and
mining taxes
Royalties and mining taxes
Partial inclusion of capital gains
Exemptions and deductions
1993
n.a.
n.a.
n.a.
S
5
89
21
540
-385
525
1994
Estimates
Table 2
Corporate income tax expenditures (cont’d.)
n.a.
n.a.
n.a.
S
3
110
50
555
-395
550
1995
n.a.
n.a.
n.a.
S
4
130
40
610
-435
575
n.a.
n.a.
n.a.
S
5
140
30
635
-450
605
1997
($ millions)
1996
n.a.
n.a.
n.a.
S
5
145
25
575
-405
635
1998
Projections
n.a.
n.a.
n.a.
S
5
150
10
600
-430
670
1999
n.a.
n.a.
n.a.
S
5
155
10
620
-440
700
2000
Chapter 2
14
Deferral of income from destruction of livestock
Copyright royalties22
Exemptions from non-resident withholding tax21
Non-taxation of life insurance companies’
world income
International
Deferral of tax from use of billed-basis
accounting by professionals
81
n.a.
n.a.
S
-3
n.a.
n.a.
Cash basis accounting
Flexibility in inventory accounting
20
n.a.
–
Deductibility of earthquake reserves18
Deferral of income from grain sold through
cash purchase tickets19
–
–
Deductibility of countervailing and
anti-dumping duties17
23
n.a.
n.a.
S
13
n.a.
–
15
–
Deductibility of contributions to mine reclamation
and environmental trusts16
18
n.a.
4
n.a.
Capital gains taxation on realization basis
n.a.
15
22
1994
Expensing of advertising costs15
n.a.
19
49
Available for use
Holdback on progress payments to contractors
Allowable business investment losses
13
1993
Estimates
Table 2
Corporate income tax expenditures (cont’d.)
57
n.a.
n.a.
S
7
n.a.
n.a.
–
–
15
8
n.a.
n.a.
18
22
1995
60
n.a.
n.a.
S
S
n.a.
n.a.
–
–
15
10
n.a.
n.a.
15
25
63
n.a.
n.a.
S
7
n.a.
n.a.
–
–
15
10
n.a.
n.a.
18
25
1997
($ millions)
1996
66
n.a.
n.a.
S
7
n.a.
n.a.
15
n.a.
15
10
n.a.
n.a.
17
26
1998
Projections
69
n.a.
n.a.
S
7
n.a.
n.a.
20
n.a.
15
10
n.a.
n.a.
17
28
1999
72
n.a.
n.a.
S
7
n.a.
n.a.
25
n.a.
15
10
n.a.
n.a.
17
29
2000
ESTIMATES AND PROJECTIONS
23
24
Dividends
n.a.
n.a.
Income tax exemption for provincial and
municipal corporations
Non-taxation of certain federal
Crown corporations
Aviation fuel excise tax rebate26
Excise tax transportation rebate
–
23
n.a.
Non-taxation of registered charities and
other non-profit organizations
25
63
450
n.a.
10
Interest credited to life insurance policies
Transfer of income tax room to provinces in
respect of shared programs
Other tax expenditures
Exemption from Canadian income tax of
income earned by non-residents from
the operation of a ship or aircraft in
international traffic
Management fees
74
460
24
325
Interest on long-term corporate debt
40
Interest on deposits
Royalties for the use of, or right to use,
other property23
1993
–
S
n.a.
n.a.
n.a.
70
560
n.a.
16
21
515
400
49
1994
Estimates
Table 2
Corporate income tax expenditures (cont’d.)
–
–
n.a.
n.a.
n.a.
73
695
n.a.
17
52
545
425
51
1995
–
–
n.a.
n.a.
n.a.
74
700
n.a.
18
62
535
420
150
n.a.
–
n.a.
n.a.
n.a.
77
765
n.a.
19
68
530
410
160
1997
($ millions)
1996
n.a.
–
n.a.
n.a.
n.a.
81
805
n.a.
19
70
550
425
165
1998
Projections
n.a.
–
n.a.
n.a.
n.a.
85
820
n.a.
20
72
550
430
175
1999
n.a.
–
n.a.
n.a.
n.a.
90
825
n.a.
21
74
550
430
185
2000
Chapter 2
32
100
n.a.
Patronage dividend deduction
430
Exempt corporations
260
4
62
75
1,990
1,035
Threshold35
Large corporations tax
Deductible meals and entertainment
expenses34
Farm losses applied to current year33
Net capital losses applied to current year
Net capital losses carried back
Non-capital losses applied to current year
Non-capital losses carried back30
Loss carry-overs
220
Refundable capital gains for investment
corporations and mutual fund
corporations
29
805
Refundable Part I tax on investment income
of private corporations
31
–
Temporary tax on the capital of large
deposit-taking institutions28
Memorandum items
–
Surtax on the profits of tobacco
manufacturers27
1993
145
n.a.
485
240
8
130
84
2,135
850
170
855
–
-45
1994
Estimates
Table 2
Corporate income tax expenditures (cont’d.)
210
n.a.
520
195
11
150
62
3,050
745
225
1,045
-40
-60
1995
225
n.a.
555
200
12
225
83
2,245
995
220
955
-60
-65
245
n.a.
565
205
12
170
80
2,785
960
230
995
-65
-65
1997
($ millions)
1996
255
n.a.
575
215
13
165
88
2,705
1,055
240
1,030
-70
-70
1998
Projections
260
n.a.
590
225
13
160
99
2,680
1,190
255
1,080
-75
-70
1999
265
n.a.
600
230
14
160
110
2,695
1,320
265
1,120
–
-15
2000
ESTIMATES AND PROJECTIONS
25
26
92
S
Non-resident-owned investment
corporation refund
Investment corporation deduction
n.a.
n.a.
n.a.
n.a.
S
180
n.a.
15
The increases over the 1993 to 1995 period in the revenue cost of the low tax rate for manufacturing and processing (M&P) profits reflect both a decrease in the
tax rate on M&P profits from 23 per cent to 21 per cent and an increase in the level of M&P profits. The decrease from 1995 to 1996 reflects a projected
decrease in the level of M&P profits.
n.a.
n.a.
n.a.
S
160
n.a.
16
35
2000
3
n.a.
n.a.
n.a.
S
145
n.a.
24
35
1999
Unless otherwise indicated in the footnotes, changes in the projections from the figures in last year’s edition of this document result from changes in the
explanatory economic variables upon which the projections are based.
n.a.
n.a.
n.a.
S
130
n.a.
32
35
1998
The 1993 figures are based upon final data and may differ from the figures in last year’s edition of this document which were based on preliminary data.
n.a.
n.a.
n.a.
S
115
n.a.
63
30
20
1997
($ millions)
1996
2
n.a.
n.a.
n.a.
S
105
n.a.
35
75
1995
Projections
1
Notes
n.a.
n.a.
Deduction for intangible assets
Tax exemption on income of foreign
affiliates of Canadian corporations
n.a.
n.a.
S
60
n.a.
11
88
1994
n.a.
Deferral of capital gains income through
various roll-over provisions
n.a.
5
35
Deductibility of royalties paid to
Indian bands
Deductibility of provincial royalties
(joint venture payments) for the
Syncrude project (remission order)37
Logging tax credit
36
1993
Estimates
Table 2
Corporate income tax expenditures (cont’d.)
Chapter 2
The increase between 1993 and 1994 is largely attributable to an increase in the number of taxpayers claiming scientific research and experimental development
(SR&ED) tax credits and to investment tax credit (ITC) rule changes. Prior to 1994, there was annual limitation on the amount of ITCs that could be utilized.
SR&ED tax credits earned but not claimed or refunded in a current year may be carried forward. When claimed, these unused credits are included under ITCs
claimed in a current year but earned in prior years.
The projected cost of the tax expenditure declines in 1997 because a large portion of this tax expenditure relates to the Hibernia offshore oil project which will
complete its investment phase before the end of 1998.
New investments did not earn this credit after December 31, 1994. Credits not claimed in 1994 and prior years may be carried forward. However, they are
included in the forecasts for ITCs claimed in a current year but earned in prior years.
The Cape Breton investment tax credit was applicable to eligible equipment acquired after May 23, 1985 and before 1993. When claimed, Cape Breton ITCs
earned before 1993 and claimed after 1993 are included under ITCs claimed in a current year but earned in prior years.
Since the small business investment tax credit was available for eligible expenditures on machinery and equipment acquired after December 2, 1992 and before
1994 only, the revenue cost is concentrated in the 1993 and 1994 taxation years. Unclaimed credits are carried forward and may be claimed in subsequent
years. When claimed, these unused credits are included under ITCs claimed in a current year but earned in prior years.
All ITCs earned in previous years but not claimed until the current year are included under this item. Because this tax expenditure fluctuates significantly from year
to year, the tax expenditure projections are based upon an average of the amounts of 1992 to 1994.
This measure was introduced in 1995.
Due to the elimination of the earned depletion allowance, there have been no additions to this tax expenditure pool since 1989. Amounts claimed in the current
years relate to depletion earned in 1989 and prior years.
This tax expenditure consists of the fast write-off of certain capital assets, including capital equipment used for SR&ED, and of resource exploration and
development expenditures and energy conservation and efficiency equipment. See text on page 88 for a further explanation of why no figures have
been calculated.
The tax expenditure for allowable business investment losses fluctuates from year to year depending upon the amount of current year losses and the availability
of income against which to apply these losses. The decrease in the tax expenditure amount from 1993 to 1994 results from a decrease in the amount of
losses realized.
The amount of this tax expenditure can fluctuate significantly from year to year depending primarily upon the level of construction activity.
Estimates and projections were not previously provided for this item. The 1991 and 1992 estimates are less than $2.5 million.
This measure was introduced in 1994.
This measure was introduced in 1998.
This measure was introduced in 1998.
Estimates and projections were not previously provided for this item. The 1991 and 1992 estimates are $-3 million and $-4 million respectively.
Estimates and projections were not previously provided for this item. The 1991 and 1992 estimates are less than $2.5 million.
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
ESTIMATES AND PROJECTIONS
27
These estimates are based on the benchmark assumption that no behavioural response would occur after the hypothetical removal of existing withholding tax
exemptions. This assumption is particularly difficult to sustain for this type of tax, as indicated in the text, which means that the amounts shown in the table
should not be regarded as estimates of the revenue gain that would be realized from the hypothetical removal of the listed withholding tax exemptions.
The decline from 1993 to 1994 is due to a decline in the level of exempt payments made to non-residents. Such a decline can be expected on occasion since
the events that trigger such payments will not necessarily occur on a regular basis.
The large increase from 1995 to 1996 can be attributed to protocol changes to the Canada-U.S. tax treaty.
The decline from 1993 to 1994 is due to a decline in the level of exempt payments made to non-residents. Such a decline can be expected on occasion since
the events that trigger such payments will not necessarily occur on a regular basis.
This measure was effective for 1991 and 1992 calendar years only. The 1993 estimate has been decreased by $45 million from the previous publication to reflect
the repayment of rebates.
This measure is effective for the years 1997 to 2000 inclusive.
This measure was introduced in 1994 and is scheduled to expire in 2000.
This measure was introduced in the 1995 budget, and extended in the 1996, 1997 and 1998 budgets. The measure is scheduled to expire after
October 31, 1999.
The impact of loss carry-overs can fluctuate significantly from year to year depending upon the amount of current and prior years’ losses and the availability of income
against which to apply these losses.
The decrease in this amount over the 1993 to 1995 period results from a decrease in the amount of losses available for carry-back to reduce income of
prior years.
The increase in this amount over the 1993 to 1995 period results from an increase in the amount of income against which to apply losses of prior years.
The increase in this amount over the 1993 to 1996 period results from an increase in the amount of income against which to apply losses of prior years.
The increase in this amount over the 1993 to 1995 period results from an increase in the amount of income against which to apply losses of prior years.
The decrease in the tax expenditure for meals and entertainment expenses over the 1993 to 1995 period reflects the impact of the decrease in the deductible
portion of such expenses from 80 per cent to 50 per cent, effective after February 1994.
The large corporations tax rate increased to 0.225 per cent from 0.2 per cent, effective February 28, 1995. Therefore, the value of the exempt threshold was
increased for taxpayers.
The increase in the revenue cost for this item in 1993 to 1995 can be attributed to an increase in the profitability of the industries subject to logging taxes and the
refunds of softwood lumber countervailing duties paid to the U.S. in 1992 and 1993 following a tribunal ruling in favour of Canadian exporters.
The amount of this tax expenditure can fluctuate significantly from year to year depending primarily upon profitability and capital expenditures. These two factors
can change the payments made under the joint venture agreement with the Government of Alberta. The large decrease from 1996 to 1997 can be attributed to
changes in the joint venture agreement, implemented on January 1, 1997.
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
Chapter 2
28
80
130
80
115
50
105
55
100
85
135
105
50
5
30
180
350
355
1,500
n.a.
n.a.
S
S
150
285
2,675
1995
90
150
110
45
5
30
185
370
385
1,555
n.a.
n.a.
S
S
155
300
2,760
1996
90
160
120
45
5
30
200
395
430
1,575
n.a.
n.a.
S
S
165
315
2,885
($ millions)
1997
90
165
125
50
5
35
215
430
475
1,585
n.a.
n.a.
S
S
175
335
3,080
1998
90
175
130
50
5
40
225
445
495
1,595
n.a.
n.a.
S
S
185
350
3,190
1999
Projections
* The elimination of a tax expenditure would not necessarily yield the full tax revenues shown in the table. See pages 45-47 for a discussion of the
reasons for this.
Water and basic garbage collection services
Quick method accounting
Exemption for small business
Municipal transit
1
5
30
5
30
Ferry, road and bridge tolls
Legal aid services
340
175
330
170
Education services (tuition)
Child care and personal services
1,450
n.a.
340
1,395
S
n.a.
325
Health care services
Long-term residential rent
Tax-exempt goods and services
n.a.
Zero-rated financial services
S
n.a.
Certain zero-rated purchases made by exporters
Non-taxable importations
S
145
140
S
275
2,595
1994
Estimates
265
2,550
1993
Agricultural and fish products and purchases
Medical devices
Prescription drugs
Basic groceries
Zero-rated goods and services
Table 3
GST tax expenditures*
90
185
135
55
5
40
240
470
525
1,650
n.a.
n.a.
S
S
195
370
3,320
2000
ESTIMATES AND PROJECTIONS
29
30
n.a.
500
Tax rebates
Rebates for book purchases made by qualifying
public institutions2
Housing rebate3
305
Rebates for schools5
n.a.
2,645
Tax Credits
Special credit for certified institutions
The GST credit
n.a.
2,785
70
135
135
75
50
120
290
275
530
50
520
n.a.
n.a.
n.a.
1994
n.a.
2,820
70
140
55
120
300
270
565
55
415
n.a.
n.a.
n.a.
1995
Estimates
50
Rebates for non-profit organizations6
Rebates for charities
Rebates for colleges5
Rebates for universities
120
275
Rebates for hospitals5
5
510
Rebates for municipalities5
45
n.a.
Certain supplies made by non-profit organizations
Rebate for foreign visitors on accommodations4
n.a.
1993
Domestic financial services
Table 3
GST tax expenditures
–
2,850
65
140
50
115
285
250
540
65
435
S
n.a.
n.a.
1996
n.a.
70
150
50
115
285
250
540
70
520
25
n.a.
–
2,895
($ millions)
1997
–
2,980
75
160
50
115
285
250
540
75
545
25
n.a.
n.a.
1998
–
2,975
80
165
50
115
285
250
540
75
555
30
n.a.
n.a.
1999
Projections
–
2,970
80
175
50
115
285
250
540
80
605
30
n.a.
n.a.
2000
Chapter 2
Estimates of this tax expenditure were derived as part of the review of a Visitors’ Rebate Program.
Since the value of this tax expenditure is influenced by provincial budgetary decisions, the projected value of the tax expenditure for the relevant years is simply
the value estimated for 1996.
Estimates of the expenditure over the historical period have been revised to reflect revisions in the administrative data.
The numerical approach used to derive the tax expenditure figures is tightly integrated with the tax expenditure estimates reported for the personal and corporate
tax system. The decline in 1994 largely reflects the reduction in the eligibility limit for meal and entertainment expenses from 80 per cent to 50 per cent.
5
6
7
n.a.
85
115
The sharp decline in 1995 reflects the significant weakness in residential construction in that year.
n.a.
80
115
2000
4
n.a.
75
110
1999
This measure was introduced in October 1996.
n.a.
75
105
1998
3
($ millions)
1997
2
n.a.
70
105
1996
The decline in this expenditure over the 1993 to 1996 period can be attributed to declines in municipal spending. The projected increase for the 1997 to 2000
period reflects the underlying economic forecast used to project the expenditure over the period.
n.a.
60
100
1995
Projections
1
Notes
70
n.a.
65
n.a.
Rebate to employees and partners
Sales of personal-use real property
1994
115
1993
Estimates
145
Memorandum Items
Meals and entertainment expenses7
Table 3
GST tax expenditures
ESTIMATES AND PROJECTIONS
31
Chapter 3
FRAMEWORK
AND
METHODOLOGY
Introduction
The purpose of this report is to serve as a source of information for parliamentarians,
government officials and others who wish to analyze Canada’s federal income tax
system and the goods and services tax (GST). It is also an important input into the
process of evaluating the operation of these tax systems. However, it should be
emphasized that this report itself does not attempt to make judgements about
either the appropriateness of government policy objectives or the effectiveness of
the various tax provisions in achieving those objectives.
The principal function of taxes is to raise the revenues necessary to finance
government operations. This tax revenue is often raised in a way which, at the
same time, implements government policy objectives by providing assistance
or incentives to particular groups of individuals, businesses or to certain types
of activities. These measures, which can take the form of tax exemptions,
deductions, rebates, deferrals or credits, are typically referred to as tax expenditures.
This document provides historical estimates, based on a sample of taxpayer
returns, of the cost of these items for the last years for which data are available.
In the case of the personal income tax system, these are 1993, 1994 and
1995. For the corporate income tax system, they are 1993 and 1994. The
GST estimates are for the years 1993 to 1996. In addition, it also provides
projections of these tax expenditures, beyond the last historical year, to 2000.
In order to identify tax expenditures, it is necessary to establish a “benchmark”
tax structure which does not contain any preferential tax provisions. Tax
expenditures are then defined as deviations from this benchmark. It is
important to recognize that reasonable differences of opinion exist as to the
definition of the benchmark tax system, and hence what constitutes a tax
expenditure. For example, child care expenses could be considered to be a
cost of earning income and therefore part of the benchmark tax system; if not,
then tax assistance for child care expenses would be a tax expenditure.
This report takes a broad approach – only the most fundamental structural
elements of each tax system are considered to be part of the benchmark. By
defining the benchmark in this manner, many tax provisions are treated as tax
expenditures. This approach provides information on a full range of measures,
and so allows readers who take a different position as to the appropriate
benchmark system to construct their own list of tax expenditures.
In keeping with this objective of providing as much information as possible, the
document identifies several tax provisions that are not generally considered to
be tax expenditures even though they reduce the amount of revenue collected.
These measures are denoted as “memorandum items” and have been included
simply to provide additional information. Three types of memorandum items
are included.
33
Chapter 3
■
Measures that are considered to be part of the benchmark system. The
dividend tax credit, for example, reduces or eliminates the double taxation
of income earned by corporations and distributed to individuals
through dividends.
■
Measures where there may be some debate over whether the item should
be considered to be a tax expenditure. The cost of business-related meals
and entertainment, for example, may be considered to be an expense
incurred in order to earn income (and therefore part of the benchmark)
or may be considered to provide a benefit (and therefore constitute a
tax expenditure).
■
Measures where the available data do not permit separation of the tax
expenditure component from the portion which is essentially part of the
benchmark tax system. For example, a portion of tax-free allowances for
Members of Parliament (MPs) is used to cover legitimate employment
expenses (and is therefore part of the benchmark for the income tax
system) while the rest may be used for personal consumption (and is
therefore an income tax expenditure). Since it is not possible to distinguish
between these two elements, the non-taxation of such allowances is
included as a memorandum item.
The federal and provincial income tax and sales tax systems interact with each
other to various 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 are purely federal in nature.
The remainder of this chapter discusses the tax expenditure concept in order
to facilitate understanding of the quantitative estimates. It also discusses the
calculation and interpretation of the costs of tax expenditures, including key
assumptions used in the analysis. Chapter 2 presented estimates of the costs
of tax expenditures and memorandum items in the personal and corporate
income tax systems and the GST.
Simplified descriptions of each tax expenditure as well as information on data
sources and methodology used in constructing the estimates are presented in
Chapter 4 (personal income tax), Chapter 5 (corporate income tax) and
Chapter 6 (GST). Chapter 7 sets out the stated objectives for each of the tax
expenditures in each tax system.
34
FRAMEWORK AND METHODOLOGY
What are tax expenditures?
Tax expenditures are those tax incentives that are used as alternatives to
direct government spending for achieving government policy objectives.
While there is agreement on this conceptual definition of a tax
expenditure, difficulties arise in making this definition operational. There is
no widely accepted operational methodology for estimating tax
expenditures. A range of methodologies exists internationally, some
restrictive, others very broad. The broadest of the available options is to
estimate tax expenditures as all deviations from a benchmark tax system.
Typically, these deviations take the form of exemptions, deductions, rate
reductions, rebates, credits or deferrals. It is to be expected that such a
wide interpretation will produce a list which includes many items that are
not tax expenditures. It is this interpretation of tax expenditures that is
used here to provide as much information as possible on deviations from
the benchmark tax system.
Elements of Tax Expenditures in the Personal
and Corporate Income Tax Systems
The benchmark for the personal and corporate tax systems includes the
existing tax rates and brackets, unit of taxation, time frame of taxation,
treatment of inflation for calculating income and those measures designed to
reduce or eliminate double taxation.
The definition of income is crucial in determining what constitutes a tax
expenditure. Tax provisions that provide for the deduction of current costs
incurred to earn income are considered to be part of the benchmark system
and therefore not tax expenditures. For example, the deductibility of labour
costs or economic depreciation of business assets in determining business
income would not be considered a tax expenditure.
It is important to emphasize that the definition of the benchmark tax structure,
and hence the identification of tax expenditures, is subjective. Reasonable
differences of opinion may exist as to the interpretation and categorization of
tax measures. For example, employment insurance (EI) premiums paid by an
employee could be viewed either as an expense of earning income or as a tax
used to finance an income transfer to the unemployed. From the first perspective,
the current system of providing employees a tax credit for contributions would
not be a tax expenditure. The credit for EI premiums merely recognizes an expense
of earning income and, hence, is part of the benchmark tax structure. On the
other hand, one could argue that the tax credit for EI contributions represents
a tax expenditure because the taxes paid by taxfilers are generally not deductible
against personal income taxes. For this reason the tax treatment of EI premiums
is reported as a memorandum item. Measures such as these which are subject
to debate are discussed on an individual basis in Chapters 4 and 5.
35
Chapter 3
The following provides a more detailed discussion of the features of the
benchmark for both the personal and corporate tax systems.
(1) Tax rates and income brackets
For the personal income tax system, the existing rate structure, including
surtaxes, is taken to be part of the benchmark system. The basic personal
credit is also treated as part of this structure since it is universal in its application
and can be viewed as providing a zero rate of tax up to an initial level of
income. However, the cost of this credit is included as a memorandum item.
With respect to the corporate income tax system, effective after February 27,
1995, the basic federal corporate tax rate is 29.12 per cent including the
surtax but after the provincial abatement. Provisions that reduce this tax rate
for certain types of activities or corporations are regarded as tax expenditures.
These include the lower tax rate for manufacturing and processing profits, and
the lower tax rate for small business profits, which is available on the first
$200,000 of active business income earned by most Canadian-controlled
private corporations (CCPCs). The large corporations tax, levied at the existing
rate, is also considered to be part of the benchmark tax system.
(2) Tax unit
Personal income taxes in Canada are based on individual income.
Consequently, the individual is taken as the benchmark tax unit for the
purposes of identifying tax expenditures in this report. This choice leads to the
classification of the various provisions related to dependants, such as the
spousal credit, as tax expenditures.
The choice of the appropriate unit for the corporate income tax benchmark
system raises a number of conceptual issues. There is a wide range of possible
tax units, including the establishment or activity unit within a corporation, the
single legal corporate entity, and the consolidated group of related corporations.
The present income tax system contains elements of all these approaches. For
example, the view that the activity unit is the appropriate unit of taxation is
consistent with the “at-risk” rules, which restrict the amount of investment tax
credits and business losses that may be flowed out to limited partners. The view
that the single legal corporate entity is the relevant tax unit is supported by the
fact that income from one part of a business can be offset by other business
losses within the same corporation, whereas losses by one corporation may not
generally be used against the income of another corporation in the group. Other
provisions in the current tax system allow corporate groups to reorganize their
corporate structures without triggering any capital gains or recaptured
depreciation. These roll-over provisions lead to a deferral of capital gains and
recaptured depreciation, which would be appropriate if the taxation unit is the
consolidated group of related corporations. On balance, the view most closely
related to the existing system is that of the single legal corporate entity. For this
reason, the single corporation is adopted as the benchmark tax unit, together
with the availability of various roll-over provisions which permit the deferral of
capital gains when a corporate structure is changed.
36
FRAMEWORK AND METHODOLOGY
(3) Taxation period
The benchmark taxation period for the personal income tax system in this
document is the calendar year. Accordingly, any measures that provide
deferrals of taxable income to a subsequent year are considered to be tax
expenditures. For example, farmers are permitted to defer the receipt of
income from the sale of grain through the use of special cash purchase tickets
and this is listed as a tax expenditure.
The benchmark taxation period for the corporate income tax system is the
fiscal year. As with the personal tax system, deferrals, such as the accelerated
write-off of capital assets, are considered to be tax expenditures.
A strict application of the annual taxation period would imply that measures
which provide for the carry-over of losses to other years would be tax
expenditures. However, the relatively cyclical nature of business and
investment income suggests that such income should be viewed over a
number of years. Consequently, carry-overs of business and investment losses
are treated as part of the benchmark tax system in this report. Estimates of the
cost of these provisions are provided in the memorandum items section.
(4) Treatment of inflation
Both the personal and corporate income tax systems are based on nominal
income with a number of provisions that account for the impact of inflation.
Nominal income is therefore taken as the appropriate basis for the benchmark
tax system. Consequently, special measures, such as the partial exclusion of
capital gains from taxable income, which may serve to recognize inflation, are
identified as tax expenditures.
(5) Avoidance of double taxation
Conceptual difficulties arise in deciding whether certain provisions which
reduce or eliminate double taxation should be considered as tax expenditures.
For example, regarding the personal and corporate income tax systems as
completely separate would suggest that the dividend tax credit is a tax
expenditure. However, the credit is an essential feature of the overall (i.e. both
corporate and personal) income tax structure and serves to eliminate or reduce
double taxation. In its absence, income earned through corporations would be
taxed twice, once in the corporation and once at the personal level. For this
reason, the dividend tax credit is not considered to be a tax expenditure.
Similarly, the non-taxation of intercorporate dividends is designed to ensure
that income already taxed in one corporation is not taxed again upon receipt of
a dividend by another corporation. Without this exemption, double taxation
would occur and the corporate income tax system would not be neutral
across organizational structures. For example, consider a single corporation
that currently operates as a number of divisions. Now suppose it reorganizes
into a holding company with wholly owned subsidiaries instead of divisions.
The profits from the subsidiaries flow to the holding company through
intercorporate dividends. If these dividends were subject to taxation at both
37
Chapter 3
the subsidiary and the holding company levels, double taxation would occur.
Consequently, the exemption of intercorporate dividends is not considered a
tax expenditure.
Similar reasoning applies to the tax exemption on income of foreign affiliates of
Canadian corporations. Canada either exempts certain dividend income paid
by foreign affiliates from Canadian corporate income tax or it provides a foreign
tax credit for income taxes paid in the other country. In either case, the
intention is to ensure that income is not subject to double taxation (i.e. once in
the country of residence of the foreign affiliate and once again in Canada when
the dividends are paid out). A further discussion of this topic and the possible
benchmarks that could be considered is contained in Chapter 5.
Information on some of these measures that provide relief from “double
taxation” is provided in the appropriate memorandum sections of this report.
The benchmark for the income tax system
The definition of the benchmark tax structure, and hence the identification
of tax expenditures, is subjective. A broadly based system is used as the
benchmark for income taxes in this report. The essential features are:
Personal income tax
■
the existing tax rates and income brackets are taken as given;
■
the tax unit is the individual;
■
taxation is imposed on a calendar year basis;
■
nominal income (i.e. no adjustment for inflation) is used in defining
income; and
■
it incorporates structural features of the overall tax system such as
the dividend gross-up and credit.
Corporate income tax
■
the existing general tax rate is taken as given;
■
the tax unit is the corporation;
■
taxation is imposed on a fiscal year basis;
■
nominal income (i.e. no adjustment for inflation) is used in defining
income; and
■
it incorporates structural features of the overall tax system such as
the non-taxation of intercorporate dividends.
38
FRAMEWORK AND METHODOLOGY
Tax Expenditures in the Goods and Services Tax 1
The benchmark system used to analyze the GST is a broadly based, multistage value-added tax collected according to the destination principle and
using a tax credit mechanism to relieve the tax in the case of business inputs.
The following provides a more detailed discussion of the features of
the GST benchmark.
(1) Multi-stage system
The main structural elements of a multi-stage consumption tax are taken to be
part of the benchmark. Under the multi-stage system, tax is applied to the
sales of goods and services at all stages of the production and marketing
chain. At each stage, however, businesses are able to claim tax credits to
recover the tax they paid on their business inputs. In this way, the tax system
has the effect of applying the tax only to the value added by each business.
Since the only tax that is not refunded is the tax collected on sales to final
consumers, the tax rests ultimately on final consumption.
(2) Destination-based
The benchmark system applies tax only to goods and services consumed in
Canada. Accordingly, the tax applies to imports as well as domestically
produced goods and services. Exports are not subject to the tax.
(3) Single tax rate
The benchmark system has only one tax rate. This rate corresponds to the
statutory rate of 7 per cent. As a result, GST provisions that depart from this
single rate are considered to be tax expenditures.
(4) Taxation period
The benchmark taxation period is the calendar year.
(5) Constitutional provisions for government sectors
Section 125 of the Constitution Act, 1867, provides that “no land or property
belonging to Canada or any province shall be liable to taxation”. This means
that neither the federal nor the provincial governments (or their Crown agents)
are liable to taxation by the other. Accordingly, constitutional immunity from
taxation is recognized as part of the benchmark system for the GST.
1
It should be noted that this analysis deals only with the GST and not with other commodity taxes
(e.g., excise taxes). The exclusion of these other commodity taxes recognizes the inherent conceptual
difficulties of defining an appropriate benchmark system in the context of a tax which is applied to a
specific commodity. Work is continuing on defining an appropriate benchmark system which would
allow the future measurement of the associated tax expenditures.
39
Chapter 3
The benchmark also recognizes that the federal and provincial governments
have taken steps to simplify the operation of the tax for transactions involving
government sectors.
■
The federal government decided to apply the GST to purchases by federal
departments and Crown corporations in order to keep the tax as simple
as possible for vendors. As a result, the GST and the benchmark system
treat federal Crown corporations in the same manner as any other
business entity.
■
By virtue of Section 125, provincial governments and Crown agents are
not liable to pay the GST on their purchases. However, the federal
government and most provinces have entered into Reciprocal Tax
Agreements (RTAs). These agreements specify situations in which each
level of government agrees to pay the sales taxes of the other, and
generally this involves applying tax to purchases made by Crown
corporations. As a result, provincial Crown corporations are treated like
any other business entity in the benchmark system.
Unlike provincial governments, municipalities are liable to pay the GST.
Therefore, the benchmark system considers them as paying tax on their
purchases. Universities, colleges, schools and hospitals are also considered to
pay tax on their purchases. The GST and the benchmark generally treat these
sectors as final consumers – that is, they pay GST on their purchases, they do
not claim input tax credits and they do not collect GST on their sales.
The only exception to this benchmark treatment arises from the fact that
municipalities, universities, colleges, schools and hospitals engage in certain
commercial activities analogous to those provided in the private sector. For
example, some municipalities operate golf courses. Such commercial activities
are taxable under the GST and the GST paid on associated inputs can be
claimed as input tax credits.
The benchmark for the goods and services tax
The essential features are:
■
basic structural features of a broadly based, multi-stage tax system;
■
destination approach;
■
7-per-cent rate;
■
calendar year basis for the taxation period; and
■
recognition of constitutional provisions for government sectors.
40
FRAMEWORK AND METHODOLOGY
Types of GST tax expenditures
Comparing the actual structure of the GST to the benchmark system, it is
possible to identify four types of tax expenditure:
■
zero-rated goods and services;
■
tax-exempt goods and services;
■
tax rebates; and
■
tax credits.
(i) Zero-rated goods and services
Under the GST, certain categories of goods and services are considered to be
taxed at a “zero” rate, rather than at the general tax rate of 7 per cent. Vendors
do not charge GST on their sales of zero-rated goods and services (whether
these sales are to other businesses or to final consumers). However, vendors
are entitled to claim input tax credits to recover the GST they paid on inputs
used to produce zero-rated products. As a result, zero-rated goods and
services are tax free.
One category of zero-rated sales is basic groceries – i.e. foods intended to be
prepared and consumed at home. Other categories of zero-rated sales include
prescription drugs, medical devices and most agricultural and fish products.
(ii) Tax-exempt goods and services
Some types of goods and services are exempt under the GST. This means
that the GST is not applied to these sales. Unlike zero-rated goods and
services, however, vendors of exempt products are not entitled to claim input
tax credits to recover the GST they paid on their inputs to these products.
Examples of tax-exempt goods and services include long-term residential
rents, most health and dental care services, day-care services, most sales
by charities, most domestic financial services, municipal transit and legal
aid services.
(iii) Tax rebates
Certain sectors are eligible for rebates on a portion of the GST paid on inputs.
For example, there are rebates for schools, universities, hospitals and
municipalities. To the extent that these sectors make taxable sales, they can
claim input tax credits to recover the tax they paid on inputs to these sales.
Where they provide tax-exempt services, however, they are eligible to receive
rebates for only a portion of the GST paid on their inputs to these services.
These rebates ensure that these institutions do not bear a greater tax burden
on their purchases under the GST than they would have under the
manufacturers’ sales tax, which the GST replaced. This treatment constitutes
a tax expenditure because, under the benchmark system, these institutions
are considered to be final consumers.
41
Chapter 3
Other examples of tax rebates include the rebates for charities, substantially
government-funded non-profit organizations, newly built housing and book
purchases made by qualifying institutions. Also, foreign visitors to Canada
are able to claim a rebate for the GST they pay on hotel accommodation
and on goods they take home. Only the rebate for hotel accommodation is
considered to be a tax expenditure, however, because goods taken home
by foreign visitors are effectively exports which are not taxable under the
benchmark system.
(iv) GST credit 2
To ensure that the GST system is fair, a GST credit is provided through the
personal income tax system to single individuals and families with low and
moderate incomes. The credit is paid by cheque four times a year in equal
instalments. The total amount of the credit people receive depends on family
size and income and is calculated annually based on information provided in
the personal income tax return.
GST tax expenditures:
■
zero-rated goods and services;
■
tax-exempt goods and services;
■
tax rebates; and
■
tax credits.
Memorandum items for the goods and services tax
As indicated earlier, some tax measures are presented as memorandum items
even though they are not generally considered to be tax expenditures. For
example, the refund of GST for certain employees’ expenses is included as a
memorandum item.
Many employees, such as commission salespeople, incur significant expenses in
the course of carrying out their duties. Examples include restaurant meals and
automobile expenses. Often, such expenses are not reimbursed by employers
except indirectly through the salaries and commissions paid to employees. Since
employees are not considered to be carrying on a commercial activity, they are
not able to claim input tax credits for the GST they paid on these expenses.
However, employees can receive a refund of the GST paid on those employment
expenses that are deductible for income tax purposes. The refund of GST paid on
2
It should be noted that there was a small business transitional credit which accompanied the
introduction of the GST. This temporary measure provided a one-time credit of up to $1,000 to
GST registrants whose taxable sales did not exceed $500,000 in their first full quarter of 1991 or
in any three-month period beginning in 1990.
42
FRAMEWORK AND METHODOLOGY
employees’ personal consumption expenses would constitute a tax expenditure.
However, it is not possible to determine exactly what portion of these expenses
should be considered personal consumption. Therefore, the refunds of GST paid
on employees’ expenses are reported as memorandum items. The memorandum
items for the GST are discussed in more detail in Chapter 6.
Calculation and Interpretation of the Estimates
The estimates indicate the annual cash-flow impact to the government of each
particular measure, and not their long-run or steady-state revenue cost,
subject to the following limitations:
■
all measures are evaluated independently; and
■
all other factors remain unchanged.
These methodological distinctions are important and have implications for
the interpretation of the estimates. These concepts are discussed in further
detail below.
Independent estimates
The estimate of the cost of each tax expenditure is undertaken separately,
assuming that all other tax provisions remain unchanged. An important
implication of this is that the estimates cannot be meaningfully aggregated to
determine the total cost of a particular group of tax expenditures or of all tax
expenditures combined.
As explained in more detail in the following paragraphs, this restriction arises
from the fact that:
■
the income tax rate structure is progressive; and
■
tax measures interact with one another.
Progressive income tax rates
The combined effect of claiming a number of income tax exemptions and
deductions may be to move an individual to a lower tax bracket than would
have applied had none of the tax measures existed. To the extent that this
occurs, aggregation of the individual estimates may under-represent the “true”
cost to the federal government of maintaining all of them. For example,
consider a taxpayer whose taxable income was $1,000 below the level at which
he or she would move from the 17-per-cent into the 26-per-cent tax bracket.
Imagine that this taxpayer arrives at this level of taxable income by using two
tax deductions of $1,000 each (e.g., home relocation loan and registered
retirement savings plan (RRSP) contribution). Eliminating either deduction by
itself would increase taxable income by $1,000 and the taxpayer’s federal tax
liability by $170. Eliminating both measures simultaneously, however, would not
raise the tax liability by $170 + $170, but rather by $170 + $260.
43
Chapter 3
Aggregating the individual estimates for these two items would provide a
misleading impression of the revenue impact of eliminating both of them.
Therefore, the estimates in this document cannot be meaningfully aggregated
to determine the total cost of a particular group of tax expenditures or of all tax
expenditures combined.
While there is only one statutory tax rate for corporations, the small business
deduction creates a de facto progressive tax rate schedule for some
corporations. In this way, the above argument is valid for the corporate
income tax system as well, although the effect is not as large as for personal
income taxes.
Interaction of tax measures
As noted above, the estimates are computed one at a time, assuming all other
provisions remain unchanged. Given that tax provisions sometimes interact,
the total cost of a group of tax expenditures calculated individually may differ
from the dollar value of calculating the cost of the same group of tax
expenditures concurrently. This is because adding the independently
estimated costs of the tax provisions would result in double counting and so
would not provide an accurate measure of the revenue which would be
generated by simultaneously altering a group of measures.
For example, consider the non-taxation of veterans’ allowances, which
reduces the recipient’s net income. Many measures, such as the medical
expense credit, are calculated on the basis of net income. Thus, the reported
estimate for the non-taxation of veterans’ allowances represents not only the
direct impact on government receipts of not taxing the allowances, but also
the indirect impact of the change on the cost of other tax measures (such as
the medical expense credit) which depend on net income.
Since estimates for GST tax expenditures are made using the same
methodological approach as for income taxes, they too cannot be aggregated
because they may interact. The following discussion of hospital rebates and
zero-rating of prescription drugs illustrates the differences between
independent and concurrent estimates for these two provisions.
■
Eliminating hospital rebates: If hospital rebates were eliminated, hospitals
would no longer be able to recover 83 per cent of the GST they pay on
their purchases.3 However, they could continue to purchase prescription
drugs on a tax-free basis because these drugs are zero-rated. The
estimate for hospital rebates recognizes that the rebate would not have
been claimed in respect of zero-rated prescription drugs.
3
Most services provided by hospitals are exempt from the GST. This means that no tax is charged
on these services but input tax credits cannot be claimed to recover the tax paid on inputs.
However, hospitals are able to claim a rebate of 83 per cent of the GST paid on the inputs they use
to provide exempt services.
44
FRAMEWORK AND METHODOLOGY
■
Eliminating the zero-rating of prescription drugs: If prescription drugs were
taxed at the GST rate of 7 per cent, then hospitals would pay the tax on
their drug purchases but recover 83 per cent of the tax through the rebate
system. Therefore, the estimate for the zero-rating of prescription drugs
is calculated as net of the expected increase in the payment of
hospital rebates.
■
Eliminating the two measures concurrently has a revenue impact greater
than the sum of the independent estimates because the GST would be
payable on prescription drugs and hospitals would be unable to claim a
rebate for these purchases.
Aggregation of estimates
The estimates for individual tax expenditures cannot be added together
to determine the cost of a group of tax expenditures. There are two
reasons for this:
■
the simultaneous elimination of more than one income tax
expenditure would generate different estimates because of
progressive income tax rates; and
■
given the interaction of certain tax measures, the revenue impact of
eliminating two or more measures simultaneously would differ from
taking the independently estimated numbers published in this
document and simply aggregating them.
All other factors remain unchanged
The estimates in this report represent the amount by which federal tax
revenues were reduced due to the existence of each preference assuming
that all other factors remain unchanged.
In order to evaluate the extent of the revenue reduction, the approach taken
here is to recalculate federal revenues assuming the measure in question has
been eliminated. The difference between this recalculated figure and actual
revenues provides the quantitative estimate of the cost of the tax expenditure.
The assumption that all other things remain the same means that no allowance
is made for: (i) behavioural responses by taxpayers; (ii) consequential
government policy changes; or (iii) changes in tax collections due to altered
levels of aggregate economic activity which might result from the elimination of
a particular tax measure (further detail is provided below). Incorporating these
factors would add a large subjective element to the calculations.
45
Chapter 3
(1) Absence of behavioural responses
In many instances, the removal of a tax expenditure would cause taxpayers to
rearrange their affairs to minimize the amount of extra tax they would have to
pay, perhaps by making greater use of other tax measures. Therefore, the
omission of behavioural responses in the estimating methodology generates
cost estimates which may exceed the revenue increases that would have
resulted if a particular provision had been eliminated.
As one example, consider the case of the deduction for RRSP contributions.
Eliminating this provision would result in the amount of additional federal
revenue indicated in the report only if the contributions were not directed to an
alternative tax-preferred form of saving. However, the absence of the RRSP
deduction might encourage individuals to place their funds instead in some
other tax-favoured instrument, such as shares in a labour-sponsored venture
capital corporation. If such a response did occur, eliminating the RRSP
deduction would result in a smaller increase in revenues than that indicated.
The effects of this assumption can also be illustrated for the GST by
considering the housing rebate. Homeowners are eligible for a rebate of the
GST they pay on the purchase of new houses. If this rebate were eliminated,
the price of new houses would increase relative to the price of used houses.
This, in turn, might reduce the demand for new houses while increasing
the demand for used houses (which are tax exempt). Since the dynamics of
the housing market are not taken into account, the revenues obtained
by eliminating the housing rebate could actually be lower than the
indicated estimate.
(2) Consequential government policy changes
The estimates ignore transitional provisions that might accompany the
elimination of a particular measure and take no account of other consequential
changes in government policy. For example, if the government were to
eliminate a particular tax deferral, it could require the deferred amount to be
brought into income immediately. Alternatively, it might prohibit new deferrals
but allow existing amounts to continue to be deferred, perhaps for a specified
period of time. The estimates in this report do not provide for any such
transitional relief.
Similarly, the estimates make no allowance for consequential government
policy changes. For example, if capital gains on owner-occupied housing were
made taxable under the personal income tax system, an argument could be
made that the cost of maintenance should be deductible in the same way as
other investment expenses. Furthermore, it may not be possible to track and
assess small gambling winnings. This may mean that a threshold under which
winnings would be non-taxable would be required. However, in calculating the
cost of providing the exemption for lottery winnings, no allowance is made for
such hypothetical consequential government policy changes.
46
FRAMEWORK AND METHODOLOGY
(3) Impact on economic activity
The estimates do not take into account the potential impact of a particular tax
provision on the overall level of economic activity and thus aggregate tax
revenues. For example, although eliminating the low corporate tax rate for
manufacturing and processing could generate a significant amount of revenue
for the government, the amount of manufacturing activity could decline,
resulting in possible job losses, a reduction in taxable income and, hence,
a reduction in the aggregate amount of tax revenue collected. Furthermore,
the derivation of the estimates does not include speculation on how the
government might use the additional funds available to it and the possible
impacts this could have on other tax revenues.
How to interpret the estimates
Each estimate in this report represents the amount by which federal tax
revenues were reduced due to the tax expenditure assuming that all other
factors remain unchanged. The estimates do not take into account
changes in taxpayer behaviour, consequential government actions or
feedback on aggregate tax collections through induced changes in
economic activity. Accordingly, the elimination of a tax expenditure would
not necessarily yield the full tax revenues shown in Tables 1, 2 and 3.
Developing Historical Estimates
The majority of the personal income tax estimates in this report were
computed with a personal income tax model. This model simulates changes
to the personal income tax system using the statistical sample of tax returns
collected by Revenue Canada for its annual publication Taxation Statistics. The
model estimates the revenue impact of possible tax changes by recomputing
taxes payable on the basis of adjusted values for all relevant income
components, deductions and credits. For example, the removal of the moving
expense deduction would result not only in a change in net income but also in
all of the credits, such as the medical expense tax credit, whose values
depend on net income. For those tax expenditures whose costs could not be
estimated using this model alone, supplementary data were acquired from a
variety of sources. Details on data sources and the methodologies used
for estimating the cost of specific personal income tax measures are provided
in Chapter 4.
A corporate income tax model was used to measure most of the corporate
tax expenditures. As with the personal income tax model, it is based on a
statistical sample of tax returns collected by Revenue Canada, and is able
to recompute taxes payable on the basis of adjusted tax provisions.
This recomputation of taxes takes into account the availability of unused tax
47
Chapter 3
credits, tax reductions, deductions and losses that would be used by the
corporation to minimize its tax liability. Where costs could not be estimated
using this model alone, supplementary data acquired from a variety of sources
were used. Details on these sources are provided in Chapter 5.
Estimating the cost of tax deferrals presents a number of methodological difficulties
since, even though the tax is not currently received, it may be collected at some
point in the future. It is therefore necessary to derive estimates of the cost to the
government of providing such a tax deferral while at the same time ensuring
comparability with the other estimates presented here.
In this report, income tax deferrals are estimated on a “current cash-flow”
basis – that is, the cost is computed as the forgone tax revenue associated
with the additional net deferral in the year (deductions for the current year less
the income inclusion from previous deferrals). The estimates thus computed
provide a reasonably accurate picture of the ongoing costs of maintaining a
particular tax provision in a mature tax system. They can be aggregated over
time without double counting and are comparable to estimates of the costs
associated with tax credits and deductions.
The costs of the majority of the GST tax expenditures presented in this report
were estimated using a Sales Tax Model based on Statistics Canada InputOutput Tables and the National Income and Expenditure Accounts. In cases
where estimates were not derived using this model, supplementary data from
a variety of sources were used. Details on both the data sources and
methodologies are provided in Chapter 6.
Developing Future Projections
As with the historical estimates, the projections represent the estimated
amount by which the federal tax revenues would be reduced due to the tax
expenditure, assuming that all measures are evaluated independently. This
means that the projections cannot be aggregated. In addition, it is assumed
that all other factors remain unchanged. Thus, the projections make no
provision for any behavioural change that might result from the removal of the
provision; for any consequential policy changes that might accompany the
change; or for the possible impact of the change on overall economic activity
and thus on tax revenues. The projections do, however, take into consideration
the impact of announced tax changes.
In contrast to the estimates of tax expenditures for the historical period, when
values of the tax expenditures can generally be obtained from tax statistics or
other historical data, projections of tax expenditures must rely on estimated
relationships between tax expenditures and explanatory economic variables.
Using these relationships, the values for the explanatory variables are
projected into the future and so permit an estimation of the future expected
values of tax expenditures. Key explanatory variables are generally those
reflecting the state of the economy.
48
FRAMEWORK AND METHODOLOGY
Projections for the explanatory variables are either based upon the 1998
budget forecasts (e.g., GDP, population, employment, corporate profits,
inflation, consumer spending) or on past trends in the tax expenditure.
Where projected tax expenditures were not obtained using these approaches,
information on the alternative methodology is provided in Chapter 4 for
personal income tax, Chapter 5 for corporate income tax and Chapter 6 for
GST tax expenditures.
Any projections are inherently subject to forecast error, and quite substantial
errors at times. Those familiar with forecasts prepared for the Canadian
economy, or for any other economy, recognize that forecasting is not a
science. Future values for key explanatory variables are based on best
judgements and unchanged policies are assumed for the forecast period.
Furthermore, the relationships between variables that are being explained and
those that provide the explanation may not be robust and could quickly
change over time. For all these reasons, the projected values of tax
expenditures should be treated as “best efforts”, which do not have any
greater degree of reliability than the variables that explain them. For example, if
the level of gross domestic product (GDP) explains a tax expenditure, one
would not expect the projected level of tax expenditure to materialize if the
expected level of GDP did not occur. Even if the expected level of GDP did
materialize, the level of the tax expenditure might still not if, in the future, the
relationship between the tax expenditure and GDP turns out to be different
from that estimated on average in the past. Therefore, in general, one should
expect that the degree of reliability of the projected tax expenditures should be
less than that of the underlying explanatory variables.
Comparison With Direct Expenditures
In comparing the cost of the tax expenditures in this report to direct spending
estimates, it should be noted that a dollar of tax preference is often worth
substantially more to the taxpayer than a dollar of direct spending. This results
from the fact that, in most cases, government grants (i.e. direct spending) are
taxable to the recipients. For example, consider an individual facing a marginal
tax rate of 29 per cent. A deduction of $100 would be worth $29. If, instead,
the government were to provide the individual with a taxable grant of $29,
after-tax income would increase by only $20.59 since he/she would face an
income tax liability of $8.41 ($29 x 29 per cent).
The same conclusions do not always apply to tax expenditures provided to
corporate taxpayers. Consider, for example, an investment tax credit to a
corporation with respect to capital equipment acquired to carry out SR&ED in
Canada. The cost to the government of providing a 20-per-cent tax credit
would, in most circumstances, be the same as it would be if the government
had provided a direct grant of 20 per cent. This is because investment tax
credits are considered to be assistance and are therefore treated in the same
manner as direct government grants or subsidies. The 20-per-cent tax credit,
like a direct grant, is either included in income, and subject to corporate
income tax, or it reduces the capital or other costs deductible by the taxpayer.
49
Chapter 4
DESCRIPTION OF PERSONAL
INCOME TAX PROVISIONS
The descriptions of the specific tax measures contained in this chapter are
intended as a simplified reference and are not detailed descriptions of specific
tax measures.
A number of measures which primarily affect corporations, but also
unincorporated businesses, are treated in Chapter 5 on the corporate income
tax measures.
Explanations of the methodologies used to produce estimates and projections
are provided where they deviate from the standard approach of using the
personal income tax simulation model described in Chapter 3.
Culture and Recreation
Deduction for clergy residence
A taxpayer who is a full-time member of the clergy or regular minister of a
religious denomination may deduct housing costs from income for tax
purposes. Where a member of the clergy is supplied living accommodation by
his/her employer or receives housing allowances, an offsetting deduction may
be claimed to the extent that this benefit is included in income. The estimate
for this item is based on the number of clergy in Canada and Statistics Canada
expenditure data on rent.
Flow-through of CCA on Canadian films
Prior to 1995, the capital cost allowance (CCA) rate generally available on films
was 30 per cent, subject to the half-year rule. On Canadian content films, the
half-year rule did not apply. The CCA could be flowed through to investors and
deducted against all sources of income. An additional allowance of up to the
remaining undepreciated capital cost of the film was deductible against an
investor’s income from certified Canadian films.
Losses arising from CCA claimed at the partnership level and flowed through
as limited partnership losses are included in the “Deduction of limited
partnership losses” tax expenditure. It is estimated that 15 per cent of limited
partnership losses relate to CCA on Canadian films.
The 1995 budget replaced the special tax shelter rules that applied to
Canadian content films by a 12-per-cent credit that can be claimed only by
certain film and video production corporations. Transitional rules for the 1995
taxation year allowed full deductibility of undepreciated capital cost against film
income and the flow-through of the CCA to the investor only if the 12-per-cent
refundable tax credit was not claimed in respect of the production.
51
Chapter 4
Deduction for certain contributions by individuals
who have taken vows of perpetual poverty
Where a person has taken a vow of perpetual poverty as a member of a
religious order, that person may deduct donations to the religious order up to
his/her total employment and pension income (but not investment or other
income) in lieu of the charitable donations credit.
Write-off of Canadian art purchased
by unincorporated businesses
Canadian art acquired by businesses for display in an office may be
depreciated on a 20-per-cent declining-balance basis even though it may
depreciate at a much slower rate, and may even appreciate.
No data are available.
Assistance for artists
Artists may deduct the costs of creating a work of art in the year the costs are
incurred rather than in the year the work of art is sold.
Artists may also elect to value a charitable gift from their inventories at any
amount up to its fair market value. This value is included in the artist’s income.
The percentage of income limit for the charitable donations tax credit
does not apply.
No data are available.
Deduction for artists and musicians
Employed musicians are able to claim the cost of maintenance, rental,
insurance and capital cost allowance on musical instruments against
employment income earned as a musician.
Employed artists are also entitled to deduct expenses related to their artistic
endeavours up to the lesser of $1,000 or 20 per cent of their income derived
from employment in the arts.
No data are available.
Non-taxation of capital gains on gifts of cultural property
Certain objects certified as being of cultural importance to Canada are exempt
from capital gains tax if donated to a designated museum or art gallery.
Such donations amounted to $101 million in 1994 and $99 million in 1995.
However, there is no information on the portion of the value which represents
capital gains.
52
DESCRIPTION OF PERSONAL INCOME TAX PROVISIONS
Education
Tuition fee credit
A 17-per-cent tax credit is available for tuition fees paid by students to a
prescribed educational institution. A credit is available with respect to fees paid
to an institution if the total tuition fees paid to the institution exceed $100. The
1997 budget proposed to extend the credit to most mandatory ancillary fees
imposed by post-secondary institutions, starting in 1997.
Education credit
Students who are enrolled at prescribed educational institutions on a full-time
basis are entitled to claim a tax credit of 17 per cent of an education amount.
The amount is $80 for every month of full-time attendance from 1993 to 1995,
and $100 for 1996. The 1997 budget proposed that the amount be increased
to $150 for 1997, and to $200 for 1998 and subsequent taxation years.
The 1998 budget proposes to extend this tax relief to part-time students for
1998 and subsequent years. Students enrolled at an educational institution in
Canada in an eligible program lasting at least three consecutive weeks and
involving a minimum of 12 hours of courses each month will be eligible. For
each qualifying month, the education amount will be $60 per month on which
the 17-per-cent tax credit will be provided.
Education and tuition credits transferred
The unused portions of the education and the tuition fee amounts may be
transferred to a supporting spouse, parent or grandparent. The maximum
transfer for the two credits combined is 17 per cent of $4,000 for taxation
years 1993 to 1995 and of $5,000 for 1996 and subsequent taxation years.
Carry-forward of tuition and education credits
The 1997 budget proposes to allow students to carry forward indefinitely for
their own use, education and tuition fee amounts that have not been either
already used by the student or transferred to a supporting individual.
Student loan interest credit
In order to ease the burden of student debt, the 1998 budget proposes to
provide a 17-per-cent non-refundable tax credit on the interest portion of
student loan payments made in a year for 1998 and subsequent years. The
credit may be claimed in the year in which it is earned or in any of the
subsequent five years.
Exemption on first $500 of scholarship, fellowship
and bursary income
The first $500 of scholarship, fellowship and bursary income is exempt from
income tax.
53
Chapter 4
The tax expenditures reported in the table are understated since no data are
available on individuals receiving scholarship, fellowship or bursary income of
less than $500.
Deduction of teachers’ exchange fund contributions
Teachers may deduct up to $250 per year in contributions to a fund established
by the Canadian Education Association for the benefit of teachers from Commonwealth countries visiting Canada under a teachers’ exchange agreement.
Registered education savings plans
A taxpayer may contribute to a registered education savings plan (RESP) on
behalf of a designated beneficiary (usually the taxpayer’s child). Contributions
to RESPs are not deductible, but are usually returned to the subscriber free of
tax. The investment return on these funds is not taxable until it is withdrawn for
the education of the named beneficiary. In 1993, 1994 and 1995, the annual
contribution in respect of a beneficiary generally could not exceed $1,500 per
beneficiary, with an overall limit of $31,500. Effective 1996, the annual limit was
increased to $2,000 with an overall limit of $42,000.
The 1997 budget proposed to increase the annual limit to $4,000. It also
proposed that, where beneficiaries of a plan are not pursuing higher education
and a number of other conditions are met, the contributor be allowed to
receive RESP income. In particular, beginning in 1998 a contributor would be
allowed to roll over investment income to his/her registered retirement savings
plan (RRSP) without penalty, subject to available RRSP room. Prior to 1998,
RESP income could be used only for educational purposes, and was generally
taxable in the hands of the beneficiary.
The 1998 budget proposes to supplement contributions to RESPs with a
20-per-cent grant, subject to annual and lifetime limitations, beginning
January 1, 1998. While this enhancement does not directly represent a tax
expenditure, it should increase the cost of the tax expenditure to the extent
that it encourages participation in the RESP program.
No data are available. In light of the increasing importance of registered education
savings plans, the 1997 budget indicated that Revenue Canada will require
additional information from RESP trustees, including the amount of the funds
accumulated in these plans.
Employment
Deduction of home relocation loans
For up to five years, an offsetting deduction from taxable income is provided
for the benefit received by an employee in respect of a home relocation loan.
The amount of the deduction is the lesser of the amount included in income as
a taxable benefit and the amount of the benefit that would arise in respect of
an interest-free loan of $25,000.
54
DESCRIPTION OF PERSONAL INCOME TAX PROVISIONS
Non-taxation of allowances for volunteer firefighters
Volunteer firefighters were eligible to receive up to $500 per year in
non-taxable allowances. The 1998 budget proposes to replace this measure
with an exemption of up to $1,000 for amounts received by emergency
service volunteers.
The estimates are based on census data.
Deduction for emergency service volunteers
The 1998 budget proposes to provide a tax exemption of up to $1,000 for
amounts received by emergency service volunteers who, in their capacity as
volunteers, are called upon to assist in emergencies or disasters.
Northern residents deductions
Individuals living in prescribed areas in Canada for a specified period may
claim the northern residents deductions. The benefits consist of a residency
deduction of up to $15 a day, a deduction for two employer-provided vacation
trips per year, and unlimited employer-provided medical travel. Residents of
the Northern Zone are eligible for full benefits, while residents of the
Intermediate Zone are eligible for 50 per cent of the benefits.
The current definition of prescribed areas came into force in 1991. However,
the implementation of the current system was gradual. Certain communities,
which had qualified under the pre-1991 regime but which are no longer eligible
under the current system received full benefits until 1992, two-thirds benefits
in 1993, one-third benefits in 1994, and zero benefits thereafter. Communities
in the Intermediate Zone which had qualified under the pre-1991 regime
received full benefits until 1992, two-thirds benefits in 1993, and 50-per-cent
benefits thereafter.
Overseas employment credit
A tax credit is available to Canadian employees working abroad for more than
six months in connection with certain resource, construction, installation,
agricultural or engineering projects. The credit is equal to the tax otherwise
payable on 80 per cent of the employee’s net overseas employment income
taxable in Canada (up to a maximum income of $80,000).
Employee stock options
Provided certain conditions are met, the benefits provided by employee stock
options (ESOs) are taxed at a preferential rate. A deduction equal to onequarter the value of the benefit from the ESO is available to offset the tax
liability on the option.
For employees of Canadian-controlled private corporations (CCPCs), the
benefits accruing from ESOs are not generally included in income until the
disposition of shares acquired with the options. However, the shares must be
held for a minimum of two years to qualify for the one-quarter deduction.
55
Chapter 4
For non-CCPCs, the benefit provided by an ESO must be included in income
when the option is exercised.
Estimates presented in the table reflect the one-quarter deduction, but not the
benefit from the deferred inclusion in income of benefits accruing under ESOs.
Non-taxation of strike pay
Strike pay is non-taxable.
Statistics Canada has ceased collecting information on the amount of
strike pay.
Deferral of salary through leave of absence/sabbatical plans
Employees may be entitled to defer salaries through a leave of
absence/sabbatical plan. Provided certain conditions are met by the plan,
these amounts are not subject to tax until received.
No data are available.
Employee benefit plans
In certain circumstances, employers may make contributions to an “employee
benefit plan” on behalf of their employees. The employee is not required to
include in income the contributions to the plan or the investment income
earned within the plan until amounts are received. Employers may not deduct
these contributions to the plan until these contributions are actually distributed
to the employees.
No data are available.
Non-taxation of certain non-monetary employment benefits
Fringe benefits provided to employees by their employers are not taxed when
it is not administratively feasible to determine the value of the benefit.
Examples include merchandise discounts, subsidized recreational facilities
offered to all employees and special clothing.
No data are available.
Family
Spousal credit
A taxpayer supporting a spouse is entitled to a tax credit of 17 per cent of
$5,380. This credit is reduced by 17 per cent of the amount by which the
dependent spouse’s income exceeds $538.
Effective with the 1993 taxation year, the definition of spouse for tax purposes
has been expanded to include common-law spouses, provided that the
couple has lived together at least one year or has a common child.
56
DESCRIPTION OF PERSONAL INCOME TAX PROVISIONS
Equivalent-to-spouse credit
An “equivalent-to-spouse” tax credit may be claimed in respect of a
dependent child under age 18 or a parent or grandparent by taxpayers without
a spouse. The amount of the credit and the limitation on the dependant’s
income are the same as for the spousal credit.
Infirm dependant credit
For taxation years 1993, 1994 and 1995, taxpayers could claim the dependant
credit for dependent relatives over 17 years of age who were physically or
mentally infirm. The credit was 17 per cent of $1,583 for dependants whose
income was below $2,690. The credit was reduced by 17 per cent of the
dependant’s net income in excess of that amount and was exhausted when
the dependant’s net income exceeded $4,273.
Effective in the 1996 taxation year, the amount on which the credit is based is
$2,353 and the credit begins to be phased out at $4,103.
Caregiver credit
The 1998 budget proposes to provide a caregiver tax credit of up to $400 for
individuals residing with, and providing in-home care for, an elderly parent or
grandparent or an infirm dependent relative. The credit amount will be reduced
by the dependant’s net income in excess of $11,500. This measure is effective
for 1998 and subsequent years.
Child tax benefit
The child tax benefit (CTB) was introduced in 1993, replacing the family allowance,
the dependant credit for children under 18 years of age and the refundable child
tax credit. The child tax benefit payments are made monthly and are non-taxable.
The child tax benefit provides a basic credit of $1,020 per child annually, plus
$75 for the third and each subsequent child. It also includes a supplement of
$213 for each child under age 7, the total of which is reduced by 25 per cent
of the child care expenses claimed. The total benefit is reduced by 5 per cent
(2.5 per cent for one-child families) of family net income over $25,921.
The child tax benefit also includes a working income supplement for low-income
working families. Until July 1, 1997, the working income supplement (WIS) was
equal to 8 per cent of the family-earned income in excess of $3,750, reaching
a maximum supplement of $500 at $10,000 of family earned income. The WIS
was reduced by 10 per cent of the family net income in excess of $20,921.
The 1996 budget provided a two-step increase in the WIS, adding $125
million in July 1997 and an additional $125 million in July 1998. The 1997
budget proposed to enrich and restructure the WIS by providing benefits for
each child, instead of a single benefit per family. The maximum benefit was
increased from $500 per family to $605 for a first child, $405 for a second
child and an additional $330 for the third and each subsequent child.
57
Chapter 4
The WIS is phased in at annual family earnings of $3,750, reaching a
maximum at $10,000 of family earned income. The WIS is reduced by 12.1
per cent of net family income in excess of $20,921 for one-child families, 20.2
per cent for a two-child family and 26.8 per cent for families with three or more
children.
The proposed 1997 budget change enriched the WIS by $195 million in July 1997,
$70 million more than the $125 million proposed for July 1997 in the 1996 budget.
The CTB will be enriched further by $600 million and simplified to become the
Canada Child Tax Benefit (CCTB) starting July 1, 1998, as part of a federalprovincial-territorial initiative to create a National Child Benefit System.
The 1998 budget announced the intention to enrich the CCTB by $425 as of
July 1999 and a further $425 as of July 2000. Details of benefit increases will
be determined in consultation with provincial and territorial partners
and Canadians.
Deferral of capital gains through transfers to a spouse,
spousal trust or family trust
Individuals may transfer capital property to their spouses or spousal trusts at
the adjusted cost base of the property rather than the fair market value. This
provides a deferral of the capital gain until the subsequent disposition of the
property or until the transferee spouse dies.
Property transferred to other family members or to unrelated individuals (or to
trusts of which they are beneficiaries) is treated differently. The transferor is
generally deemed to have disposed of the property at the time of transfer at fair
market value and must include any resulting capital gain in income at that time.
In the case of property transferred to a trust (other than a spousal trust), capital
gains are generally considered to be realized at the time of the transfer on the
basis of the fair market value of the property at that time. In addition, trust
assets are generally subject to a deemed realization every 21 years at the fair
market value of the assets. The 21-year deemed realization date was deferred
to certain electing trusts. However, the 1995 budget eliminated this election
and prevents any deferral of the 21-year realization beyond January 1, 1999.
Farming and Fishing
$500,000 lifetime capital gains exemption for farm property
A $500,000 lifetime capital gains exemption is available for gains in respect of
the disposition of qualified farm property and qualified small business shares.
The $500,000 limit is available only to the extent that the basic $100,000
lifetime capital gains exemption (where applicable) and the $500,000 lifetime
capital gains exemption on small business shares have not been used, and to
the extent that the gains exceed cumulative net investment losses incurred
after 1987.
58
DESCRIPTION OF PERSONAL INCOME TAX PROVISIONS
Net Income Stabilization Account (NISA)
Farmers may deposit a percentage of a given year’s eligible net sales, up to a
limit, to their Net Income Stabilization Account (NISA). No tax deduction is
given in respect of these deposits. Some of the deposits are matchable by the
federal and provincial governments. Governments also pay a 3-per-cent
interest bonus annually on the farmer’s deposits which remain in the account.
Governments’ contributions and interest accrued in the account are not
taxable until withdrawn. All withdrawals from the NISA are taxable except for
the contributor’s original deposits, which were made with after-tax dollars.
Withdrawal entitlements from the NISA are triggered if the current year gross
margin (net sales less eligible expenses) is less than the average gross margin
from previous years (up to five), or if net income is below $10,000 (or $20,000
of family net income if the family held only one account).
The federal tax expenditure is a function of two components: the deferral of tax
on the investment income accrued in the account and on government contributions
to the account; and the income inclusion of these amounts when withdrawn
from the account. The former has the effect of increasing tax expenditures, while
the latter has the opposite effect. The estimates provided in the table are made
on a current cash-flow basis – that is, they measure the impact on revenues of
the tax measure in each of the years under consideration.
Deferral of income from destruction of livestock
If the taxpayer elects, when there has been a statutory forced destruction of
livestock, the income received from the forced destruction can be deemed to
be income in the following year. The deferral is also available when the herd has
been reduced by at least 15 per cent in a drought year. This provision allows for
a deferral of income to the following year when the livestock is replaced. Under
the benchmark tax system, income is taxable when it accrues.
The estimates are based on data provided by Agriculture Canada.
Deferral of income on grain sold through cash purchase tickets
Under the cash purchase ticket program of the Canadian Wheat Board,
farmers may make deliveries of grain before the year end and receive payment
in the form of a ticket that may be cashed in subsequent years. The payment
is included in income only when the ticket is cashed.
The estimates are based on data provided by the Canadian Wheat Board.
Deferral through 10-year capital gain reserve
If proceeds from a sale of a farm property to a child, grandchild or greatgrandchild are not all receivable in the year of sale, realization of a portion of
the capital gain may be deferred until the year in which the proceeds become
receivable. However, a minimum of 10 per cent of the gain must be brought
into income each year, creating a maximum 10-year reserve period. For most
other assets, the maximum reserve period is five years.
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Chapter 4
Deferral of capital gain through intergenerational
roll-overs of family farms
Sales or gifts of assets to children, grandchildren or great-grandchildren
typically give rise to taxable capital gains to the extent that the fair market
value exceeds the adjusted cost base of the property. However, capital gains
on intergenerational transfers of farm property are deferred in certain
circumstances until the property is disposed of outside the immediate family.
No data are available.
Exemption from making quarterly tax instalments
Taxpayers earning business income must normally pay quarterly income tax
instalments. However, individuals engaged in farming and fishing pay twothirds of their estimated tax payable at the end of the taxation year and the
remainder on or before April 30 of the following year.
No data are available.
Cash basis accounting
Individuals engaged in farming and fishing may elect to include revenues when
received, rather than when earned, and deduct expenses when paid rather
than when the related revenue is reported. This treatment allows a deferral of
income inclusion and a current deduction for prepaid expenses. Under the
benchmark tax structure, income is taxable when it accrues, and expenses are
deductible for the period to which they relate.
No data are available.
Flexibility in inventory accounting
Farmers using the cash basis method of accounting are allowed to depart
from it with regard to their inventory. Under cash accounting, net additions to
inventory are treated as a cost which is deducted in computing income. When
inventory is increasing from year to year, such costs could create a loss for tax
purposes. However, a discretionary amount, not exceeding the fair market
value of farm inventory on hand at year end, may be added back to income
each year. This amount must then be deducted from income in the following
year. The effect of this provision is to allow farmers to avoid creating losses
which would be subject to the time limitation if carried forward. The value of
the tax expenditure is thus the amount of tax relief associated with the losses
that would otherwise have been subject to the time limitations.
No data are available.
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DESCRIPTION OF PERSONAL INCOME TAX PROVISIONS
Federal-Provincial Financing Arrangements
Quebec abatement
Under the contracting-out arrangements which were offered to provinces in the
mid-1960s for certain federal transfer programs, provinces could elect to receive
part of the federal contribution in the form of a tax abatement. Quebec was the
only province to elect this arrangement at the time and this has resulted in a
16.5-percentage-point abatement of federal tax for Quebec residents.
Transfers of income tax room to provinces
In 1967, the federal government transferred tax points to all provinces in place
of certain direct cash transfers under the cost-shared program for postsecondary education. As a result, the personal income tax abatement was
increased by 4 percentage points. In 1977, an additional 9.5 percentage
points of individual income tax were provided to the provinces in respect of
post-secondary, hospital insurance and medicare programs.
General Business and Investment
$100,000 lifetime capital gains exemption
The 1994 budget eliminated the $100,000 lifetime capital gains exemption
(LCGE) for gains accrued after February 22, 1994. Accrued gains prior to that
date were grandfathered. Individuals who had not disposed of their assets on
that date were allowed to elect to claim the $100,000 LCGE on their 1994 tax
return for gains accrued up to February 22, 1994. They were deemed to have
disposed of their assets for an amount not exceeding their fair market value on
that date.
The $100,000 LCGE applied in taxation years 1992 and 1993 and in 1994 for
capital gains realized before February 22, 1994. The LCGE allowed individuals
to exempt up to $100,000 in realized capital gains over their lifetime. The
exemption was available only to the extent that the gains exceeded cumulative
net investment losses incurred after 1987. The costs of tax expenditures
associated with capital gains realized on exempt qualified farm property and
exempt qualified small business shares are listed separately, even though some
of these gains would qualify for the $100,000 lifetime capital gains exemption.
The 1992 budget eliminated the exemption for real estate gains accruing after
February 1992 on property not used in an active business.
Partial inclusion of capital gains
Only three-quarters of net realized capital gains are included in income.
Deduction of limited partnership losses
A limited partner is able to deduct losses against other income up to the
amount of investment at risk whereas a shareholder is normally not permitted
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Chapter 4
to deduct corporate losses against personal income. Unused losses may be
carried back three years or forward seven years.
Limited partnership losses arise from a range of investments, from real estate
investments to certified film productions. It is estimated that 15 per cent of this
tax expenditure for years before 1995 is attributable to CCA claimed on
Canadian films.
Investment tax credits
Tax credits are available for investments in scientific research and experimental
development, exploration activities and certain regions. The tax credits range
from 15 per cent to 45 per cent. The estimates treat the full investment tax
credit as a tax expenditure even though tax credits reduce the capital cost of
assets for CCA purposes and the adjusted cost base for capital gains
purposes. A more detailed explanation is provided in Chapter 5.
Deferral through five-year reserve
If proceeds from a sale of capital property are not all receivable in the year of
the sale, realization of a portion of the capital gain may be deferred until the
year in which the proceeds are received. A minimum of 20 per cent of the
gain must be brought into income each year, creating a maximum five-year
reserve period.
Deferral through capital gains roll-overs
In certain circumstances, taxpayers may defer the reporting of capital gains for
tax purposes. General business roll-over provisions may be categorized into
three groups:
Involuntary dispositions
Capital gains resulting from an involuntary disposition (e.g., insurance
proceeds received for an asset destroyed in a fire) may be deferred if the funds
are reinvested in a replacement asset within a specified period. The capital
gain is taxable upon disposition of the replacement property.
Voluntary dispositions
Capital gains resulting from the voluntary disposition of land and buildings by
businesses may be deferred if replacement properties are purchased soon
thereafter (for example, a business changing location). The roll-over is generally
not available for properties used to generate rental income.
Transfers to a corporation for consideration including shares
Individuals may transfer an asset to a corporation controlled by them or their
spouses and elect to roll over any resulting capital gain or recaptured
depreciation into the corporation instead of paying tax in the year of sale.
No data are available.
62
DESCRIPTION OF PERSONAL INCOME TAX PROVISIONS
Deferral through billed-basis accounting by professionals
Under accrual accounting, costs must be matched with their associated
revenues. In computing their income for tax purposes, however, professionals
are allowed to elect either an accrual or a billed-basis accounting method.
Under the latter method, the costs of work in progress can be written off as
incurred even though the associated revenues are not brought into income
until the bill is paid or becomes receivable. This treatment gives rise to a
deferral of tax.
No data are available.
Deduction of accelerated tax depreciation
The depreciation allowable for tax purposes is called capital cost allowance
(CCA). It may differ from true economic depreciation. A tax deferral may thus
be created when the tax deductions in the early years of the life of an asset
exceed the actual depreciation in the value of the asset. The difference is
captured upon subsequent disposition of the asset.
The methodology for estimating this tax expenditure is explained in Chapter 5.
$1,000 capital gains exemption on personal-use property
Personal-use property is held primarily for the use and enjoyment of the owner
rather than as an investment.
In calculating the capital gain on personal-use property, if the proceeds of
disposition are less than $1,000, no capital gain needs to be reported. If the
proceeds exceed this amount, the adjusted cost base (ACB) will be deemed to
be a minimum of $1,000, thus reducing the capital gain in situations where the
true ACB is less than $1,000.
No data are available.
$200 capital gains exemption on foreign exchange transactions
The first $200 of net capital gains on foreign exchange transactions is exempt
from tax.
No data are available.
Taxation of capital gains upon realization
Capital gains are taxed upon the disposition of property and not when they
accrue. This provides a tax deferral.
No data are available.
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Chapter 4
Health
Non-taxation of business-paid insurance benefits
for group private health and dental plans
Employer-paid benefits for private health and dental plans are not taxable.
The 1998 budget proposes to extend this measure to allow deductions from
business income of self-employed persons for amounts paid for private health
service plan coverage subject to certain restrictions.
The estimates are based on data from Statistics Canada and from an annual
survey “Health Insurance Benefits in Canada”, conducted by the Canadian Life
and Health Insurance Association.
Disability credit
Canadians who are markedly restricted by disabilities in the carrying on of the
basic activities of daily living are entitled to a tax credit. The credit is 17 per
cent of $4,233. Any unused amount of the credit may be transferred to a
supporting person.
Medical expense credit
Taxpayers are entitled to a 17-per-cent credit for eligible medical expenses
incurred by the taxpayer, the taxpayer’s spouse or by dependants. The credit
is available in respect of expenses which exceed the lesser of 3 per cent of net
income or $1,614. The 1998 budget proposes to allow supporting persons to
claim the medical expense tax credit for training courses related to the care of
dependent relatives with physical or mental infirmities
Medical expense supplement for earners
The 1997 budget proposed the creation of a refundable medical expense
credit for low-income working Canadians with high medical expenses.
The new refundable credit supplements the assistance that is provided
through the existing medical expense tax credit. The maximum refundable
credit is the lesser of $500 and 25 per cent of eligible medical expenses. It is
available to those individuals earning over $2,500, and is reduced by 5 per
cent of net family income in excess of $16,069.
Income Maintenance and Retirement
The non-taxation of income-tested programs such as the guaranteed income
supplement and provincial social assistance presents conceptual difficulties.
The problems arise because, in many respects, these programs operate like
an income tax in that eligibility for benefits is phased out after a certain income
level. In this regard, excluding such benefits from income tax might not be
considered a tax expenditure since they are subject to their own “tax”.
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DESCRIPTION OF PERSONAL INCOME TAX PROVISIONS
On the other hand, a broadly based benchmark tax system would include
such amounts in income. Given the comprehensive approach taken in this
document, these items are considered to be tax expenditures.
Non-taxation of guaranteed income supplement
and spouse’s allowance benefits
The guaranteed income supplement (GIS) is an income-tested benefit payable
to old age security (OAS) pensioners. Spouses of OAS recipients (or widows/
widowers) between ages 60 and 64 may be eligible for the spouse’s allowance
(SPA). Benefits under both the guaranteed income supplement and spouses’
allowance programs are non-taxable. Although GIS and SPA benefits must be
included in income, an offsetting deduction from net income is provided. This
approach effectively exempts such payments from taxation while continuing to
have them affect income-tested credits.
The estimates are based on data from Human Resources Development
Canada and the personal income tax simulation model was developed by
the Department of Finance from tax data.
Non-taxation of social assistance benefits
Social assistance benefits received by low-income Canadians must be
included in income. However, an offsetting deduction from net income is
provided. This approach effectively exempts such benefits from taxation while
continuing to have them affect income-tested credits.
The estimates are based on data from Human Resources Development
Canada and the personal income tax simulation model was developed by
the Department of Finance from tax data.
Non-taxation of workers’ compensation benefits
Workers’ compensation benefits must be included in income. However, an
offsetting deduction from net income is provided. This approach effectively
exempts such benefits from taxation while continuing to have them affect
income-tested credits.
Non-taxation of certain amounts received as damages
in respect of personal injury or death
Amounts received in respect of damages for personal injury or death, and awards
paid pursuant to the authority of criminal injury compensation laws are not taxable.
In addition, investment income earned on personal injury awards is excluded
from income until the end of the year in which the person reaches the age of 21.
The values reported in the tables understate the tax expenditure since they are
based on awards paid by provinces’ Criminal Injuries Compensation Boards only.
No data were available for compensation awards paid by other sources, or
regarding the investment income earned on awards by individuals under age 22.
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Chapter 4
Non-taxation of employer-paid premiums
for group term life insurance of up to $25,000
Employer-paid premiums for group term life insurance coverage of up to
$25,000 per employee paid before July 1, 1994 were not taxable.
The 1994 budget eliminated the tax exemption, effective July 1, 1994.
Non-taxation of veterans’ allowances, civilian war pensions
and allowances, and other service pensions
(including those from Allied countries)
These amounts are not included in income for tax purposes.
The estimates are based on public accounts data.
Non-taxation of veterans’ disability pensions
and support for dependants
These amounts are not included in income for tax purposes.
The estimates for this item are based on public accounts data.
Treatment of alimony and maintenance payments
Payments by a taxpayer to a divorced or separated spouse are deductible to
the payer and taxable in the hands of the recipient for agreements or awards
made prior to May 1, 1997.
This treatment represented a tax expenditure because it departed from the
benchmark system established for purposes of this report. Under this benchmark
tax system, deductions are permitted only for expenses incurred in order to
earn income and amounts received from other individuals are not included in
the income of the recipient.
As of May 1, 1997, child support paid pursuant to a written agreement or court
order made on or after that day will not be deductible to the payer nor included
in the income of the recipient. Child support paid pursuant to a court order or
written agreement made before that date will continue to be deductible to the
payer and included in the income of the recipient, unless the agreement is varied.
The tax changes do not apply to spousal support. Spousal support payments
remain deductible by the payer and included in the income of the recipient.
The estimates for this item are computed as the value of the deduction to the
payer less the tax collected from the recipient.
Age credit
Individual taxpayers age 65 or over are entitled to claim a tax credit of up to
17 per cent of $3,482. Unused portions may be transferred to a spouse. Starting
in 1994, the age credit became subject to an income test. The age amount
was reduced by 7.5 per cent of net income in excess of $25,921 in 1994, and
by 15 per cent for 1995 and future years.
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DESCRIPTION OF PERSONAL INCOME TAX PROVISIONS
Pension income credit
A 17-per-cent tax credit is available on up to $1,000 of certain pension income.
The unused portion of the credit may be transferred to a spouse.
Saskatchewan Pension Plan
Contributions to the Saskatchewan Pension Plan are deductible up to the
lesser of $600 or the amount of unused RRSP room in a particular year.
Registered pension plans/registered retirement savings plans
The federal revenue forgone due to the provisions pertaining to registered
retirement savings plans (RRSPs), registered pension plans (RPPs) and deferred
profit-sharing plans (DPSPs) is a function of three components: the deductibility
of contributions to such plans; the non-taxation of investment income accrued
within such plans; and the income inclusion of RPP/RRSP withdrawals which
reduces the cost resulting from the previous two. Individuals benefit from a deferral
of tax on amounts contributed and on investment income. Also, there is an
absolute tax saving to the extent that the tax rate on withdrawals is below
that faced at the time of contributions. That is, many contributors are in a higher
tax bracket during their working lives than when they are retired.
As noted in Chapter 3, the estimates provided in the table are made on a
current cash-flow basis – that is, they measure the impact on revenues of the
tax measure in each of the years under consideration. The Auditor General has
recommended that the estimates for registered pension plans and registered
retirement savings plans be provided on a present value basis as well as the
current cash-flow estimates. Work is proceeding on developing such estimates,
although they are not yet ready to be included in this year’s report.
In 1991, a new system of comprehensive limits on tax-assisted retirement
saving took effect. Under this system, saving in RRSPs, RPPs and DPSPs is
governed by a comprehensive limit of 18 per cent of earnings up to a dollar
amount. In more detail, the limits are as follows.
■
For defined benefit pension plans, the limits are the same as in 1990 –
that is, there are no fixed limits on employee contributions while employer
contributions are restricted to the amounts necessary to fully fund the
promised benefits. Annual pension benefits under these pension plans are
limited to the lesser of $1,722 and 2 per cent of earnings for each year of
pensionable service.
■
For RRSPs, contributions are limited to 18 per cent of earned income for
the preceding taxation year up to a dollar maximum ($12,500 for 1993,
$13,500 for 1994, $14,500 for 1995, $13,500 from 1996 to 2003), minus
a pension adjustment (PA). The PA is based on RPP or DPSP benefits
earned by plan members in the previous taxation year. For a money
purchase RPP or a DPSP, the PA is simply the total contribution made by,
or on behalf of, a plan member in the year. For a defined benefit RPP, the
PA is a measure of the benefits earned in the year, calculated according to
a prescribed formula.
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Chapter 4
In 1992, the federal government introduced the Home Buyers’ Plan as a
temporary measure. It allowed all individuals to withdraw up to $20,000 from
their RRSPs on a tax-free basis to purchase a home. Amounts withdrawn
under the Home Buyers’ Plan are to be repaid to the individual’s RRSP on an
interest-free basis over a period of 15 years. Amounts that are not repaid are
included in the individual’s income for tax purposes. In 1994, this measure was
made permanent, but restricted to first-time home buyers only. The 1998
budget proposes to allow persons eligible for the disability tax credit to
participate in the Home Buyers’ Plan more than once in the individual’s lifetime.
The funds must be used to purchase a home that is more accessible for, or
better suited for, the care of the individual. The impact of the Home Buyers’
Plan on the cost of RRSPs is expected to be small.
The 1998 budget proposed to allow individuals to make tax-free RRSP
withdrawals for lifelong learning, subject to certain restrictions. Individuals will
have to repay these amounts over a fixed period of time. In many ways, this
program parallels the Home Buyers’ Plan.
It should be noted that the RRSP/RPP estimates do not reflect a mature
system because contributions currently exceed withdrawals. Assuming a
constant tax rate, if contributions equalled withdrawals, only the non-taxation
of investment income would contribute to the net cost of the tax expenditure.
As time goes by and more retired individuals have had the opportunity to
contribute to RRSPs throughout their lifetime, the gap between contributions
and withdrawals will shrink and possibly even become negative. The upward
bias in the current cash-flow estimates can therefore be expected to decline.
The estimates may not reflect the benefit to a particular individual in any given
year because the individual is typically either a contributor or withdrawer at a
point in time but not both. In order to estimate the benefit to a particular
individual, one could calculate the difference in disposable income between a
situation in which that individual invests in an RRSP/RPP and one in which that
individual invests in a non-sheltered savings instrument.
Data used to estimate the value of these measures were taken from
the personal income tax model, unpublished data from Statistics Canada,
and from Statistics Canada publications Trusteed Pension Funds (Cat. 74-201)
and Pension Plans in Canada (Cat. 74-401), as well as from the Bank of
Canada Review.
Deferred profit-sharing plans
Employers may make tax-deductible contributions to a profit-sharing plan on
behalf of their employees. These amounts are taxable in the hands of the
employees when withdrawals are made from the plan. The employer’s
contribution cannot exceed one-half of the money purchase RPP dollar limit
for the year ($6,750 in 1993 and $7,250 in 1994 to 2003) or 18 per cent of the
employee’s earnings. The amount is included in the PA for the taxpayer. The
taxpayer’s total PA (for both RPP and DPSP contributions) cannot exceed the
money purchase RPP dollar limit for the year ($13,500 for 1993 and $14,500
for 1994 to 2003).
No data are available.
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DESCRIPTION OF PERSONAL INCOME TAX PROVISIONS
Non-taxation of RCMP pensions/compensation
in respect of injury, disability or death
Pension payments and other compensation received in respect of an injury,
disability or death associated with service in the Royal Canadian Mounted
Police are non-taxable.
No data are available.
Non-taxation of up to $10,000 of death benefits
Up to $10,000 of death benefits paid by an employer to the spouse of a
deceased employee is non-taxable.
No data are available.
Non-taxation of investment income on life insurance policies
The investment income earned on some life insurance policies is not taxed as
income to the policyholder. Instead, for reasons of administrative convenience,
insurance companies are subject to tax on such earnings.
(See Chapter 5 for a further description of this measure and estimates of the
cost of the tax expenditure involved.)
Small Business
$500,000 lifetime capital gains exemption for small business shares
A $500,000 lifetime capital gains exemption is available for gains in respect of
the disposition of qualified small business shares. The $500,000 limit is available
only to the extent that the basic $100,000 lifetime capital gains exemption (where
applicable) and the $500,000 lifetime capital gains exemption on qualified farm
property have not been used, and to the extent that the gains exceed cumulative
net investment losses incurred after 1987.
Deduction of allowable business investment losses
Under the benchmark system, capital losses arising from the disposition of
shares and debts are generally deductible only against capital gains. However,
three-quarters of capital losses in respect of shares or debts of a small business
corporation (allowable business investment losses) may be used to offset other
income. Unused allowable business investment losses may be carried back
three years and forward seven years. After seven years, the loss reverts to an
ordinary capital loss and may be carried forward indefinitely.
The estimated tax expenditure is the amount of tax relief provided by allowing
these losses to be deducted from other income in the year. The tax expenditure
is overestimated since it does not reflect the future reduction in tax revenues that
would occur if those losses were instead deducted from future capital gains.
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Chapter 4
Labour-sponsored venture capital corporations credit
A tax credit is provided to individuals for the acquisition of shares of laboursponsored venture capital corporations. For shares acquired before March 6,
1996, the rate of the federal credit was 20 per cent to a maximum credit of
$1,000. For shares acquired after March 5, 1996, the rate of the federal tax
credit is 15 per cent, to a maximum credit of $525.
Deferral through 10-year capital gain reserve
If proceeds from the sale of small business shares to children, grandchildren or
great-grandchildren are not all receivable in the year of sale, recognition of a
portion of the capital gain realized may be deferred until the year in which the
proceeds become receivable. However, a minimum of 10 per cent of the gain
must be brought into income each year creating a maximum 10-year reserve
period. This contrasts with the treatment of most other property where the
maximum reserve period is five years.
Other Items
Non-taxation of capital gains on principal residences
Capital gains realized on the disposition of a taxpayer’s principal residence are
non-taxable. The capital gains were determined using Multiple Listing Service
(MLS) housing prices, adjusted to include expenditures on capital repairs and
major additions and renovations, obtained from Statistics Canada’s Consumer
Expenditure Survey. The holding period for principal residences was derived
from 1981 Census data.
Estimates for this item are provided for both partial and full inclusion rates for
capital gains.
Non-taxation of income from the Office of the Governor General
This income is exempt from personal income taxation.
Data were provided by the Office of the Governor General.
Assistance for prospectors and grubstakers
Where a prospector or grubstaker disposes of mining property to a
corporation in exchange for shares in that corporation, the tax liability is
deferred until the subsequent disposition of the shares. At that time, only
three-quarters of the amount for which the mining property was transferred to
the corporation need be included in income.
Charitable donations credit
Donations of up to 50 per cent of net income for taxation year 1996 (20 per cent
prior to 1996) made to registered charities qualified for the charitable donation
credit in the year. The 1997 budget proposed to further increase the limit for 1997
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DESCRIPTION OF PERSONAL INCOME TAX PROVISIONS
and subsequent years to 75 per cent of net income. Provision was made in 1996
and maintained in the 1997 proposals to ensure that no short-term tax liability
would arise from the realization of capital gains on donations of appreciated
assets. The 1997 proposals extended this treatment to any capital cost allowance
recapture arising from the donation of depreciable capital property. Donations
in excess of the limit may be carried forward for up to five years. The percentage
of income restriction does not apply to certain gifts of cultural property nor,
beginning in 1995, to donations of ecologically sensitive lands.
The credit is 17 per cent on the first $200 ($250 prior to 1994) of total donations
(including gifts to the Crown) and 29 per cent on donations in excess of $200
($250 prior to 1994).
Reduced inclusion rate for capital gains arising
from certain charitable donations
The 1997 budget proposed to reduce the inclusion rate on capital gains arising
from certain donations by individuals or corporations to charities (other than private
charitable foundations) from 75 per cent to 371⁄2 per cent. Eligible donations
would be those of securities that are listed publicly on a recognized stock
exchange in Canada, where the donation is made between February 18, 1997
and the end of the year 2001.
Gifts to the Crown credit
A tax credit is available for gifts to the Crown. The credit is 17 per cent on the
first $200 ($250 in 1993) of total donations (including charitable donations) and
29 per cent on donations in excess of $200 ($250 in 1993). Prior to 1997, tax
credits arising from gifts to the Crown could be used up to reduce taxes on
up to 100 per cent of income.
The 1997 budget proposed to restrict this to 75 per cent of income for 1997
and subsequent years. The limit would also be increased by 25 per cent of the
amount of taxable capital gains arising from the donations of appreciated capital
property and 25 per cent of any capital cost allowance recapture arising from
the donation of depreciable capital property. Donations of ecologically sensitive
land and certain gifts of cultural property are exempt from the net income limit.
The limit does not apply to gifts in the year of death and the preceding year.
Unused contributions may be carried forward for up to five years.
Political contribution credit
A credit is available for donations to registered federal political parties. The
credit is 75 per cent of the first $100 of contributions, 50 per cent on the next
$450 of contributions and 331⁄3 per cent on the next $600. The maximum credit
claimable in any year is $500.
Non-taxation of income of Indians on reserves
Section 87 of the Indian Act exempts the personal property of a status Indian
and Indian bands from taxation if such personal property is situated on a
71
Chapter 4
reserve. Courts have held that the term “personal property” includes income.
Determining whether income is situated on reserve requires an examination of
the factors that connect it to a reserve. With respect to employment income,
for example, a key factor is the location (on or off a reserve) at which the
employment duties were performed.
No data are available.
Non-taxation of gifts and bequests
Gifts and bequests are not included in the income of the recipient for
tax purposes.
No data are available.
Memorandum Items
Non-taxation of lottery and gambling winnings
Lottery and gambling winnings are excluded from income for tax purposes.
The estimate for the non-taxation of winnings in government lotteries is based
on information provided by Statistics Canada. Values for the non-taxation of
winnings from horse racing are estimated using data provided by Agriculture
Canada. The values do not include winnings from other types of gambling,
such as bingo and casino winnings where no accurate data are available.
The tax expenditure estimate assumes that the total amount of lottery and
horse racing winnings would be included in income and subject to tax. This
would likely not be the case because there would be a large administrative
cost in taxing thousands of small prizes, in particular instant win lotteries.
A threshold below which winnings would be non-taxable would result in
substantially lower revenues than the figure published in this report.
It should also be noted that proceeds from the sale of lottery tickets are an
important source of funds for provincial governments and not-for-profit
organizations. As a result, there is already a considerable element of taxation
to lottery and gambling proceeds.
This estimate is therefore included as a memorandum item only.
Non-taxation of specified incidental expenses
Members of Parliament (MPs), Members of Legislative Assemblies (MLAs),
Senators and some other public officials (such as elected municipal officials
and judges) receive flat allowances for expenses incidental to their duties.
These amounts are not included in income for tax purposes.
This provision is a memorandum item because it is not possible to distinguish
the proportion of these allowances which is used for personal consumption
and that which is for work-related expenses.
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DESCRIPTION OF PERSONAL INCOME TAX PROVISIONS
Data are available only for the non-taxable allowances provided to MPs, MLAs
and Senators. This information is found in the publications Canadian Legislatures
and The Canadian Parliamentary Guide.
Non-taxation of allowances for diplomats and
other government employees posted abroad
Diplomats and other government employees posted abroad receive an
allowance to cover the additional costs associated with living outside Canada.
These allowances are not taxable.
Information on total allowances was obtained from Treasury Board.
Child care expense deduction
Child care expenses incurred for the purpose of earning business or employment
income, taking an occupational training course or carrying on research for which
a grant is received are deductible, up to a limit. Prior to 1998, the deduction
could not exceed the lesser of $5,000 per child if the child was under age 7 or
was disabled plus $3,000 per child between 7 and 14 years of age (16 years
after 1995); two-thirds of earned income for the year; and the actual amount of
child care expenses incurred. The two-thirds earned income limit does not
apply to single parent students after 1995. The deduction must generally be
claimed by the spouse with the lower income. However, the higher-income
parent may claim a deduction if the lower-income parent is infirm, confined to
a bed or a wheelchair, in prison, or attending a designated educational
institution on a full-time basis.
The 1998 budget proposes to enhance the child care expense deduction by
increasing the deduction limits by $2000 to $7000 for children under age 7 or
disabled and $1000 to $4000 for older children. The budget also proposes to
allow child care expenses incurred by an individual in order to pursue part-time
education to be claimed, subject to certain limits.
Attendant care expense deduction
A disabled individual can deduct the cost of unreimbursed care provided by a
part-time attendant, if such an expense is required to enable the individual to
work. For taxation years 1993 to 1997, the deduction cannot exceed the
lesser of $5,000 and two-thirds of earned income for the year. The 1997
budget proposed to eliminate the limit on attendant care expenses.
Moving expense deduction
All reasonable moving expenses incurred to earn employment or selfemployment income at a new location (e.g., transportation, meals and
temporary accommodation, cost of selling a former residence) are deductible
from earnings or business income received after the move if the taxpayer
moves at least 40 kilometres closer to the new place of employment or study.
The deduction has to be claimed in the year, or in the following year if it
exceeds earnings at the new location in the year of the move.
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Chapter 4
Prior to 1998, moving expense reimbursements provided by employers are not
included in income. The 1998 budget proposed to include certain employerprovided reimbursements in income, and to allow an offsetting deduction to
the same extent as permitted for self-paid expenses. The 1998 budget also
proposed to expand the definition of relocation costs eligible for deduction.
The estimates do not include non-taxable reimbursements received
from employers.
Deduction of carrying charges incurred to earn income
Interest and other carrying charges, such as investment counselling fees and
safety deposit box charges, incurred to earn business or investment income
are deductible.
Some might consider the deductibility of such expenses to be a tax
expenditure because of the tax deferral arising from the up-front deduction of
expenses associated with the earning of income which will not be taxed until
received possibly in future years. Others would hold that carrying charges are
incurred for the purpose of earning income and therefore represent part of the
benchmark income tax system.
Deduction of meals and entertainment expenses
Meals and entertainment expenses are considered to be a memorandum item
because the amount that should be deductible under a benchmark tax system
is debatable. While a portion of these expenditures is incurred in order to earn
income, there is an element of personal consumption associated with these
expenditures. Consequently, only a partial deduction for these expenses would
be permitted under the benchmark tax system.
The deduction is limited to 50 per cent of the cost of food, beverages and
entertainment (80 per cent before March 1, 1994). Where the cost of food,
beverages or entertainment is part of a package price which includes amounts
not subject to the 50-per-cent limitation – for instance, the fee for a conference
– the taxpayer is required to determine the value or make a reasonable
estimate of the amount subject to the 50-per-cent limitation.
Deduction of farm losses for part-time farmers
Individuals whose major source of income is not farming are allowed to deduct
farm losses against other income up to an annual maximum of $8,750.
Part-time farm losses that are not deductible in the current year may be carried
back three years and forward 10 years to deduct against farm or non-farm
income. The estimates include the cost of these carry-overs.
Farm and fishing loss carry-overs
Farm and fishing losses may be carried back three years and forward 10 years.
Most other business losses may be carried forward only seven years.
74
DESCRIPTION OF PERSONAL INCOME TAX PROVISIONS
The only data that are available are prior years’ losses carried forward to the
current year. In this regard, the estimates do not include current year losses
carried forward or back to other taxation years, nor do they include future
losses carried back to the taxation year in question. The estimates do not
include losses carried over by part-time farmers.
Capital loss carry-overs
Net capital losses may be carried back three years and forward indefinitely to
offset capital gains of other years.
The only data which are available are prior years’ losses carried forward to the
current year to reduce taxes payable. The estimates do not include current
year losses carried forward or back to other taxation years nor do they include
future losses carried back to the taxation year in question.
Non-capital loss carry-overs
Non-capital losses may be carried back three years and forward seven years
to offset other income.
The only data which are available are prior years’ losses carried forward to the
current year to reduce taxes payable. Thus, the cost estimates may understate
the true amount of revenue forgone because they do not include current year
losses carried forward or back to other taxation years nor do they include
future losses carried back to the taxation year in question.
Logging tax credit
The logging tax credit reduces federal taxes payable by the lesser of two-thirds
of any logging tax paid to a province and 62⁄3 per cent of income from logging
operations in that province.
The estimates are based on data from Revenue Canada.
Deduction of resource-related expenditures
Individuals are entitled to deduct certain expenses associated with the exploration
for, and development of, Canadian natural resources. These expenses are
deductible if the taxpayer either engages directly in these resource activities or
provides financing to a resource company which, in turn, “flows through” the
tax deductions to the taxpayer.
A tax expenditure arises when a flow-through share investor is able to use
deductions for exploration and development more quickly than would otherwise
have been possible by the resource company that actually undertook these
expenditures. This may be because the taxpayer has otherwise-taxable income
in a year and the corporate issuer of the flow-through does not. It may also be
the direct result of a special provision for junior oil and gas companies whereby
expenses that would otherwise be deductible at 30 per cent can be deducted
at 100 per cent when “flowed through” using flow-through shares.
75
Chapter 4
However, the available data do not permit a separation of expenses that are
flowed through to investors and those that are incurred directly by the taxpayers.
Accordingly, only some portion of resource-related expenditures deducted
represents a true tax expenditure. Consequently, the total cost of all these
deductions has been calculated, but these amounts are treated as a
memorandum item.
Deduction of other employment expenses
Employee expenses are generally not deductible. However, specific
employment expenses (e.g., automobile expenses, cost of meals and lodging
for certain transport employees, legal expenses paid to collect salary) are
deductible in certain circumstances in the computation of income.
This provision is a memorandum item because it is not possible to distinguish
the proportion of these expenses which is used for personal consumption and
that which is incurred in order to earn income.
Deduction of union and professional dues
Union and professional dues are fully deductible from income.
The mandatory nature of these payments leads to their classification as
expenses to earn income.
Employment insurance contribution credit/
non-taxation of employer-paid premiums
A 17-per-cent tax credit is provided for employment insurance contributions.
Employer-paid premiums are not included in the employee’s income.
The mandatory nature of employment insurance contributions leads to their
classification as expenses incurred to earn income.
Canada and Quebec Pension Plan contribution credit/
non-taxation of employer-paid premiums
A 17-per-cent tax credit is provided for Canada/Quebec Pension Plan
contributions by both employees and the self-employed. Employer-paid
premiums are not included in the employee’s income.
Again, since CPP/QPP contributions are mandatory, they are classified as
expenses incurred to earn income.
Foreign tax credit
In order to avoid double taxation, a tax credit is provided in recognition of
income taxes paid in foreign countries.
76
DESCRIPTION OF PERSONAL INCOME TAX PROVISIONS
Dividend gross-up and credit
Dividends received from taxable Canadian corporations are “grossed up”
by a factor of one-quarter and included in income. A tax credit equal to
13.33 per cent of the grossed-up amount is then provided, in recognition of
taxes paid at the corporate level. These provisions contribute to the integration
of the corporate and personal income tax systems.
Supplementary low-income credit
The 1998 budget proposes to provide a supplement of $500 to the basic
personal, spousal and equivalent-to-spouse non-refundable tax credits for
low-income taxfilers. The supplementary amount for a single individual will
be reduced by 4 per cent of income in excess of $6,956. The total amount
available to an individual with an eligible dependant will be reduced by
4 per cent of the filer’s income minus the total of $6,956 and the dependant’s
adjusted income.
Basic personal credit
All taxpayers qualify for a basic personal credit equal to 17 per cent of $6,456.
Non-taxation of capital dividends
Private corporations may distribute the exempt one-quarter of any realized
capital gains accumulated in their “capital dividend account” to their shareholders
in the form of a capital dividend. This dividend is non-taxable. This measure is
reported as a memorandum item since it contributes to the integration of the
taxation of corporate and personal income.
No data are available.
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Chapter 5
DESCRIPTION OF CORPORATE
INCOME TAX PROVISIONS
The descriptions of the specific tax measures contained in this chapter are
intended as a simplified reference and are not detailed descriptions of specific
tax measures.
Many of the estimates and projections are provided using the corporate
income tax micro-simulation model, which has been developed jointly with
Revenue Canada.
Tax Rate Reductions
The following items are measures that reduce the statutory tax rate faced by a
corporation. They are considered to be tax expenditures because income is
taxed at a rate other than the generally applicable tax rate.
Low tax rate for small businesses
Corporations that are Canadian-controlled private corporations (CCPCs) are
eligible for a small business tax rate reduction, known as the small business
deduction. This deduction lowers the basic federal tax rate on the first
$200,000 of active business income of CCPCs by 16 percentage points –
from 28 per cent to 12 per cent.
Some larger CCPCs are ineligible for the small business deduction. Effective
July 1, 1994, CCPCs with more than $15 million of taxable capital employed in
Canada are no longer eligible for this rate reduction. In addition, CCPCs with
between $10 million and $15 million of taxable capital employed in Canada
have reduced access to the small business deduction.
Low tax rate for manufacturing and processing
Canadian manufacturing and processing (M&P) income not eligible for the
small business deduction is subject to a reduced tax rate, known as the
manufacturing and processing profits deduction. This deduction lowers the
basic federal tax rate on eligible income earned after 1993 by 7 percentage
points – from 28 per cent to 21 per cent.
For years prior to 1994, the manufacturing and processing profits deduction
was lower:
■
for 1993, the reduction was 6 percentage points, thereby reducing
the basic federal tax rate on eligible income from 28 per cent to
22 per cent; and
■
for 1992, the reduction was 5 percentage points, thereby reducing the
basic federal tax rate on eligible income from 28 per cent to 23 per cent.
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Chapter 5
Low tax rate for credit unions
Although not a private corporation for most purposes, a credit union is eligible
for the small business deduction (i.e. 16 per cent of its taxable income). A credit
union with more than $200,000 of active business income may be eligible for
a deduction of 16 per cent of its taxable income where the total income of the
corporation since 1971 is less than the corporation’s “maximum cumulative
reserve”, which is equal to 5 per cent of amounts owing to members (including
members’ deposits and share capital). The purpose of this additional deduction
is to permit a credit union to accumulate capital on a tax-preferred basis up to
a maximum of 5 per cent of deposits and capital.
Exemption from branch tax for transportation, communications,
banking and iron ore mining corporations
The branch tax is imposed on that portion of the income of non-resident
corporations derived from the carrying on of business in Canada through a
branch. If a Canadian branch has ceased active business operations, nonresidents are liable for tax on capital gains on dispositions of taxable Canadian
property. The rate is 25 per cent, but is frequently reduced by bilateral tax
treaties to 15 per cent, 10 per cent or 5 per cent.
A corporation is exempt from the branch tax if it is:
■
a bank;
■
a corporation whose principal business is:
– the transportation of persons or goods,
– communications, or
– mining iron ore in Canada; or
■
an exempt corporation such as a registered charity.
No data are available.
Exemption from tax for international banking centres
A prescribed financial institution’s branch or office carrying on certain business
in the cities of Montreal or Vancouver may qualify as an international banking
centre (IBC) and therefore be exempt from tax on its income. To qualify as an
IBC under the Income Tax Act, the branch’s income must be derived from
accepting deposits and making loans to non-residents. This measure, introduced
in 1987, is considered a tax expenditure because a financial institution can
undertake business with non-residents through a Canadian permanent
establishment without being subject to Canadian income taxes.
No data are available.
80
DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Tax Credits
Investment tax credits
The following measures are credits against federal income taxes otherwise
payable. They are considered to be tax expenditures because they provide
incentives to taxpayers which invest in certain activities, such as scientific
research and experimental development (SR&ED), or in certain capital assets
in designated regions of the country.
The amount of an investment tax credit (ITC) is calculated as a percentage of
the cost of eligible expenditures. ITCs can reduce federal income tax revenues
in one of two ways. They may be:
■
used to offset federal income taxes otherwise payable; or
■
fully or partially refunded in the year they are incurred in the case of
smaller CCPCs.
Prior to 1994, there was a limitation on the amount of ITCs that could be utilized
in a taxation year. Specifically, in most cases, ITCs could only be used to offset
up to 75 per cent of a taxpayer’s federal income tax and surtax otherwise payable.
For CCPCs, a special rule permitted the full offset of federal tax on their business
income eligible for the small business deduction. The annual ITC limitation had
been introduced to reduce the number of large corporations that were profitable,
but did not pay income tax. However, as announced in the 1993 budget, the
introduction of the large corporations tax eliminated the need for the annual
ITC limitation and investment tax credits became fully deductible for all taxpayers
for taxation years beginning after 1993.
Certain ITCs earned in a year may be refunded to individuals and qualifying
corporations that cannot use them to reduce federal income taxes otherwise
payable. The rate of refundability for these ITCs is generally 40 per cent.
However, a qualifying CCPC may receive a refund of 100 per cent on SR&ED
ITCs earned at the 35-per-cent rate in respect of up to $2 million of eligible
current expenditures.
Prior to 1994, a qualifying corporation for purposes of the refund was generally
a CCPC with taxable income not exceeding $200,000 in the preceding year.
However, the 1993 budget modified this rule in the case of the SR&ED ITC so
that, after 1993, refundability phases out as the prior-year taxable income of a
CCPC (or associated corporate group) rises above $200,000 and is eliminated
entirely at $400,000. This change was made to reduce the negative consequences
of exceeding the $200,000 limit by even a small amount. The change eases
the transition between the start-up phase and the period of expansion that small
businesses typically experience and provides more certainty to their business
planning. In order to focus ITC benefits to smaller CCPCs, the 1994 budget
introduced a further change to phase out refundability after 1995 for CCPCs
with taxable capital employed in Canada exceeding $10 million and to fully
eliminate refundability for CCPCs with taxable capital employed in Canada
exceeding $15 million.
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Chapter 5
All refunds reduce the amount of ITC for carry-over purposes. Unused ITCs
may be carried forward 10 years or back three years.
ITCs utilized or refunded in a year reduce either the undepreciated capital cost
of the asset for capital cost allowance (CCA) purposes or, in the case of
SR&ED, the SR&ED pool. Credits earned in respect of a property acquired
after 1989, and not immediately available for use may not become claimable
or refundable until the property is available for use or has been held by the
taxpayer for two years.
Issues in calculating the value of ITCs
To maintain consistency with the other estimates in this document, the
amounts reported in the table estimate the forgone revenue for the year in
question from each ITC. In other words, the estimates show how much
additional revenue would have been collected by the government in the year if
the ITC had been eliminated in that particular year. To do this, the amount of
ITCs used in the year are separated into two components: ITCs that were both
earned and used in the year, and ITCs that were earned in prior years, but
carried forward and used in the year. The former represents credits in respect
of current year expenditures. The costs of any applicable refunds of ITCs
earned are included in these estimates. The latter item – ITCs earned in past
years but not used until the current year – is itemized separately as an
aggregate for all ITCs.
Another perspective on the revenue cost of each ITC may be obtained by
looking at the amount of ITCs earned in a specific year. This information is
provided in the following table for 1993 and 1994. However, it should be
recognized that ITCs earned in the year are not necessarily used in the year –
they may be used in a subsequent or previous year, subject to the carry-over
rules. As a result, had the ITCs been eliminated, government revenues for the
year would not have been higher by the amounts shown in the following table
since it may take a number of years for ITCs earned in a year to be used by
the taxpayer to reduce federal taxes.
Investment tax credits earned in the year
1993*
1994
($ millions)
SR&ED ITC
Atlantic ITC
Special ITC
Cape Breton ITC
Small business ITC
1,370
124
48
S
228
1,483
152
119
0
203
* These 1993 figures are based on final data and may differ from the figures in last year’s edition of
this document which were based on preliminary data.
82
DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
SR&ED investment tax credit
There were three rates of SR&ED ITC prior to 1995: a general rate of 20 per cent;
an enhanced rate of 35 per cent for CCPCs with prior-year taxable income of
less than $200,000; and a rate of 30 per cent for the Atlantic provinces and
the Gaspé region. The latter rate was eliminated in the 1994 budget effective
after 1994. The maximum amount of SR&ED expenditures that can earn ITCs
at the 35-per-cent rate in a year is $2 million.
The SR&ED ITC is earned on eligible current and capital expenditures in
respect of SR&ED in Canada performed by, or on behalf of, a taxpayer and
related to a business of the taxpayer.
Atlantic investment tax credit
Prior to 1995, the Atlantic investment tax credit (AITC) was available at a rate
of 15 per cent in respect of eligible expenditures in the Atlantic region –
i.e. Newfoundland, New Brunswick, Nova Scotia, Prince Edward Island, the Gaspé
region and their associated offshore areas. The 1994 budget reduced the AITC
rate to 10 per cent for eligible expenditures incurred after 1994.
The AITC is earned on eligible expenditures on new buildings, machinery and
equipment employed in the following qualifying activities: farming, fishing, logging,
mining, oil and gas, and manufacturing and processing.
The AITC is refundable at a rate of 40 per cent for qualifying CCPCs
and individuals.
Special investment tax credit
Prior to 1995, the special investment tax credit (SITC) was provided at a rate
of 30 per cent for eligible expenditures on new buildings, machinery and
equipment used in qualifying activities in qualifying regions of Canada. The
SITC was eliminated in the 1994 budget, effective January 1, 1995. However,
certain activities in the Atlantic region continue to be eligible for the AITC.
Qualifying activities were defined under the Regional Development Incentives
Act and its regulations, and generally included manufacturing and processing
facilities located in a qualifying region with the exception of certain primary
processing of natural resources.
Qualifying regions included north-eastern British Columbia, north-western Alberta,
northern Saskatchewan, most of Manitoba, northern Ontario, northern Quebec
and the Gaspé region, and areas of Atlantic Canada.
Cape Breton investment tax credit
The Cape Breton investment tax credit was applicable to eligible expenditures
on new buildings, machinery and equipment acquired for use in qualifying
activities in Cape Breton after May 23, 1985 and before 1993. The original rate
of 60 per cent was reduced to 45 per cent after 1988.
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Chapter 5
Small business investment tax credit
The small business investment tax credit was available at a rate of 10 per cent
for eligible expenditures on machinery and equipment acquired after December 2,
1992 and before 1994 by unincorporated businesses, partnerships and CCPCs,
other than those subject to the large corporations tax. The credit was
not refundable.
ITCs claimed in current year but earned in prior years
These are tax credits that were earned by corporations in previous years but
not claimed until the current year. There is a revenue cost to the government
when the credits are used by corporations to reduce federal taxes payable.
While the aggregate amount of these credits is known with some confidence,
there is not enough information available to identify separately the amounts for
each credit.
Political contribution tax credit
A non-refundable tax credit is available for contributions to registered federal
political parties or candidates. The credit is earned at a rate of 75 per cent on
the first $100 contributed, 50 per cent on the next $450 contributed and
331⁄3 per cent on the next $600 contributed. The maximum credit is $500 and
is available when the taxpayer has contributed $1,150.
This measure constitutes a tax expenditure because political contributions are
not incurred to earn income.
Canadian film or video production tax credit
The Canadian film or video production tax credit was introduced in the 1995
budget for certified Canadian film productions produced by qualified corporations.
It provides a refundable investment tax credit of 25 per cent of the cost of
eligible salaries and wages expended after 1994, except where the financing
of the film is eligible for transitional relief from the termination of the CCA film
incentive. Eligible salaries and wages are limited to 48 per cent of the cost of
production, so that the credit provides assistance of up to 12 per cent of the
cost of the production. Canadian film or video productions are certified by the
Minister of Canadian Heritage.
This tax credit was intended to retarget government assistance available to
Canadian film productions in order to maximize the benefit to such productions.
It replaced a tax shelter of accelerated capital cost allowance deductions used
principally by higher-income individuals with a refundable tax credit for eligible
films produced by qualified taxable Canadian corporations.
Exemptions and Deductions
The following exemptions and deductions are considered tax expenditures
because they deviate from the benchmark tax system.
84
DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Partial inclusion of capital gains
Three-quarters of net realized capital gains are included in income. The amount
of the tax expenditure is the additional tax that would have been collected had
the remaining one-quarter of the capital gains been included in income. However,
this amount is likely an overestimate of the true amount of this tax expenditure.
To the extent that the capital gains are from shares that have increased in value
due to retained earnings, and which have already been taxed at the corporate
level, the partial inclusion of the capital gains provides some relief from double
taxation and, therefore, should be part of the benchmark tax system.
The 1997 budget proposed to reduce the inclusion rate on capital gains arising
from certain donations to charities (other than private charitable foundations)
from 75 per cent to 371⁄2 per cent. Donations that would be eligible would be
those of securities that are listed publicly on a recognized stock exchange in
Canada, where the donation is made between February 18, 1997 and the end
of the year 2001.
Royalties and mining taxes
Non-deductibility of Crown royalties and mining taxes
The current tax system does not permit a deduction for Crown royalties or
mining taxes. The deduction has been denied since May 6, 1974. From that
time to the end of 1975, oil and gas and mining companies were eligible for a
resource tax abatement which provided a lower rate of tax on oil and gas and
mining income. A resource allowance (discussed below) was introduced in the
June 1975 budget and replaced the resource tax abatement after 1975.
A negative tax expenditure is calculated for the non-deductibility of Crown
royalties and mining taxes. A negative tax expenditure implies that the government
collects more income taxes than would have otherwise occurred in the benchmark
system. The issue arises as to whether the benchmark tax system would include
a deduction for all Crown royalties and mining taxes. Two generic types of nondeductible Crown charges are levied on the extraction of natural resources.
One type is a simple royalty system where the Crown charge is based only on
gross revenues. There are also more complex systems of Crown charges that
are based on net resource profits – i.e. resource profits after the deduction of
numerous costs, including capital, operating costs and sometimes a return on
capital employed.
In the case of Crown charges based on gross revenues, the benchmark system
would include a deduction for these royalties since they are analogous to costs
of production. However, the benchmark tax system would not include a deduction
for the latter type of profit-related Crown royalties and mining taxes because
they are structured more like income taxes. Provincial income taxes are not
considered to be a deductible expense in the benchmark system. Provincial
payroll and capital taxes, on the other hand, are deductible and they are not
treated as tax expenditures.
85
Chapter 5
The calculations shown here represent the federal corporate income tax revenues
generated by the current rules which deny the deductibility of all Crown royalties
and mining taxes. No attempt has been made to divide the disallowed royalties
into the two categories described above. This is, in part, due to the fact that many
royalty systems include characteristics of both a gross and net calculation. Thus,
the calculation represents an overestimate of the actual negative tax expenditure.
Resource allowance
Since 1976, the income tax system has provided a resource allowance deduction
equal to 25 per cent of a taxpayer’s annual resource profits, computed after
operating costs and capital cost allowances, but before the deduction of
exploration expenses, development expenses, earned depletion and interest
expenses. The resource allowance is provided in lieu of the deductibility of
Crown royalties, mining taxes and other charges related to oil and gas or mining
production. The measure allows the provinces room to impose royalties or
mining taxes on the production of natural resources while maintaining the federal
income tax base. For analytical purposes, the value of the tax expenditure for
the royalties and mining taxes is broken down into two components:
■
the federal tax revenue earned by disallowing royalty deductibility
(a negative tax expenditure, described above); and
■
the federal tax revenue forgone resulting from the resource allowance
deduction (a positive tax expenditure).
An approximation of the overall impact of the resource allowance measure
(compared to the benchmark tax system) can be obtained by netting the
two above effects.
Earned depletion
Earned depletion is an additional deduction from taxable income of certain
exploration and development expenditures and other resource investments.
Prior to 1990, taxpayers were entitled to earn an extra deduction of up to
331⁄3 per cent of most exploration and development expenses or the costs of assets
related to new mines or major expansions. The deductions for earned depletion
are generally limited to 25 per cent of the taxpayer’s annual resource profits
although mining exploration depletion can be deducted against non-resource
income. As in the case of a Canadian exploration expense or a Canadian
development expense, earned depletion could be pooled (i.e. placed in a
special account, and any remaining balance could be carried forward indefinitely
for use in later years).
Additions to the depletion pools for earned depletion and mining exploration
depletion were eliminated as of January 1, 1990. Deductions can still be made
on the basis of existing depletion pools.
Under the benchmark tax system, a deduction for earned depletion would not
be available.
86
DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Deductibility of charitable donations
Donations made by corporations to registered charities are deductible in
computing taxable income within certain limits. Unused deductions may be
carried forward for up to five years.
For years prior to 1996, this deduction was limited to 20 per cent of net
income. The 1996 budget announced that the deduction limit would be raised
to 50 per cent of net income plus 50 per cent of taxable capital gains resulting
from the donation of property. The 1997 budget announced a further increase
in the limit to 75 per cent of net income plus 25 per cent of the amount of
taxable capital gains arising from the donation of appreciated capital property
and 25 per cent of any capital cost allowance recapture arising from the
donation of depreciable capital property.
This deduction would not be permitted under the benchmark tax system
because these expenditures are not incurred to earn income.
Deductibility of gifts to the Crown
Gifts made by corporations to Canada or a province are deductible in
computing taxable income within certain limits. Unused deductions may be
carried forward for up to five years.
Prior to 1997 the amount deductible was only limited to the amount of income
in a particular year. The 1997 budget proposed to restrict the deductible amount
to 75 per cent of net income plus 25 per cent of the amount of taxable capital
gains arising from the donation of appreciated capital property, and 25 per cent
of any capital cost allowance recapture arising from the donation of depreciable
capital property. The limit would not apply to gifts of ecologically sensitive land
and certain gifts of cultural property.
This deduction would not be permitted under the benchmark tax system
because these expenditures are not incurred to earn income.
Interest on small business financing loans
Small businesses in financial difficulty are able to treat interest paid on small
business financing (SBF) loans entered into between February 25, 1992 and the
end of 1994 as a non-deductible payment and SBF lenders are permitted to
treat the interest received as a dividend – resulting in such interest being nontaxable to corporate lenders and individual lenders being eligible for a dividend
tax credit. This tax treatment permitted lenders to reduce the interest charges
to such small businesses while maintaining their after-tax rates of return.
Non-deductibility of advertising expenses in foreign media
Expenses for advertising in non-Canadian newspapers or periodicals or on
non-Canadian broadcast media cannot generally be deducted for income tax
purposes if they are directed primarily to a market in Canada. Deducting the
cost of advertising in foreign periodicals or on television stations is not
restricted if the advertising is to promote sales in foreign markets.
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Chapter 5
This treatment results in a negative tax expenditure since the deduction of an
expense incurred to earn income is denied. Under the benchmark tax system,
advertising expenses in foreign media incurred to gain or produce income from
a business or property would be deductible whether targeted at foreign or
domestic markets.
No data are available.
Non-taxation of provincial assistance for
venture investments in small business
Government assistance received by a corporation is normally either included in
the corporation’s income or reduces the cost basis of the assets to which the
assistance relates for CCA purposes. There are a number of exceptions to this
rule, including provincial assistance provided for venture capital investment
under specified provincial programs. Under the benchmark tax system, this
type of assistance would be included in the corporation’s income or would
reduce the cost basis of the related assets.
No data are available.
Deferrals
The tax expenditures in this section provide for a deferral of income taxes from
the current to a later taxation year. They have been valued on a cash-flow
basis (i.e. the forgone tax revenue associated with the additional net deferral in
the year). The alternative way of valuing deferrals would be to calculate the
value of the interest-free loan that is provided to the taxpayer when taxes are
deferred to a later year.
Accelerated write-off of capital assets
and resource-related expenditures
Under the benchmark tax system, corporations would be permitted an annual
deduction for their use of capital assets based on their anticipated economic
life. Using the cash-flow approach, the tax expenditure in any particular year
would be calculated as the forgone tax revenue resulting from the difference
between the deduction taken for tax purposes, usually CCA, and the true
economic depreciation based upon the asset’s useful economic life. These
annual calculations of the impact on cash flow can provide some indication of
the tax expenditures resulting from the accelerated deductions for capital
assets but they could also be very misleading.
Tax expenditure amounts are not provided because:
■
differences between the deductions for tax purposes and economic
depreciation may not accurately reflect the tax expenditure; and
■
adequate data are not available to calculate with any degree of accuracy
this tax expenditure.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
There are instances when differences between the deductions for tax purposes
and economic depreciation would not accurately reflect the tax expenditure.
First, it should be noted that the accelerated deductions for tax purposes lead
only to a deferral, not a permanent reduction, of tax payable. If CCA rates are
higher than actual depreciation rates, then during the initial years, the CCA claim
would exceed economic depreciation. However, in later taxation years, the
reverse would occur (i.e. actual depreciation would exceed the amount allowed
for tax purposes). These differences between CCA and actual depreciation
would lead to a positive tax expenditure in the early years of asset ownership
since higher CCA rates in the initial years are a tax incentive. However, in later
years, the CCA claim would be less than actual depreciation resulting in a
negative tax expenditure, thus offsetting the previous tax expenditure to some
extent. For the corporate sector in total, the aggregate tax expenditure in any
particular year could be positive or negative depending upon the level of
investment in the current and previous years. As a result, the tax expenditure
depends critically on the growth rate of investments. If the growth rate were
zero, then, in the long run, one would expect no tax expenditure amount since
the positive tax expenditures resulting from more recent asset acquisitions
would be offset by the negative tax expenditures resulting from older assets –
that is, in total, the annual tax depreciation claimed would be equal to the
economic depreciation.
In addition, because CCA is a discretionary deduction, the cash-flow method
could result in a tax expenditure being reported even if there is no acceleration
of CCA rates (i.e. the CCA rates correspond with economic depreciation rates).
A company has discretion to claim less than the maximum amount in a particular
year. As a result, in that year, the cash-flow method would result in a negative
tax expenditure. Because the company would now have a larger undepreciated
balance for tax purposes, future CCA write-offs would be larger than the
corresponding economic depreciation, thereby resulting in a positive tax
expenditure in future years.
Finally, differences between CCA and economic depreciation may also result
from the treatment of dispositions. For tax purposes, assets are grouped in
pools with gains or losses on disposition adjusting the undepreciated balance
while gains and losses for economic depreciation purposes are recognized on
an asset-by-asset basis. Also, the asset cost for tax purposes may differ from
the cost for economic depreciation purposes in that, for economic depreciation
purposes, interest costs are often capitalized while, for tax purposes, such
costs are generally expensed in the year incurred.
Because economic depreciation is difficult to determine, the deductions for
capital assets reported by companies in their financial statements are often
used as a substitute. However, financial statement depreciation may differ from
economic depreciation. Furthermore, not all companies classify the capital
asset deductions as depreciation or some other readily identifiable expense.
For example, in the leasing industry, a lease may be classified as an operating
lease for tax purposes with capital cost allowance being claimed, while for
accounting purposes, it may be classified as a capital lease, in which case the
corresponding accounting deduction may not be specifically identifiable. Since
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Chapter 5
the costs written off for financial statement purposes for this sector cannot be
precisely determined, it is not possible to estimate the related tax expenditure.
More generally, adequate data are not available to calculate with any degree of
accuracy this tax expenditure.
Although it may not be possible to estimate with any degree of accuracy the
expenditure using the cash-flow approach, some indication of the magnitude
of the tax expenditure relating to a particular accelerated write-off provision
can be calculated by comparing the estimated discounted present value of the
tax benefits resulting from acquisitions in a particular year under each of the
two depreciation methods. For example, if the CCA rate is higher than the
actual depreciation rate, the discounted present value of the benefit of being
able to claim CCA would exceed the discounted present value of the benefit of
the financial statement depreciation, thereby resulting in a measure of the
positive tax expenditure or tax incentive that has been provided.
The number of asset classes with accelerated depreciation rates was reduced
significantly when changes were introduced in 1988. As a result, many CCA
rates now approximate the rate of economic or financial statement depreciation
and the associated tax expenditure related to accelerated depreciation provisions
has been reduced. However, a few instances remain where the CCA rates are
clearly accelerated – that is, the tax system allows a larger deduction from
income for the first few years after the property is acquired than is applied for
financial statement purposes. Some of the more significant of these accelerated
CCA provisions are described below along with illustrations of the net present
value of the benefit of some of the remaining accelerated CCA provisions.
Vessels (class 7)
Vessels are generally included in class 7 and are subject to a maximum CCA
rate of 15 per cent on a declining-balance basis. Accelerated CCA on a
straight-line basis at a maximum rate of 331⁄3 per cent of the capital cost of the
property is available in respect of a vessel, including furniture, fittings, radio
communication equipment and other equipment if it was (a) constructed in
Canada, (b) registered in Canada, and (c) not used for any purpose whatever
before acquisition by the owner. These assets are depreciated over a four-year
period, with 162⁄3 per cent written off in the first and fourth years, and 331⁄3 per
cent written off in the second and third years.
Railway assets (classes 35, 1 and 3)
Railway cars are generally included in class 35 and depreciated at a rate of
7 per cent on a declining-balance basis. However, some railway cars are eligible
for additional allowances. Railway cars acquired by common carriers are
eligible for an additional allowance of 3 per cent. Railway cars for rent or lease
are generally eligible for an additional allowance of 6 per cent.
Other railway property such as track, grading, control or signalling equipment,
is generally included in class 1 and subject to a 4-per-cent declining-balance
rate. Certain railway property included in class 1 is eligible for an additional
allowance of 6 per cent.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Railway trestles are generally included in class 3 and subject to a 5-per-cent
declining-balance rate. Certain trestles are eligible for an additional allowance of
5 per cent.
These additional allowances generally raise the CCA rates on certain railway
cars, track and other railway equipment acquired to 10 per cent.
Energy-efficient equipment (classes 34 and 43.1)
Prior to the changes announced in the 1994 budget, straight-line depreciation of
25 per cent, 50 per cent and 25 per cent was applicable to certain equipment
used for the generation of electricity or the production or distribution of heat.
Qualifying equipment includes equipment designed to: produce heat derived
primarily from the consumption of wood wastes or municipal wastes; produce
electrical energy by using wind energy; or recover heat that is a by-product
of an industrial process. Also included as qualifying equipment were: hydroelectric installations not exceeding 15 megawatts; certain types of
co-generation equipment; and certain types of active solar heating equipment.
The changes announced in the 1994 budget effectively terminated additions
to class 34 after February 21, 1994, and redefined eligibility criteria. Many of
the assets that had been eligible for class 34 became eligible for a reduced
depreciation rate of 30 per cent on a declining-balance basis under class 43.1.
Class 43.1 was introduced following the termination of class 34. Eligibility for
class 43.1 is described in draft regulations to the Income Tax Act. In general,
the following types of equipment may qualify for inclusion in class 43.1:
co-generation and specified waste-fueled electrical generation systems; active
solar systems; small-scale hydroelectric installations; heat recovery systems;
wind energy conversion systems; photovoltaic electrical generation systems;
geothermal electrical generation systems; and specified waste-fueled heat
production equipment. Active solar systems, heat recovery systems and
waste-fueled heat production equipment must be used directly in connection
with an industrial process to qualify as class 43.1 equipment.
Class 43.1 is also subject to the “specified energy property” rules which may
reduce the amounts that can be deducted to less than 30 per cent of the
unclaimed capital cost.
Water and air pollution control property (classes 24 and 27)
Assets which are acquired primarily for the purposes of abating water or air
pollution at a site are included in class 24 or class 27, respectively. These
assets are eligible for three-year straight-line CCA of 25 per cent, 50 per cent
and 25 per cent. The water and air pollution control equipment must be new
property that is used in operations that were started before 1974 and have
been continuously carried on since that time. The 1994 budget announced
that additions to these classes will be terminated after 1998.
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Chapter 5
Mining
Certain mining buildings, machinery and equipment acquired for use at a new
mine or a major expansion of an existing mine may qualify for an accelerated
CCA rate of up to 100 per cent. A 25-per-cent increase in a mine’s capacity is
generally considered to be a major expansion.
These mining assets were previously included in class 28 and depreciated at a
rate of 30 per cent. Acquisitions after 1987 are included in class 41, and
depreciated at a rate of 25 per cent. In addition to the 25-per-cent allowance
provided in class 41, a taxpayer owning such property and operating the mine
may claim an additional allowance equal to the lesser of (1) the remaining
undepreciated capital cost of property of the class, or (2) the income for the
year from the new or expanded mine.
The 1996 budget announced income tax changes for oil sands projects. The
objective of the changes was to provide a more equitable tax treatment for the
two different oil sands extraction methods (mining and in situ). Mining methods
involve the removal of overburden and the transportation of bituminous sands
to a central processing facility where the oil (bitumen) is separated from the
sand using hot water. With in situ operations, the oil is recovered from an
underground reservoir by the application of heat or other techniques which
make the oil more mobile and capable of flowing from a well or wells.
The 1996 budget extended the accelerated CCA rules to the eligible
depreciable capital costs for in situ projects. The tax treatment that previously had
been available only for new mines (both mineral and oil sands) and major mine
expansions was also extended to other capital investments, including large
incremental capital costs that might not otherwise qualify as a major expansion
(for example, efficiency improvements and environmental protection purposes).
Specifically, all tangible capital expenditures incurred for all types of mines,
including oil sands projects, would qualify for accelerated CCA to the extent that,
in a year, these capital costs exceeded 5 per cent of gross revenue from that
mine or oil sands project in that year.
Exploration costs
Expenditures incurred in determining the existence, location, extent or quality
of mineral resources, and oil or gas, or incurred to develop mineral resources
prior to commercial production in Canada are classified as a Canadian
exploration expense (CEE) and deducted for tax purposes at a rate of
100 per cent.
Generally accepted accounting principles allow companies to depreciate
exploration expenditures on either a “full cost” or a “successful efforts” basis.
The full cost method requires that all exploration costs, whether they result in
new production or not, be capitalized and amortized as the reserves are
depleted. The successful efforts method requires that only those costs which
result in the discovery of reserves and which have a benefit in terms of future
revenues are capitalized; other costs are expensed as incurred. Most
Canadian-controlled companies follow the full cost method, while foreigncontrolled companies in Canada usually follow the successful efforts method.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
The 100-per-cent write-off of CEE for tax purposes is more rapid than the
amounts used for financial statement purposes, especially for successful
exploration. The fast write-off for CEE provides a deferral of tax.
Under the benchmark tax system, corporations would be permitted an
immediate deduction only for unsuccessful exploration expenditures. However,
those costs associated with successful exploratory activities (i.e. those costs
that result in producing assets for both the mining and oil and gas sectors)
would be permitted a deduction based on an amortization over the life of
the asset.
Under certain conditions, corporations entering into flow-through share
agreements are entitled to reclassify limited amounts of a Canadian
development expense (normally a 30-per-cent deduction on a decliningbalance basis) into a Canadian exploration expense. The tax expenditure
associated with this provision appears as a personal tax expenditure item
since these deductions are taken by the purchasers of the flow-through shares
which are generally individuals.
Capital equipment used for SR&ED
Eligible capital expenditures for the provision of premises, facilities or
equipment used for SR&ED in Canada may be fully deducted in the year they
are incurred. In the absence of this provision, these amounts would have
been depreciable over several years. Under the benchmark tax system,
expenditures that are capital in nature and designed to produce income in
the future are depreciated over a period approximating that during which the
income is expected to arise.
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Chapter 5
Illustration
Assuming a taxable corporation makes a $100,000 investment in an eligible
asset, the net present value of the income tax reduction resulting from accelerated
CCA is presented in the following table. This illustration is based upon a federal
corporate income tax rate of 29.12 per cent and uses a discount rate of 8 per cent.
The actual net present value of the reduced federal tax resulting from accelerated
CCA will vary depending upon the tax status of the corporation, its effective
tax rate, and the amount of CCA actually claimed in future years. The following
table presents the maximum value of the incentive assuming that firms can fully
benefit from the accelerated CCA. The one exception is for the analysis of
mining assets (see table footnote).
Baseline tax
depreciation
rate
Net present value of
reduced federal tax
resulting from
accelerated CCA
CCA Class
Accelerated
rate
Vessels
7
331⁄3% straight-line
15% declining
balance
$5,800
Railway cars
35
10% declining
balance
7% declining
balance
$2,500
43.1
30% declining
balance
4% declining
balance
$12,800
34
50% straight-line
30% declining
balance
$2,900
Water and air pollution
control property
24 and
27
50% straight-line
30% declining
balance
$2,900
Mining assets
Oil sands and
in situ oil
28 and
41
100% (subject
to income
restriction)
25% declining
balance
$500 to
$4,0001
28 and
41
100% (subject
to income
restriction)
25% declining
balance
$500 to
$1,3002
Scientific research
and experimental
development
equipment
Full writeoff in year
Full write-off
in year
30% declining
balance
$4,800
Exploration costs
Full writeoff in year
Full write-off
in year
30% declining
balance
$4,800
Electrical generating
equipment using wind,
solar and geothermal
energy
Energy-efficient
equipment used in
manufacturing and
processing
(pre-1994 budget)
Conventional mines
1
Accelerated CCA can only be claimed against income earned by the related project, not against total
corporate income. The income of the project, in turn, depends inter alia on prices for oil/minerals. Therefore,
the net present value of the federal tax reduction resulting from claiming accelerated CCA varies depending
upon the amount of project income against which CCA may be claimed. These estimates are based on the
operating results of a range of existing and proposed oil sands mining and in situ oil sands projects as
obtained from industry sources. The calculations result in a range of $500 to $4,000 per $100,000
investment; however, most oil sands projects would generally fall between $700 and $2,500.
2
For conventional mines, the analysis was based on hypothetical mine models developed by
Natural Resources Canada. These models include a range of low and high profitability metal mines.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Allowable business investment losses
Capital losses arising from the disposition of shares and debts are generally
deductible only against capital gains. However, under the allowable business
investment loss rules, three-quarters of capital losses in respect of shares or
debts of a small business corporation may be used to offset other income.
Unused allowable business investment losses may be carried back three years
and forward seven years. After seven years, the loss reverts to a capital loss
and may be carried forward indefinitely.
The value of the tax expenditure is the amount of tax relief provided by
allowing these losses to be deducted from other income in the year rather than
being deducted against uncertain taxable capital gains in the future.
Holdback on progress payments to contractors
In the construction industry, contractors are typically given progress payments
as construction proceeds. However, a portion of these progress payments
(e.g., 10 per cent to 15 per cent) is often held back until the entire project is
completed satisfactorily. The amount held back need not be brought into the
income of the contractor until the project to which it applies is certified as
complete, rather than when earned as would be required in the benchmark
tax structure. Where a contractor, in turn, withholds an amount from a
subcontractor, costs equal to the amount of the holdback are not considered
to have been incurred by the contractor and are not deductible until paid.
The net impact of these two measures on a given contractor’s tax liability
depends on the ratio of holdbacks payable to holdbacks receivable. If
holdbacks receivable are greater than holdbacks payable, there is a deferral
of tax. If holdbacks payable exceed holdbacks receivable, there is a
prepayment of taxes.
Increases in net holdbacks receivable or decreases in net holdbacks payable
result in a positive estimate of the amount of the tax expenditure. Increases in
net holdbacks payable or decreases in net holdbacks receivable result in a
negative estimate.
Available for use
Taxpayers may claim CCA and ITCs on eligible property at the earlier of the
time it is put in use or in the second taxation year following the year of
acquisition. Property that becomes eligible for CCA and ITCs by virtue of the
two-year deferral rule could result in a significant mismatch of revenues and
expenses which give rise to a tax deferral. This is a tax expenditure because
taxpayers are allowed to claim deductions and tax credits on property before it
is put in use.
No data are available as assets are pooled into classes and are not accounted
for separately. Furthermore, assets are not identified as being “available for
use” or “not available for use”.
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Chapter 5
Capital gains taxation on realization basis
Capital gains are taxed upon the disposition of property and not on an accrual
basis. This treatment results in a tax deferral. Furthermore, certain roll-over
mechanisms such as share-for-share exchange provisions extend the period
of tax deferral. Under the benchmark tax system, capital gains would be fully
included in income as they accrue.
However, since 1994, financial institutions and investment dealers have been
required to report gains and losses on certain securities on an accrual basis
(i.e. mark to market).
No data are available.
Expensing of advertising costs
Advertising expenses are deductible on a current basis even though some of
these expenditures provide a benefit in the future. Under the benchmark tax
system, the expenses would be amortized over the benefit period.
The estimates provided are based upon the assumption that 25 per cent of
advertising costs incurred in a particular year provide a benefit in the following
two years. Since tax expenditures are estimated on a cash-flow basis, an
increase in annual advertising costs would result in a positive estimate of the
tax expenditure. Decreases in annual advertising costs would result in a
negative tax expenditure.
Deductibility of contributions to mine reclamation
and environmental trusts
Certain environmentally sensitive activities can disturb the natural environment
in the area where the activity takes place, and measures may need to be taken
to repair the environmental damage after operations have terminated. In these
situations, governments may require companies to set aside funds in advance
in trust funds to ensure that adequate amounts are available to conduct
restoration activities at the end of operations.
The 1994 budget permitted a deduction of required contributions to mine
reclamation trusts in the year in which they are made rather than permitting a
deduction only when the mine reclamation costs are actually incurred. Income
earned in such trusts is subject to tax each year. When actual reclamation
costs are incurred, any withdrawal of funds from the trust will be included in
income subject to tax and the actual reclamation costs will be deductible.
The 1997 budget extended this treatment to similar funds established for
waste disposal sites and quarries for the extraction of aggregate and other
similar substances.
The overall effect is to advance the timing of the deduction in respect of
reclamation expenses. The value of the tax expenditure is the amount of tax
relief that is effectively provided by allowing payments to be deducted from
income when contributions are made to the trust. This tax expenditure could
be positive or negative depending upon the amount of contributions to and
withdrawals from these trusts in a particular year.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Deductibility of countervailing and anti-dumping duties
In accordance with the rules established under the World Trade Organization,
countervailing and anti-dumping duties may be imposed by countries to offset
the injurious effects of imports which are subsidized or dumped. These actions
may result in Canadian taxpayers paying such amounts in order to export their
products. The 1998 budget proposes that cash outlays for duties be deductible
in computing income subject to tax in the year they are paid even though these
amounts may be refunded, in whole or in part, in a subsequent year. Any
refunds or additional amounts subsequently received, such as interest, would
have to be included in income in the year of receipt.
The value of the tax expenditure is the amount of tax relief provided by allowing
these contingent costs to be deducted from income when paid rather than
when the exact amount, if any, of the duty is determined. This tax expenditure
could be positive or negative depending upon the amount of countervailing
duties paid and recovered by firms in a particular year.
No forecasts have been made of the future tax expenditure amounts since
it is not possible to determine the cost of future trade actions affecting
Canadian taxpayers.
Deductibility of earthquake reserves
In 1997, the Office of the Superintendent of Financial Institutions (OSFI)
introduced new guidelines that require federally regulated insurance companies
to meet target levels of preparedness to ensure they have sufficient financial
capacity to pay insured earthquake losses when they occur. The draft appendix
to the guidelines proposes an earthquake reserve to be composed of two parts:
the first element, the ‘earthquake premium reserve’, is based on a percentage
of net earthquake premiums written; and the second element, the ‘earthquake
reserve complement’, takes into account the earthquake exposure reinsured
with another insurance company and a proportion of the capital and surplus of
the company. The 1998 budget proposes that the ‘earthquake premium reserve’
will be deductible for income tax purposes. Under the benchmark system, such
reserves would not be deductible.
Cash basis accounting
Farming and fishing corporations may elect to include revenues as received,
rather than when earned, and deduct expenses when paid rather than when
the related revenue is reported. This treatment allows a deferral of income and
a current deduction for prepaid expenses. Under the benchmark tax structure,
income is taxable when it accrues.
No data are available.
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Chapter 5
Flexibility in inventory accounting
Farm corporations using the cash basis method of accounting are allowed to
depart from it with regard to their inventory. A discretionary amount, not exceeding
the fair market value of farm inventory on hand at year end, may be added
back to income each year. This amount must then be deducted from income
in the following year. The effect of this provision is to allow farm corporations
to avoid creating losses which, if carried forward, would be subject to the time
limitation. Thus the tax expenditure provides tax relief to the extent that the
losses would otherwise have been subject to the time limitations.
No data are available.
Deferral of income from grain sold through cash purchase tickets
Farmers may make deliveries of grain before the year end and be paid with a
ticket that may be cashed only in the following year. The payment for deliveries
of grain is included in income only when the ticket is cashed, thereby providing
a deferral of taxes. Under the benchmark tax system, income would be taxed
on an accrual basis.
The estimates are based on data provided by the Canadian Wheat Board.
Since tax expenditures are estimated on a cash-flow basis, an increase in the
balance of uncashed grain tickets represents additional income that is being
deferred and results in a positive estimate of the tax expenditure. A decrease
in the balance of uncashed grain tickets indicates that less income is being
deferred and results in a negative tax expenditure.
Deferral of income from destruction of livestock
If the taxpayer elects, when there has been a statutory forced destruction of
livestock, the income received from the forced destruction can be deemed to
be income in the following year. The deferral is also available when the herd
has been reduced by at least 15 per cent in a drought year. This provision allows
for a deferral of income to the following year when the livestock is replaced.
Under the benchmark tax system, income is taxed on an accrual basis.
Deferral of tax from use of billed-basis accounting
by professionals
Under accrual accounting, costs must be matched with their associated revenues.
However, in computing their income for tax purposes, professionals are allowed
to elect either an accrual or a billed-basis accounting method. Under the latter
method, the costs of work in progress can be written off as incurred even
though the associated revenues are not brought into income until the bill is
paid or becomes receivable. This treatment gives rise to a deferral of tax.
No data are available.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
International
Non-taxation of life insurance companies’ world income
All Canadian corporations except Canadian multinational life insurers are taxed
on their worldwide income. Canadian multinational life insurers are taxed only
on their profits from carrying on a life insurance business in Canada using
special rules in the income tax regulations.
Prior to 1993, the cost of this tax expenditure was estimated from tax returns
and information available from the Office of the Superintendent of Financial
Institutions. However, information required to estimate this tax expenditure is
not available after 1992.
Exemptions from non-resident withholding tax
Canada, like other countries, imposes a withholding tax on various types of
income paid to non-residents. The basis for this tax rests on the internationally
accepted principle that a country has the right to tax income that arises or has
its source in that country. The types of income subject to non-resident withholding
tax include: certain interest, dividends, rents, royalties and similar payments;
management fees; estate and trust income, alimony and support payments;
as well as certain pension, annuity and other payments.
Over time, as the benefits of freer trade in capital, goods and services have
been increasingly recognized, countries including Canada have adjusted their
tariff and tax structures to remove impediments to international transactions.
Part of this adjustment has been the reduction of non-resident withholding tax
on certain payments.
Canada’s statutory non-resident withholding tax rate is 25 per cent. However,
the rate is lowered and exemptions provided for certain payments through an
extensive network of bilateral tax treaties. These rate reductions, which apply
on a reciprocal basis, differ depending on the type of income and the tax
treaty country.
The Income Tax Act also provides for a number of unilateral exemptions from
withholding tax including: exemptions for interest payments on government
debt; interest payments to arm’s-length persons on long-term corporate debt;
interest payments to arm’s-length persons on foreign currency deposits with
branches of Schedule I banks; and royalty payments for the use of copyright.
Lower withholding taxes can reduce the cost to Canadian business of accessing
capital and other business inputs from abroad. For example, a lower Canadian
withholding tax on interest payments to non-residents can reduce the cost of
accessing foreign capital in cases where foreign creditors raise the interest rate
charged to cover payment for withholding tax. Similarly, a reduced withholding
tax on royalty payments can reduce the cost of accessing foreign technology
and other property and services, and thereby enhance the competitiveness of
Canadian businesses requiring these inputs.
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Chapter 5
The estimates of the tax expenditures associated with withholding tax exemptions
for certain royalties, interest, dividends and management fees paid to nonresidents were derived from a detailed analysis of payments to non-residents
and withholding tax collections on those payments for 1992, 1993 and 1994,
and projections of payments to non-residents over the post-1994 period. The
cost estimates were derived by applying treaty withholding tax rates (in the
case of payments to a country with which Canada had a tax treaty in the year
considered) or the statutory 25-per-cent withholding tax rate (in the case of
payments to non-treaty countries), that would otherwise apply in the absence
of an exemption, to observed and projected payments data under the benchmark
assumption used throughout this publication of no behavioural response to the
hypothetical removal of existing withholding tax exemptions.
This benchmark assumption of no behavioural response is particularly difficult
to sustain for this type of tax. Foreign providers of capital, technology and
other property and services, in most cases, are unwilling to bear the withholding
tax given that they do not pay such a tax when supplying other markets. If a
withholding tax was to be imposed, foreign providers would either require that
the tax be shifted back to the Canadian borrower or user of property or services
in the form of higher charges (which in many cases could not be absorbed), or
they would bypass Canada in favour of other foreign markets where such a tax
does not exist, again implying increased financing and other business costs to
Canadians. Indeed, these same competitiveness considerations have led to
the introduction of a number of withholding tax exemptions both in Canada
and in other countries.
Thus, these particular tax expenditure estimates cannot be interpreted as
additional revenues that could be collected from non-residents if the withholding
tax exemptions were removed, since the removal of the exemptions would
generally involve the elimination of the tax base.
Exemption from Canadian income tax of income
earned by non-residents from the operation of a ship or
aircraft in international traffic
Non-resident persons operating a ship in international traffic are exempted
from Canadian income tax as is done in other countries. Similarly, non-resident
persons operating an airline in international traffic are exempted from Canadian
income tax. In both cases, the exemption applies only if the non-resident’s
home country gives Canadian residents substantially similar tax relief. The
amount of the tax expenditure is the tax that would otherwise be payable on
profits related to the Canadian business of the non-resident persons, net of the
tax collected on the non-Canadian income of the resident persons.
No data are available.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Other Tax Expenditures
Transfer of income tax room to provinces
in respect of shared programs
In 1967, federal-provincial fiscal arrangements were altered. The federal
government substituted a transfer of corporate income tax points for direct
transfers to provinces under the cost-shared program for post-secondary
education. The tax change involved an increase in the corporate income tax
abatement rate from 9 to 10 percentage points, effectively reducing the
federal corporate income tax rate at that time from 37 per cent to 36 per cent
(the rate before the abatement was 46 per cent). This transfer of tax room
has been included as a tax expenditure because it is a substitute for direct
spending programs.
Interest credited to life insurance policies
Life insurance companies are taxed under the investment income tax (IIT)
at a rate of 15 per cent on net investment earnings attributable to life
insurance policies.
The IIT interacts with the taxation of policyholders. The Income Tax Act divides
life insurance policies into two categories: savings-oriented policies and
protection-oriented policies.
Savings-oriented policies are those where the amount of money invested in
the policy is large relative to the death benefit. A holder of a savings-oriented
policy is subject to annual accrual taxation in respect of the net investment
earnings credited to the policy. Net investment earnings reported by these
holders are subtracted from the IIT base in order to avoid double taxation of
net investment earnings.
In contrast, a holder of a protection-oriented policy is not subject to annual
accrual taxation. Net investment earnings are taxed when the policy is sold or
surrendered, terminated (other than by death), or when paid out as policy
dividends once the cumulative dividends exceed the total premiums paid
under the policy. Net investment earnings that are taxable to holders of
protection-oriented policies are also deductible from the IIT base.
Most of the cost of the tax expenditure relates to protection-oriented policies.
This cost has three basic elements:
■
differences between personal and IIT rates;
■
timing differences (i.e. policies that are eventually taxed in the hands
of policyholders); and
■
permanent differences (i.e. policies that are held until the death of
the insured).
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Chapter 5
Non-taxation of registered charities
and other non-profit organizations
Registered charities and other non-profit organizations, both incorporated and
unincorporated, are exempt from income tax. This is a tax preference to the
extent that the charity or organization has taxable income, mainly investment
income or profits from certain commercial activities.
No data are available.
Income tax exemption for provincial and municipal corporations
Provincial Crown corporations and municipal corporations are exempt from
income tax. Under the benchmark tax structure, such corporations would be
taxable to the extent that they had taxable income.
No data are available.
Non-taxation of certain federal Crown corporations
While federal Crown corporations are generally not subject to income tax,
those Crown corporations that carry on significant commercial activities are
taxable. It is possible, however, that some exempt corporations have income
that would be taxable under the benchmark tax system.
No data are available.
Excise tax transportation rebate
The excise tax transportation rebate, introduced in 1991 and effective for the
1991 and 1992 calendar years, allowed transportation businesses to receive
an excise tax rebate of 3 cents for each litre of eligible fuel on which federal
fuel excise tax of 4 cents per litre was paid. In exchange, businesses that
elected to receive this rebate were required to reduce their income tax losses
by 10 dollars for every one dollar rebated. This provided the industry with an
immediate cash-flow benefit at the cost of lower loss carry-forwards to offset
income taxes in future years.
This rebate was applicable to purchases of diesel and aviation fuel subject to
federal excise tax during the 1991 and 1992 calendar years.
A simpler option was available for trucking businesses that could elect to
receive a rebate of 11⁄2 cents per litre up to a maximum of $500 per taxpayer in
lieu of the 3-cent-per-litre rebate.
Aviation fuel excise tax rebate
The aviation fuel excise tax rebate, which is effective for the calendar years
1997 to 2000 inclusive, provides excise tax rebates on the aviation fuel used
by airline companies. Rebates are limited to $20 million per year per associated
group of companies. In order to receive a rebate, a company must agree to
reduce its income tax losses by 10 dollars for every one dollar of rebate.
102
DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Surtax on the profits of tobacco manufacturers
Tobacco manufacturers are subject to a special surtax on their profits. The
surtax is levied at a rate of 40 per cent of the Part I tax on tobacco manufacturing
profits. The surtax was originally announced as part of the National Action Plan
to Combat Smuggling in February 1994. In November 1996, the government
announced that the surtax would be extended for an additional three years to
February 2000.
The surtax is considered a tax expenditure because it constitutes a departure
from the benchmark system. Because the surtax results in more revenues than
would otherwise be raised under the benchmark tax system, it is a negative
tax expenditure.
Temporary tax on the capital of large deposit-taking institutions
The temporary surcharge is levied at a rate of 12 per cent of the financial
institution capital tax imposed under Part VI of the Income Tax Act calculated
before any credit for income taxes and as if there was a capital deduction of
$400 million. The surcharge applies to financial institutions as defined under
Part VI, but not to life insurance companies. The surcharge is not eligible to be
offset by tax payable under Part I.
The surcharge was introduced in the 1995 budget for a period of 18 months;
extended for one year in the 1996 budget; and extended for another year in
the 1997 budget. The 1998 budget proposes to extend the surcharge for
another year to October 31, 1999.
The surcharge is considered a tax expenditure because it constitutes a
departure from the benchmark system. Because the surcharge results in more
revenues than would otherwise be raised under the benchmark tax system, it
represents a negative tax expenditure.
Memorandum Items
Refundable Part I tax on investment income
of private corporations
This and the following item are parts of the tax system that provide some
integration between the personal and corporate tax systems. Their values are
calculated as additional corporate taxes that would be owing if corporations
and individuals were treated as separate tax units.
A portion of the income taxes paid on investment income received by a private
corporation (excluding deductible intercorporate dividends) is refunded to a
CCPC when this income is paid out to shareholders as dividends.
Prior to June 30, 1995, a corporation’s refundable tax equalled approximately
20 percentage points of the Part I tax paid on its investment income. To further
ensure the integration of corporate and individual income taxes, an additional
refundable tax of 62⁄3 per cent is levied on the investment income received after
103
Chapter 5
June 30, 1995 by a CCPC. This additional tax is refunded to a private
corporation, along with refundable Part I tax, when the investment income is
paid to shareholders as dividends. Corporations receive a refund from their
refundable tax account at a rate of one dollar for every three dollars of taxable
dividends paid.
Refundable capital gains for investment corporations
and mutual fund corporations
Capital gains realized by an investment corporation and a mutual fund
corporation are taxed at the corporation level and the tax is accumulated in the
“refundable capital gains tax on hand” account. The corporation uses this
account to claim a capital gains refund when it distributes capital gains
dividends to its shareholders or through share redemptions by a mutual fund
corporation. Since these dividends are capital gains distributions, they are
taxed as capital gains in the hands of the shareholder and not as dividends.
This measure is considered a tax expenditure because it constitutes a
departure from the benchmark system by allowing a public corporation (that
qualifies as an investment corporation or a mutual fund corporation) to flow out
its capital gains to shareholders. The result is that the distributed capital gains
will be taxed at the same rate as if the corporation were a private corporation.
Loss carry-overs
The cyclical nature of business and investment income suggests that the
impact of such income should be viewed over a longer period of time rather
than on an annual basis. As a result, carry-overs of losses are treated as part
of the benchmark tax system. The loss carry-over rules permit taxpayers to
apply their losses against past or future income. The estimates provided indicate
approximately how much tax revenue the government forgoes by allowing
current year losses to be carried back (i.e. applied to reduce tax paid in previous
years) and by allowing losses of previous years to be carried forward and
applied to reduce tax otherwise payable for the current year. There are four
types of losses that can be carried over, and specific provisions apply to each.
Non-capital losses
A non-capital loss is a company’s loss from business operations. Non-capital
losses may be carried back three years and forward seven years to reduce or
offset the corporation’s taxable income.
Estimates reflecting the impact of the carry-forward of prior years’ losses
include the revenue impact of allowing non-capital losses of previous years to
be applied to reduce Part I tax and the refundable Part IV tax otherwise
payable for the current year. Estimates reflecting the impact of allowing current
year losses to be carried back (i.e. applied to reduce income tax paid in
previous years) include the impact of allowing current year losses to be carried
back to reduce both Part I tax and refundable Part IV tax.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Net capital losses
A net capital loss can arise from the disposition of capital property. This type of
loss may be carried back three years and forward indefinitely but can only be
applied against net taxable capital gains.
Estimates include the revenue impact of allowing net capital losses of previous
years to be applied to reduce income tax otherwise payable for the current
year and the impact of allowing current year net capital losses to be carried
back (i.e. applied to reduce income tax paid in previous years).
Farm losses and restricted farm losses
A corporation can deduct, in the calculation of net income, a loss incurred
from a farming or fishing business. The unused losses of this business may be
carried back three years and forward 10 years.
When the corporation’s major source of income is not farming, the amount of
farming losses deductible in the year is restricted to a maximum of $8,750.
The unused losses, defined as the excess of the net farm losses over the farm
losses deductible in the year, are considered restricted farm losses. Restricted
farm losses may also be carried back three years and forward 10 years but
can only be applied against farm income.
Estimates consist primarily of the revenue impact of allowing farming losses of
previous years to be applied to reduce income tax otherwise payable for the
current year.
The revenue impact of applying restricted farm losses is minimal.
Deductible meals and entertainment expenses
Meals and entertainment expenses are considered to be a memorandum item
because the amount that should be deductible under a benchmark tax system
is debatable. While a portion of these expenditures is incurred in order to earn
income, there is an element of personal consumption associated with these
expenditures. Consequently, only a partial deduction for these expenses would
be permitted under the benchmark tax system.
The deduction is limited to 50 per cent of the cost of food, beverages and
entertainment (80 per cent before March 1, 1994) in order to reflect the
personal consumption portion of these costs. To the extent that the businessrelated portion (i.e. the amount deductible under the benchmark system)
exceeds the 50-per-cent deductible portion (80 per cent before March 1,
1994) there would be a negative tax expenditure since too large a portion of
the costs is denied. Conversely, if the business-related portion is less than the
tax deductible portion, there would be a positive tax expenditure. The
estimates provided reflect the additional tax revenue that would be received
if no deduction were allowed (i.e. that there is no business purpose to
the expenditure).
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Chapter 5
Large corporations tax
The large corporations tax (LCT) was introduced on July 1, 1989 as a tax on
the Canadian capital of large corporations. The rate of tax in 1993 and 1994
was 0.2 per cent. The 1995 budget increased the LCT rate to 0.225 per cent
effective budget day 1995.
This tax ensures that all large corporations, and groups of related
corporations, with more than $10 million of taxable capital employed in
Canada, pay some federal tax. Companies can reduce their LCT liability to the
extent of the Canadian portion of their corporate surtax. The rate of corporate
surtax was increased from 3 per cent to 4 per cent in the 1995 budget.
Threshold
The $10 million capital deduction effectively exempts smaller corporations from
the LCT as long as these corporations are not related to other corporations
subject to the LCT – that is, the $10 million deduction must be shared among
related corporations. This capital deduction is not considered to be a tax
expenditure because it is generally available to all corporations.
Exempt corporations
Certain corporations such as non-resident investment corporations, deposit
insurance corporations and corporations exempt from paying Part I income tax
are exempt from paying the LCT. This exemption is a tax expenditure, but data
are not available to estimate its value.
Patronage dividend deduction
In computing income for a taxation year, a taxpayer is allowed to deduct
patronage dividend payments made to customers. Patronage dividends are
payments made to customers in proportion to their volume of business. The
taxpayer is required to withhold 15 per cent of all patronage dividends in
excess of $100 paid to each customer who is resident in Canada.
The appropriate benchmark tax treatment of patronage dividends is uncertain.
These dividends could be considered to be analogous to the payment of a
volume discount or the return of excess payments. With this view of the
benchmark system, this would not be a tax expenditure.
Alternatively, these payments could be perceived as the distribution to
members (or shareholders) of earnings which would not be deductible under
the benchmark system. The amount shown, reflecting this view of the
benchmark system, is the revenue impact of allowing patronage dividends to
be deductible from income.
106
DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
Logging tax credit
The logging tax credit reduces federal taxes payable by the lesser of two-thirds
of any logging tax paid to a province and 62⁄3 per cent of income from logging
operations in that province. This reduction in federal taxes can be argued to be
a tax expenditure for the same reasons explained under the analysis of the
resource allowance deduction.
Deductibility of provincial royalties (joint venture payments)
for the Syncrude project (remission order)
Taxpaying participants in the Syncrude project are permitted to deduct both
the resource allowance and “joint venture payments” made to the province of
Alberta in lieu of a royalty in computing income subject to tax. This is
accomplished through a remission order. Under the benchmark tax system,
these joint venture payments, which are profit sensitive, would not be
deductible. The estimate of the tax expenditure is calculated as the value
provided by this extra deduction less the reduction in the resource allowance.
Deductibility of royalties paid to Indian bands
Royalties and lease rentals paid to Indian bands in respect of oil and gas and
mining activities on Indian reservations are considered to be Crown charges
paid to Her Majesty in Right of Canada or of a province in trust to the Indian
band. Unlike non-deductible Crown charges, amounts paid to the benefit of an
Indian band are generally deductible for federal income tax purposes. In
addition to the deductible Crown charges, a resource allowance is earned on
the resource profits net of the deductible Crown charges.
The amounts paid to the Government of Canada in the form of mining and oil
and gas royalties/lease rentals paid to Indian bands are provided below:
Oil and gas and mining royalties/lease rentals paid to Indian bands
1992-93
1993-94
1994-95
1995-96
1996-97
58.0
0.5
92.0
1.0
($ millions)
Oil and gas
Mining
50.0
0.8
59.0
0.6
76.0
0.7
Source: Department of Indian Affairs and Northern Development.
Non-resident-owned investment corporation refund
A non-resident-owned investment corporation must pay income tax at a rate
of 25 per cent. However, except for capital gains realized on taxable Canadian
property, this tax is refundable when the surplus is distributed as taxable dividends
107
Chapter 5
to the shareholders and the applicable rate of withholding tax then applies. The
refund is designed to relieve the dividends paid to non-residents from double
taxation that would otherwise result. The corporation is essentially treated as a
conduit for the flow-through of income. The amounts reported estimate the tax
revenues that would be generated if the non-resident-owned investment
corporation refund was not available.
Investment corporation deduction
Investment income is taxed at the corporation level and in the hands of the
individual who receives it as dividend payments. In order to achieve a certain
degree of integration between the personal and corporate tax systems, the
current rules allow an investment corporation to deduct from its Part I tax
otherwise payable 20 per cent of the amount by which its taxable income
exceeds its taxed capital gains.
This measure constitutes a tax expenditure because it allows a public
corporation that qualifies as an investment corporation to benefit from
elements of the integration system which are usually available only to private
corporations. The tax expenditure is estimated as the additional revenue that
would have been collected by the government if investment income (except
capital gains) had been taxed at the general income tax rate applicable to
public corporations.
Deferral of capital gains income through
various roll-over provisions
The taxation of capital gains is affected by provisions that permit taxpayers to
defer realization for tax purposes through various roll-over provisions. Since
the benchmark tax structure includes all accrued gains, this item is identified
separately for information purposes. Examples include:
■
the transfer of assets to a corporation or partnership in consideration for
share capital or a partnership interest;
■
amalgamations of taxable Canadian corporations;
■
the winding-up of a subsidiary corporation into its parent corporation; and
■
share-for-share exchanges.
The 1994 budget made changes that curtail the use of various roll-over
provisions in certain reorganizations.
No data are available.
Deduction for intangible assets
Three-quarters of eligible capital expenditures on intangible assets are added
to the cumulative eligible capital of a taxpayer. A deduction of up to 7 per cent
of cumulative eligible capital at the end of the year is allowed. Examples of
intangible assets include goodwill, customer lists and franchises.
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DESCRIPTION OF CORPORATE INCOME TAX PROVISIONS
The deduction for intangible assets could give rise to positive or negative tax
expenditure estimates depending on the actual rate of depreciation of these
assets relative to the amount that is permitted for tax purposes.
No data are available.
Tax exemption on income of foreign affiliates
of Canadian corporations
The Canadian system for taxing the income of foreign affiliates of Canadian
shareholders or the dividend income of the Canadian shareholders derived
from foreign affiliates is based on the objectives of encouraging international
competitiveness, protecting the tax base and eliminating double taxation.
Where the foreign affiliate earns active business income, Canada defers any
recognition of that income until it is paid to the Canadian shareholders as a
dividend on shares of the affiliate. In cases where the business income has
been earned in a country with which Canada has a double taxation treaty, the
dividend paid out of that income to Canadian corporate shareholders is not
subject to additional Canadian tax. Where the business income is earned in
non-treaty countries, the dividend is taxed in Canada but a tax deduction is
provided to Canadian corporate shareholders based on the underlying foreign
tax paid.
Where the foreign affiliate earns passive income and the affiliate is a controlled
foreign affiliate of a person resident in Canada, the passive income is taxed in
the Canadian shareholder’s hands on an accrual basis. The Canadian
shareholder can deduct taxes paid in the foreign jurisdiction in determining net
additional Canadian tax liability. When the income earned in the foreign affiliate
is actually paid to the shareholder in the form of a dividend, a deduction from
income subject to tax is provided to the extent that the income was included in
income subject to tax in a previous year.
Questions arise as to what should be the appropriate benchmark system to
measure the value of the tax expenditure, if any, in this case. Basically,
three different benchmarks could be contemplated:
■
Canada should tax only Canadian-source income.
This is the territorial approach. Under this approach, foreign subsidiaries of
Canadian companies would face the same tax burden on foreign-sourced
business income as locally owned enterprises in the foreign jurisdiction.
This approach is consistent with the concept of capital-import neutrality.
Capital-import neutrality results when the shareholders of subsidiaries do
not face additional taxes in Canada with respect to the foreign business
income earned by their subsidiaries. This is the effect of Canada’s decision
not to tax dividends arising from affiliates in countries with which Canada
has entered into a double taxation agreement as a way to relieve double
taxation. If this exempt dividend approach were to be considered as the
benchmark, then no preference would be associated with the foreign
dividend exemption.
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Chapter 5
■
Income earned by a foreign affiliate should be taxable in Canada
when dividends are paid to the Canadian shareholder and double
taxation alleviated with a foreign tax credit.
This is the approach used by a number of countries since it allows for
additional taxes to be collected in the country of residence of the
shareholder of a foreign affiliate at the time a dividend is paid to the
shareholder by the affiliate out of foreign business income. These
additional taxes would be levied when domestic tax payable exceeds
the amount of foreign taxes paid both on the dividend itself and on the
underlying foreign corporate profits out of which the dividend was paid.
In Canada, dividends from foreign affiliates that do not qualify as exempt
dividends are taxed on this basis. If this were to be considered the
benchmark system, then the exempt dividend system would provide a
preference, measured as the additional tax, net of the foreign tax credit,
that would have been payable had the dividend been taxable in Canada.
■
Income earned by foreign affiliates should be taxable in Canada as
it accrues to the Canadian shareholder (i.e. on a current basis).
This system is consistent with the concept of capital-export neutrality,
which states that income of foreign affiliates should be subject to the same
tax in the hands of its shareholders on a current basis regardless of
whether the income is earned domestically or in a foreign affiliate. Certain
passive income earned by controlled foreign affiliates is taxable on this
basis in Canada. If this system was to be viewed as the benchmark,
both the exempt dividend and the foreign tax credit approaches would
be said to provide a preference measured as the deferral of incremental
Canadian tax from the time the income is earned until the time the
dividend is paid out.
Each of these three possible benchmarks has a policy justification. Data
required to compute the amount of tax preference associated with any of
the benchmarks are currently unavailable.
110
Chapter 6
DESCRIPTION OF THE GOODS
SERVICES TAX PROVISIONS
AND
Since the goods and services tax (GST) is levied at all points in the production
and distribution chain, the value-added nature of the tax makes it equivalent to
a retail sales tax levied on the sale of goods and services to the final consumer.
Based on this equivalency, the GST base can be estimated from a Sales Tax
Model constructed using data obtained from Statistics Canada’s input-output
tables and the National Income and Expenditure Accounts.
The data from the input-output tables are used to derive detailed expenditures
by commodity for households, public sector bodies and exempt businesses.
The personal expenditure categories of the input-output tables, along with the
investment categories for residential construction and real estate commissions,
are used to derive commodity expenditures for households. The commodity
expenditures of public sector bodies are derived from certain personal expenditure
categories, current government expenditure categories and appropriate investment
categories contained in the input-output tables. (Public sector bodies include
the federal government, provincial governments, municipalities, universities,
school boards, public colleges, hospitals, charities and non-profit organizations.)
The commodity expenditures of exempt businesses are derived from the input
matrix of the input-output tables.
The commodity data described above are used to identify the impact of the
GST provisions that either zero-rate or exempt certain goods and services. In
some cases, modifications had to be made to the data derived from the inputoutput tables and the National Income and Expenditure Accounts to account
for the structure of the GST. Since final input-output tables for a given year are
available only four years after the fact, National Income and Expenditure Accounts
data are used to project the impact of each GST provision to the relevant historical
year. Expenditure data contained in the Department of Finance’s Canadian
Economic and Fiscal Model (CEFM) are used to project the impact of most
of the GST provisions over the forecast period.
The Sales Tax Model is not the sole source of the estimated tax expenditures
associated with the GST. In some cases, actual data from Revenue Canada
were used for the tax expenditure estimates. In other cases, estimates were
derived from entirely different sources. This chapter describes the various
GST expenditure estimates and how they were derived.
Zero-Rated Goods and Services
Basic groceries
Basic groceries, which include the majority of foodstuffs for preparation and
consumption at home, are zero-rated under the GST. However, the tax is
charged on certain goods such as soft drinks, candies and confections, and
alcoholic beverages.
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Chapter 6
The cost of the tax expenditure can be estimated using the Sales Tax Model
by identifying commodities purchased by final consumers and public sector
bodies which are currently not subject to tax. The majority of these purchases
are contained in Statistics Canada’s personal expenditure category “Food and
Non-Alcoholic Beverages”.
Prescription drugs
Drugs that are controlled substances for which a prescription is required are
zero-rated. This provision also includes other drugs that have been prescribed
by a recognized health care practitioner. The associated dispensing fee is also
zero-rated. However, this provision excludes those items labelled or supplied
for veterinary use.
The estimate is derived using the Sales Tax Model. However, an adjustment is
made to reflect the fact that the input-output commodity “Pharmaceuticals”
includes both prescription and non-prescription medicine. The ratio used to
separate these two categories of medicine is based on information provided
by Statistics Canada.
Medical devices
A wide range of medical devices is zero-rated under the GST. This includes
canes; crutches; wheelchairs; medical and surgical prostheses; ileostomy and
colostomy devices; artificial breathing apparatus; hearing and speaking aids;
prescription eyeglasses and contact lenses; various diabetic supplies; and
selected devices for the blind and for the hearing or speech impaired. In some
instances, a device qualifies for tax-free status only if prescribed by a
recognized health care practitioner.
The estimate is obtained using the Sales Tax Model. The zero-rated medical
devices are found in the input-output commodities “Personal Medical Goods”,
“Medical and Dental Equipment and Supplies”, and “Ophthalmic Goods”.
An adjustment is made to reflect the fact that the input-output commodities
“Personal Medical Goods” and “Ophthalmic Goods” include expenditures
made by final consumers which are not zero-rated under the medical devices
provision. The ratio used to separate the zero-rated from the non-zero-rated
expenditures is based on information provided by Statistics Canada.
Agricultural and fish products and purchases
Instead of taxing sales and providing input tax credits at early stages in the
food production-distribution chain, certain agricultural and fish products are
zero-rated all through the chain. A prescribed list of such supplies includes
farm livestock, poultry, bees, grains and seeds for planting or feed, hops, barley,
flax seed, straw, sugar cane or beets, etc. In addition, prescribed sales and
purchases of major types of agricultural and fishing equipment are zero-rated.
The main effect of this provision is on the cash-flow position of taxpayers. For
example, in the normal operation of the GST, farmers would pay the GST on
taxable purchases and would claim a corresponding input tax credit at the end
112
DESCRIPTION OF THE GOODS AND SERVICES TAX PROVISIONS
of their tax period. However, in the case of prescribed zero-rated supplies, the
farmer does not pay the GST and so does not have to wait to claim an input
tax credit. Consequently, the cash-flow position of the farmer is improved. At
the same time, however, the suppliers lose the benefit of holding the GST on
these purchases until the end of their tax period. Since the aggregate tax
liability of these taxpayers remains unchanged, the revenue implications of this
measure are small.
Certain zero-rated purchases made by exporters
Certain supplies of goods and services delivered in Canada but subsequently
exported are zero-rated. These include:
■
the supply of goods to a recipient who intends to export them, provided
they are not excisable goods (spirits, beer or tobacco) and the goods are
not further processed or modified in Canada by the recipient;
■
the supply of excisable goods to a recipient who, in turn, exports the
goods in bond;
■
supplies of natural gas made to a person who is exporting the gas by
pipeline and not further processing or using the gas in Canada before its
exportation other than as fuel or compressor gas to transport the gas; and
■
goods sold to duty-free shops licensed as such under the Customs Act.
As with agricultural and fish products, this provision has only cash-flow
implications. Again, the impact of this measure on tax revenues is small.
Non-taxable importations
Certain importations are tax free under the GST. These importations include:
■
goods, other than books and periodicals, valued at not more than $20 and
mailed to residents of Canada from other countries;
■
duty-free personal importations such as goods valued at not more than
$500 and imported by Canadians who have been outside the country for
more than seven days (the limit was $300 prior to June 13, 1995); and
■
goods imported by foreign diplomats.
No data are available.
Zero-rated financial services
Financial services provided to non-residents are generally zero-rated. However,
there are certain exceptions (e.g., financial services that relate to debt arising
from deposits in Canada, real property situated in Canada, goods purchased
for use primarily in Canada, services performed primarily in Canada).
The zero-rating provisions enable Canadian financial institutions that generate
significant amount of revenue through international activities to remain
competitive in global markets.
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Chapter 6
Tax-Exempt Goods and Services
Residential and other personal-use real property
Certain real property transactions are exempt under the GST. These include
sales of used residential property, sales of personal-use real property by an
individual or a personal trust, and the sale of farmland to a family member who
is acquiring the property for personal use.
Rentals of a residential complex (such as a house) or a residential unit (such as
an apartment) for a period of at least a month are tax exempt. Short-term
accommodation is also exempt where the charge for the accommodation is
not more than $20 per day.
The estimate is derived using the Sales Tax Model based on the GST being
applied to the input-output commodity “cash rent”, and incorporates the loss
of the GST currently paid on business inputs purchased by the landlord. In
addition, the estimate captures the GST being applied to certain consumer
expenditures on the commodity “other rent” which represents exempt
purchases of parking privileges associated with rental accommodation.
Health care services
Health care services are exempt under the GST. These services include the
following categories:
■
institutional health care services provided in a health care facility. These
include accommodation, meals provided with accommodation, and rentals
of medical equipment to patients or residents of the facility. However, it
excludes meals served in a cafeteria, parking charges, or haircuts for
which a separate fee is charged;
■
services provided by certain health care practitioners whose profession
is regulated by the governments of at least five provinces. This category
includes nursing, dental, optometric, chiropractic, physiotherapy,
occupational therapy, speech therapy chiropodic, podiatric, osteopathic,
audiological and psychological services; and
■
services covered by a provincial health insurance plan. Most of these
services are already covered by the previous two provisions.
All exempt services that are covered by provincial health insurance plans are
included in the benchmark because, under the Constitution, the GST does not
apply to purchases made by provincial governments. Thus, the only cost from
this provision involves health services purchased by final consumers. The
estimates for this provision are derived from the Sales Tax Model.
Education services (tuition)
The GST provides an exemption for most educational services. The exemption
includes tuition fees paid for courses provided primarily for elementary or
secondary school students; courses leading to credits towards a diploma or
114
DESCRIPTION OF THE GOODS AND SERVICES TAX PROVISIONS
degree awarded by a recognized school authority, university or college; and
certain other types of training for a trade or vocation. In addition, the exemption
covers meals supplied to elementary or secondary students as well as most
meal plans at a university or public college.
The estimate is derived from the revenues that would be collected if tuition fees
were taxed and input tax credits were allowed for taxable purchases. The
estimate takes into account the fact that universities and public colleges currently
receive a rebate of 67 per cent of the tax that they pay on their purchases.
The estimate is derived from the Sales Tax Model based on the input-output
commodity “Education Services” augmented by data contained in Statistics
Canada’s Education Quarterly Review.
Child care and personal services
Certain child and personal care services are exempt under the GST. The
exemption covers the following:
■
child care services provided for periods of less than 24 hours to children
under 14 years of age; and
■
certain personal care services including supplies of care and supervision to
residents of an institution, as well as accommodation where it is provided
for children or disabled or underprivileged persons.
The estimate is derived using the Sales Tax Model based on the input-output
commodity “Personal Services, including Child Care” contained in the final
demand category “Domestic and Child Care Services”. The estimate reported
here does not account for day care that might be paid by governments, or day
care provided by a non-profit organization. However, the impact of these
exclusions on the overall estimate is unclear since provincial expenditures
would not be subject to tax and the remaining expenditures would be eligible
for partial rebates if taxed.
Legal aid services
Legal services provided under a provincially authorized legal aid program are
exempt under the GST. This includes payments by the client in respect of the
legal aid services and payments by a legal aid society to a private lawyer for
legal services.
There are two ways in which the tax is relieved:
■
legal aid services delivered directly by the Crown or a Crown agency (as is
the case in Nova Scotia, Newfoundland, Prince Edward Island, Quebec,
Manitoba and Saskatchewan) are exempt; and
■
legal aid services provided by private practitioners to a legal aid plan
administrator are taxable. However, the person responsible for the legal aid
plan is entitled to a rebate of 100 per cent of any tax paid on the supply.
115
Chapter 6
Revenue Canada supplied the data related to the rebates provided to legal aid
plans in the provinces of New Brunswick, Ontario, Alberta and British Columbia.
To account for the other provinces where the service is explicitly exempt, provincial
economic accounts data are used. Specifically, it is assumed that the value of
legal aid services relative to the total expenditures contained in the provincial
economic account category “Personal Business” in the tax-exempt provinces
would be the same as in those provinces where a rebate is provided.
The projected expenditure estimate is based on the growth in consumption
obtained from the CEFM.
Ferry, road and bridge tolls
International ferry services are treated as zero-rated like other international
transportation services. Other ferry, road and bridge tolls are GST exempt.
The estimate is derived using the Sales Tax Model based on the expenditures
of final consumers on the commodity “Highway and Bridge Maintenance”.
Municipal transit
A municipal transit service is defined as a public passenger transportation
service provided by a transit authority whose services are at least 90 per cent
within a particular municipality and its surrounding areas. These municipal
transit services are exempt under the GST.
The estimate is derived using the Sales Tax Model.
Exemption for small businesses
Businesses or individuals with annual revenues of $30,000 or less from taxable
and zero-rated transactions may elect to be exempt under the GST. Such
firms would not have to charge tax on their sales and would not be able to
claim input tax credits on their business purchases.
The starting point in deriving the estimate is gross sales data for 1990
obtained from personal and corporate income tax information. From this data,
one can estimate that the total sales from firms with annual sales of less than
$30,000 accounts for approximately 0.5 per cent of all sales in the Canadian
economy. This ratio can then be applied to the total gross GST collections
to approximate the revenues that would arise from eliminating the small
business threshold.
The projected expenditure estimate is based on the growth in nominal gross
domestic product (GDP) obtained from the CEFM.
Quick method accounting
Small businesses registered under the GST are eligible to elect to account for
GST using quick method accounting. Under the scheme, businesses do not
have to keep track of the tax paid on most of their inputs. Instead, these firms
remit a prescribed percentage of the GST that they collect on their sales.
116
DESCRIPTION OF THE GOODS AND SERVICES TAX PROVISIONS
The remaining GST collected is kept by the firm in lieu of the unaccounted
input tax credits. The firm is eligible to claim an input tax credit for the tax paid
on capital goods.
The estimate is derived from micro-statistical data for 1991 supplied by
Statistics Canada. The take-up rate of this provision for eligible small businesses
is about 22 per cent. The estimate for subsequent historical years is derived by
projecting the 1991 estimate based on information regarding the growth in
total input tax credits claimed which is obtained from Revenue Canada.
The projected expenditure estimate is based on the growth in nominal GDP
obtained from the CEFM.
Water and basic garbage collection services
Water and basic garbage collection services are exempt under the GST.
Charges levied for water and basic garbage collection services are captured in
the commodity “Water, Waste Disposal and Other Utilities” contained in the
input-output tables. The estimate is derived from the Sales Tax Model.
Domestic financial services
Financial services are defined to include services relating to financial
intermediation, market intermediation and risk pooling. However, in many
cases, the price of a financial service is implicit. For example, when banks
provide lending and deposit-taking services, the banks’ fees for these services
are the spread between interest rates received from borrowers and the interest
paid to depositors. The exact price associated with each financial transaction
is difficult to determine and, therefore, it is difficult to apply the GST to the sale
of the service. As a result, most financial services provided to residents of
Canada are exempt under the GST.
Members of a “closely related group” (if there is at least 90-per-cent crossownership of voting shares between them) where one of the members is a
“listed financial institution” could jointly elect to treat most supplies between
them as tax-exempt financial services. The purpose of this election is to
recognize that a closely related corporate group can be viewed as a single
entity with respect to intragroup transactions.
No data are available.
Certain supplies made by non-profit organizations
Supplies that are GST exempt when made by non-profit organizations include
recreational services provided primarily to children age 14 and under and
individuals who are underprivileged or have a disability; supplies of
food, beverages and lodging to relieve poverty or distress; and certain
amateur performances.
No data are available.
117
Chapter 6
Tax Rebates
Rebate for book purchases made by qualifying institutions
On October 23, 1996, the Minister of Finance announced that a 100-per-cent
GST rebate would be provided on all book purchases made by public libraries,
schools, universities, public colleges, municipalities, public hospitals and
qualifying charities and non-profit organizations.
The initial expenditure estimate for 1997 is the estimated annual cost of
implementing this provision. The projected expenditure estimate is based on
appropriate expenditure data obtained from the CEFM.
Housing rebate
Purchasers of newly constructed residential dwellings and substantially renovated
houses are eligible for a rebate of the GST paid if the purchaser is acquiring
the dwelling as a primary place of residence. For houses priced at or below
$350,000, the rebate is 36 per cent of the total GST paid to a maximum
of $8,750. The rebate is phased out for houses priced between $350,000
and $450,000.
The estimate for historical years is obtained from Statistics Canada’s National
Income and Expenditure Accounts. The projected expenditure estimate is
based on the growth in investment in new residential construction obtained
from the CEFM.
Rebate to foreign visitors on accommodation
Non-residents visiting Canada are entitled to a rebate for the GST paid on
most goods and short-term accommodation. Specifically, the rebate covers
the following where the tax paid is at least $20:
■
goods for use primarily outside Canada, excluding excisable goods such
as alcoholic beverages and tobacco products, provided the goods are
exported within 60 days of purchase; and
■
the tax paid on short-term lodging, but not including meals, where the
period of stay is less than one month.
However, goods for use outside Canada are essentially the same as other
exported goods and should be considered as part of the benchmark. Thus,
the cost of this provision is only the rebate associated with short-term
accommodation.
Revenue Canada has some data related to the cost of the tourist rebate.
However, these data are not sufficient to estimate the tax expenditure
associated with the tourist rebate. Specifically, it is not possible to identify the
value of the rebates that are conferred to businesses that include these
rebates as part of their input tax credits.
118
DESCRIPTION OF THE GOODS AND SERVICES TAX PROVISIONS
Rebates for municipalities
Recognized municipalities are entitled to a rebate of 57.14 per cent of the
GST paid on their purchases used in the course of supplying exempt
municipal services.
The estimate for historical years is based on data from Revenue Canada.
Since the value of the tax expenditure is influenced by provincial budgetary
decisions, the projected value of the tax expenditure for the relevant years is
simply the value estimated for 1996.
Rebates for hospitals
Public hospitals are eligible for a rebate of 83 per cent of the GST paid on
purchases related to their supply of exempt services.
The estimate for historical years is based on data from Revenue Canada.
Since the value of the tax expenditure is influenced by provincial budgetary
decisions, the projected value of the tax expenditure for the relevant years is
simply the value estimated for 1996.
Rebates for schools
Elementary and secondary schools, operating on a not-for-profit basis, are
eligible for a rebate of 68 per cent of the GST paid on purchases related to
their supply of exempt services.
The estimate for historical years is based on data from Revenue Canada.
Since the value of the tax expenditure is influenced by provincial budgetary
decisions, the projected value of the tax expenditure for the relevant years is
simply the value estimated for 1996.
Rebates for universities
Recognized degree-granting universities operating on a not-for-profit basis are
eligible for a rebate of 67 per cent of the GST paid on purchases related to
their supply of exempt services.
The estimate for historical years is based on data from Revenue Canada.
Since the value of the tax expenditure is influenced by provincial budgetary
decisions, the projected value of the tax expenditure for the relevant years is
simply the value estimated for 1996.
Rebates for colleges
Public colleges which are funded by a government or municipality and whose
primary purpose is to provide vocational, technical or general education are
eligible for a rebate of 67 per cent of the GST paid on purchases related to
their supply of exempt services.
119
Chapter 6
The estimate for historical years is based on data from Revenue Canada.
Since the value of the tax expenditure is influenced by provincial budgetary
decisions, the projected value of the tax expenditure for the relevant years is
simply the value estimated for 1996.
Rebates for charities
Charities registered under the Income Tax Act are eligible for a rebate of 50 per cent
of the GST paid on purchases related to their supplies of exempt services.
The estimate for historical years is based on data from Revenue Canada. Since
the expenditures of charities are captured in Statistics Canada’s definition of
personal expenditures, the projected estimate is based on the growth in
consumer expenditures obtained from the CEFM.
Rebates for non-profit organizations
The organizations eligible for this rebate are government-funded non-profit
organizations. They include registered amateur athletic associations and
organizations operating a facility or part thereof to provide nursing home
intermediate care or residential care, which receive at least 40 per cent of their
funding from governments, municipalities or Indian bands. These organizations
are eligible for a rebate of 50 per cent of the GST paid on purchases related to
their supplies of exempt services.
The estimate for historical years is based on data from Revenue Canada. Since
the expenditures of non-profit organizations are captured in Statistics Canada’s
definition of personal expenditures, the projected estimate is based on the
growth in consumer expenditures obtained from the CEFM.
Tax Credits
Special credit for certified institutions
A special credit is provided in the period from January 1, 1991 to the end of
1995 to certified institutions that employ mentally or physically disabled
individuals in the manufacturing of goods. These institutions are treated in the
same manner as other businesses under the GST. However, they receive a
special credit calculated on the basis of 100 per cent of the GST collected
from sales on manufactured goods in 1991, 75 per cent in 1992, 50 per cent
in 1993 and 25 per cent in both 1994 and 1995.
No data are available.
The GST credit
When the GST was introduced, a GST credit was established to ensure that
families with annual incomes below $30,000 would be better off under the new
sales tax regime. The amount of the GST credit depends upon family size and
income. Currently, the basic adult credit is $199. Families with children 18 years
120
DESCRIPTION OF THE GOODS AND SERVICES TAX PROVISIONS
and younger receive a basic child credit of $105 for each child. However, single
parents can claim a full adult credit of $199 for one dependent child. In addition
to their basic credit, single adults (including single parents) are eligible for an
additional credit of up to $105. The value of the credit is reduced for families
with incomes of over $25,921. Both the credit amounts and the income
threshold are adjusted annually to increases in the Consumer Price Index in
excess of 3 per cent.
The estimate for historical years is based on data from Revenue Canada. The
projected expenditure estimate is obtained from the Department of Finance’s
fiscal forecast.
Memorandum Items
Meals and entertainment expenses
In the normal operation of the GST, registrants are allowed to claim full input
tax credits for the tax paid on their purchases. However, in the case of the tax
paid on meals, beverages and entertainment expenses, the registrant is allowed
to recover only 50 per cent of the GST paid as an input tax credit. (Prior to
February 1994, the input tax credit for business meals and expenses was
80 per cent.) There is no input tax credit allowed for the GST paid on membership
fees or dues in any club whose main purpose is to provide dining, recreational
or sporting facilities.
The estimate is based on the cost of the meals and entertainment tax expenditures
contained in the Personal and Corporate Income Tax Expenditure Tables. These
figures are first grossed up to arrive at the total meals and entertainment
expenses in the entire economy using the marginal federal income tax rates
by sector. Then, 15 per cent is removed to account for expenses incurred in
GST-exempt activities since they are ineligible for any input tax credits. The
cost of this provision is equal to the above net expenses multiplied by 7 per cent.
Rebate to employees and partners
A rebate is available to certain employees of a GST registrant for the GST paid
on those expenses that are deductible in computing the employee’s income
from employment for income tax purposes. For example, an employee is allowed
to claim a rebate equal to 7/107ths of the capital cost allowance on an automobile,
aircraft or musical instrument that is used in his or her employment and on which
GST is payable. Also, the GST rebate is available to an individual who is a member
of a GST-registered partnership in respect of expenses incurred outside the
partnership that are deducted in computing the member’s income from the
partnership for the purposes of the Income Tax Act.
The estimate for historical years is based on data from Revenue Canada. The
projected expenditure estimate is based on the growth in nominal GDP obtained
from the CEFM.
121
Chapter 6
Sale of personal-use real property
The sale of personal-use real property by an individual or trust (all of the
beneficiaries of which are individuals) is exempt under the GST. Examples
include the sale of used owner-occupied homes and country properties kept
for personal use. However, the exemption does not include real property that
is sold in the course of business.
No data are available.
122
Chapter 7
OBJECTIVES
OF
TAX EXPENDITURES
This chapter is included to respond to the recommendation by the
Auditor General in his April 1998 report that the department should identify
clear objectives for each tax expenditure and report these objectives in the
annual report on tax expenditures.
P ERSONAL I NCOME TAX
Culture and Recreation
Deduction for clergy residence
The special treatment of clergy housing expenses recognizes the special
nature of the contributions and circumstances of members of the clergy.
■
Budget Speech, March 1949.
Flow-through of capital cost allowance (CCA) on Canadian films
To assist the financing and development of the Canadian film industry, the tax
law provided until 1995 a special write-off for investment in certain Canadian
motion picture films or videotapes certified by the Secretary of State. After
1995, this provision was replaced with a tax credit to producers in order to
maximize the benefit to eligible productions.
■
Budget Plan, 1995.
Deduction for certain contributions by individuals
who have taken vows of perpetual poverty
This measure recognizes the special situation of members of religious orders.
■
Section 110(2), Income Tax Act, Charitable gifts.
Write-off of Canadian art purchased
by unincorporated businesses
The special CCA claim for Canadian art is intended to further the
dissemination of Canadian art, as well as to support Canadian artists.
■
Budget Papers, 1981.
Assistance for artists
Costs deductible in year incurred
The special treatment of costs incurred by artists recognizes artists’ problems
in valuing their works of art on hand, attributing costs to particular works, and
carrying inventories over long periods of time.
■
Budget Papers, 1985.
123
Chapter 7
Charitable gifts from inventory
The special election with respect to a charitable gift from an artist’s inventory
removes an obstacle to artists donating their works of art to charities, public
art galleries and other public institutions.
■
Budget Papers, 1985.
Deduction for artists and musicians
The deductibility of certain expenses incurred by artists and musicians
recognizes that these expenses are necessary to carry on employment in
those fields.
■
Musical instruments: Income Tax Reform, 1987.
■
Artists’ employment expenses: Section 8(1)(q), Income Tax Act.
Added in 1991, for expenses incurred after 1990.
Non-taxation of capital gains on gifts of cultural property
This provision encourages the donation to designated institutions (such as
museums and art galleries) of cultural property determined to be of
outstanding significance to Canada’s national heritage.
■
Budget Plan, 1998.
Education
Tuition fee credit
This measure provides tax relief to students (and their parents) by recognizing
the costs of enrolling in qualifying programs or courses.
■
Budget Speech, September 1960.
Education credit
This measure provides assistance to students by recognizing non-tuition costs
associated with full- and part-time education.
■
Budget Supplementary Information, 1972.
Education and tuition fee credits transferred
This measure increases the availability of tax assistance for education, and
acknowledges the significant contributions made to students by supporting
individuals.
■
Income Tax Reform, 1987.
124
OBJECTIVES OF TAX EXPENDITURES
Carry-forward of tuition and education credits
Combined with the provision for transfer of tuition and education credits,
this measure ensures that students can use these credits fully, whether they
have supporting individuals or not.
■
Budget Plan, 1997.
Student loan interest credit
This measure was proposed in the 1998 budget in recognition of the costs of
investment in higher education, and to help ease the burden of student loans.
■
Budget Plan, 1998.
Exemption on first $500 of scholarship, fellowship and bursary income
This measure provides additional tax assistance to students.
■
Summary of 1971 Tax Reform Legislation, 1971.
Deduction of teachers’ exchange fund contributions
This measure encourages contact with educators in other Commonwealth
countries, thereby expanding the scope of the educational experience of
Canadian students, and encouraging the exchange of information on modern
teaching methods.
■
Budget Speech, 1957.
Registered education savings plans
Tax assistance for education savings plans broadens access to higher
education by encouraging Canadians to save towards the post-secondary
education of children.
■
Budget Plan, 1998.
Employment
Deduction of home relocation loans
This deduction is intended to facilitate labour mobility by allowing employers
to compensate relocated employees facing higher housing costs at the
new location.
■
Budget Papers, 1985.
Non-taxation of allowances to volunteer firefighters
The tax-free allowance for volunteer firefighters acknowledges the importance
of these volunteers to small and rural communities.
■
Budget Plan, 1998.
125
Chapter 7
Deduction for emergency service volunteers
This measure was proposed in the 1998 budget to further support for small
and rural communities, which are often unable to maintain full-time emergency
staffs and depend on the services of volunteers.
■
Budget Plan, 1998.
Northern residents deductions
These tax preferences assist in drawing skilled labour to northern and isolated
communities by providing recognition for the additional costs faced by
residents of these areas.
■
Budget Papers, 1986.
Overseas employment credit
This measure ensures the competitive international position of Canadian
companies undertaking work outside Canada on specified business activities
by offering comparable tax treatment as that provided by other countries.
■
Budget Papers, 1983.
Employee stock options
This measure encourages employee participation in the ownership of the
employer’s business, and assists businesses in their efforts to attract and
retain highly skilled employees.
■
Budget Documents, 1977.
Non-taxation of strike pay
Strike pay is non-taxable by virtue of the Supreme Court of Canada’s
determination that it is not income from a source.
■
Wally Fries v. The Queen, (1990) 2 CTC 439, 90 DTC 6662.
■
Revenue Canada, IT-334R2 Miscellaneous Receipts.
Deferral of salary through leave of absence/sabbatical plans
This provision recognizes that the main purpose behind these plans is to
provide in advance for extended leaves of a sabbatical nature within the
employment relationship, and not the deferral of taxes.
■
Budget Papers, 1986.
Employee benefit plans
The scope of tax-deferred salary arrangements was significantly reduced in
1986 to improve the fairness of the distribution of tax benefits to individuals in
different employment situations. The preferential tax treatment under these
126
OBJECTIVES OF TAX EXPENDITURES
plans is now available only in certain circumstances where an employee’s right
to income under a plan has not been fully earned, or where the main purpose
behind the plan is to provide incentives and not the deferral of tax.
■
Budget Papers, 1979.
■
Budget Papers, 1986.
Non-taxation of certain non-monetary employment benefits
As noted in the Description of Personal Income Tax Provisions section
of the Tax Expenditures report, the taxation of these items would be
administratively difficult.
Family
Spousal credit
This credit recognizes that a taxpayer whose spouse has little or no income
has a lesser ability to pay tax than a single taxpayer with the same income.
■
Report of the Royal Commission on Taxation, 1966, vol. 3.
Equivalent-to-spouse credit
This credit recognizes that a taxpayer without a spouse who is supporting a
dependent young child, parent or grandparent has a lesser ability to pay tax
than a taxpayer with the same income and no such dependant.
■
Section 118(1)(b), Income Tax Act, Wholly dependent person.
Infirm dependant credit
This credit recognizes that a taxpayer supporting an adult dependant who is
physically or mentally infirm has a lesser ability to pay tax than a taxpayer
with the same income and no such dependant.
■
Report of the Royal Commission on Taxation, 1966, vol. 3.
Caregiver credit
This provision was proposed in the 1998 budget to provide additional
assistance to individuals providing in-home care for elderly or infirm
family members.
■
Budget Plan, 1998.
Child tax benefit
The child tax benefit consolidated a number of child-related benefits to provide
assistance to low- and middle-income families with children in a simpler, fairer
and more responsive manner. It also recognizes the effect of children on the
ability to pay tax of middle-income parents.
127
Chapter 7
■
Replaced the former refundable child tax credit, family allowance and
non-refundable tax credit.
■
Budget Papers, 1992.
Deferral of capital gains through transfers to a spouse,
spousal trust or family trust
This deferral recognizes that it is not always appropriate to treat a transfer of
assets between spouses as a disposition for income tax purposes, and
therefore allows families flexibility in structuring their total assets. However, the
tax treatment of family trusts was amended in the 1995 budget to ensure that
they do not provide undue tax advantages.
■
Budget Speech, 1971.
■
Budget Plan, 1995.
Farming and Fishing
$500,000 lifetime capital gains exemption for farm property
This measure provides an incentive to invest in the development of productive
farms, and allows farm owners to accumulate capital for retirement.
■
Budget Papers, 1985.
■
The Lifetime Capital Gains Exemption: An Evaluation,
Department of Finance, 1995.
Net Income Stabilization Account (NISA)
The NISA program provides an income averaging mechanism for farmers, and
reduces the need for other forms of government assistance to the agriculture
industry. The tax-deferral component of the program is an integral aspect of
this initiative.
■
Federal-Provincial Agreement Establishing the Net Income Stabilization
Account, 1991.
Deferral of income from destruction of livestock
This deferral was introduced to allow farmers operating on a cash basis
adequate time to replace their herds, destroyed under statutory authority,
without imposing a tax burden in the year of livestock destruction.
■
Budget Papers, 1976.
Deferral of income from grain sold through cash purchase tickets
By permitting the deferral of the reporting of income on grain sales, this
measure facilitates the orderly delivery of grain to elevators ensuring that
Canada meets its grain export commitments.
■
Budget Papers, 1974.
128
OBJECTIVES OF TAX EXPENDITURES
Deferral through 10-year capital gain reserve
This provision, while limiting the tax deferral opportunities, recognizes that
where proceeds are receivable over time, fully taxing gains in the year of sale
could result in significant liquidity problems for taxpayers. The longer period of
deferral for gains on the sale of farm property was introduced to ease the
transfer of these assets between family members.
■
Explanatory Notes for Act to Amend the Income Tax Act, December 1982.
Deferral of capital gain through intergenerational
roll-overs of family farms
This measure allows for continuity in the management of family farms in
Canada by permitting property used principally in a family farming business to
pass from generation to generation on a tax-deferred basis.
■
Budget Supplementary Information, 1973.
Exemption from making quarterly tax instalments
This measure ensures consistency in the tax treatment of farmers reporting
income on a cash-flow basis.
■
Budget Speech, 1943.
Cash basis accounting
This treatment recognizes that requiring all farmers and fishermen to adopt
the accrual method of income reporting could result in accounting and
liquidity problems.
■
Report of the Royal Commission on Taxation, 1966, vol. 4.
■
Proposals for Tax Reform, 1969.
Flexibility in inventory accounting
This measure ensures that farmers operating on a cash basis are able to avoid
creating losses that would be subject to the time limitation if carried forward.
■
From existing description in the Tax Expenditures report.
■
Budget Supplementary Information, 1973.
Federal-Provincial Financing Arrangements
Quebec abatement
This provision reflects the election by the Province of Quebec to receive part of
the federal program contribution in the form of a tax abatement.
■
From the description in the Tax Expenditures report.
129
Chapter 7
■
Federal-Provincial Fiscal Revision Act, 1964.
■
Federal-Provincial Fiscal Arrangements Act, Part VI.
Transfer of income tax room to provinces
This provision reflects transfers in 1967 and 1977 by the federal government
of tax points to all provinces in place of certain direct cash transfers. The
tax point transfer assists provinces in providing services in the areas of
post-secondary education, hospital insurance and medicare programs.
■
From the description in the Tax Expenditures report.
■
Federal-Provincial Fiscal Arrangements Act, Part V.
General Business and Investment
$100,000 lifetime capital gains exemption
This exemption was introduced to encourage risk taking and investment. The
exemption was eliminated for gains accrued after February 22, 1994 to make
the taxation of capital gains fairer, simpler and more sustainable.
■
Budget Papers, 1985.
■
Tax Reform 1987: The White Paper, 1987.
■
Tax Measures: Supplementary Information, 1994.
Partial inclusion of capital gains
The reduced rate of inclusion for capital gains provides incentives to
Canadians to save and invest, and to ensure that Canada’s treatment of
capital gains was broadly comparable to that of other countries. The original
inclusion rate of one-half was subsequently raised to two-thirds, and then to
its current level of three-quarters, in order to broaden the tax base and
increase equity in the tax system.
■
Proposals for Tax Reform, 1969.
■
Tax Reform 1987: The White Paper, 1987.
Deduction of limited partnership losses
This provision allows for the deductibility of business losses for
limited partnerships in a manner consistent with other forms of
business organizations.
■
Budget Papers, 1986.
130
OBJECTIVES OF TAX EXPENDITURES
Investment tax credits
These incentives were introduced to stimulate investments in productive
facilities, and to generate growth and employment in specified regions.
■
Budget Supplementary Information, 1975.
■
Budget Papers, 1977.
■
Budget Papers, 1978.
Deferral through five-year capital gain reserve
This provision, while limiting the tax deferral opportunities, recognizes that
where proceeds are receivable over time, fully taxing gains in the year of sale
could result in significant liquidity problems for taxpayers.
■
Explanatory Notes for Act to Amend the Income Tax Act, December 1982.
Deferral through capital gains roll-overs
Roll-over provisions are provided in some situations in which it would not be
appropriate to collect a capital gains tax even though the taxpayer has sold or
otherwise disposed of an asset at a profit.
■
Proposals for Tax Reform, 1969.
Deferral through billed-basis accounting by professionals
This treatment recognizes the inherent difficulty in valuing unbilled time and
works in progress.
■
Summary of 1971 Tax Reform Legislation, 1971.
Deduction of accelerated tax depreciation
Accelerated rates of capital cost allowance are allowed for various types of
property to encourage investment in these assets.
■
The Corporate Income Tax System: A Direction for Change, May 1985.
$1,000 capital gains exemption on personal-use property
This exemption was introduced to minimize record keeping and
simplify administration with respect to the purchase and disposal of
personal-use items.
■
Summary of 1971 Tax Reform Legislation, 1971.
$200 capital gains exemption on foreign exchange transactions
This exemption was introduced to minimize record keeping and simplify
administration with respect to modest foreign exchange transactions.
■
Section 39(2), Income Tax Act. This provision is analogous to the
exemption on personal-use property.
131
Chapter 7
Taxation of capital gains upon realization
This treatment recognizes that, in many cases, it is difficult to estimate with
accuracy the value of unsold assets, and that taxing the accrued gains on
assets that have not been sold would be administratively complex and could
create significant liquidity problems for taxpayers.
■
Report of the Royal Commission on Taxation, 1966, vol. 3.
Health
Non-taxation of business-paid health and dental benefits
This provision improves access to supplementary health and dental benefits.
■
Budget Plan, 1998.
Disability credit
This credit improves tax fairness by recognizing the effect of a severe and
prolonged disability on an individual’s ability to pay tax.
■
Budget Plan, 1997.
Medical expense credit
This credit recognizes the effect of above-average medical expenses on the
ability of an individual to pay tax.
■
Budget Speech, 1942.
■
Budget Plan, 1997.
Medical expense supplement for earners
This measure improves incentives for disabled Canadians to participate in the
labour force by providing an alternative to disability-related supports under
provincial social assistance arrangements.
■
Budget Plan, 1997.
Income Maintenance and Retirement
Non-taxation of guaranteed income supplement and
spouse’s allowance benefits
This treatment recognizes that these income-tested payments provide a basic
level of support to elderly Canadians with little income other than the old age
security pension.
■
Budget Speech, 1971.
132
OBJECTIVES OF TAX EXPENDITURES
Non-taxation of social assistance benefits
This treatment recognizes the nature of social assistance as a payment of
last resort.
■
Budget Papers, 1981.
Non-taxation of workers’ compensation benefits
Prior to 1982, workers’ compensation payments were excluded from income.
Workers’ compensation benefits have been non-taxable since the first Boards
were established in 1915. The 1981 budget included these payments in
income and provided a matching deduction.
■
Budget Papers, 1981.
Non-taxation of amounts received as damages
in respect of personal injury or death
By exempting from tax funds and annuities resulting from personal injury, this
provision recognizes that amounts received as personal injury damages
represent to a large extent compensation for a capital loss suffered by the
injured taxpayer.
■
Budget Supplementary Information, 1972.
Non-taxation of employer-paid premiums for
group term life insurance of up to $25,000
This special treatment was removed in the 1994 budget in order to improve
fairness in the tax system.
■
Tax Measures: Supplementary Information, 1994.
Non-taxation of veterans’ allowances, civilian war pensions and
allowances, disability pensions and support for dependants
This treatment recognizes that these benefits provide a basic level of support
to veterans of Canada’s military engagements and their families.
■
Budget Speech, 1942.
Treatment of alimony and maintenance payments
The 1996 budget removed this special tax treatment for child support
payments made pursuant to an agreement or court order made on or after
May 1, 1997 to provide additional support to single parents and families
with children.
■
Budget Plan, 1996.
133
Chapter 7
Age credit
This provision was introduced to reduce the tax burden borne by elderly
Canadians.
■
Budget Highlights, 1972.
Pension income credit
This provision was introduced to provide additional protection against inflation
for the retirement income of elderly Canadians.
■
Budget Speech, November 1974.
Saskatchewan Pension Plan
This measure was introduced to ensure consistency in the tax treatment of
Canadians saving for their retirement, whether they save through a private or a
provincially sponsored registered plan.
■
Budget Papers, 1987.
Registered retirement savings plans/registered pension plans
These measures were introduced to encourage Canadians to save throughout
their working lives in order to avoid a serious disruption of their living standards
upon retirement.
■
Pension Reform: Improvements in Tax Assistance for Retirement Saving,
Department of Finance, 1989.
The Home Buyers’ Plan
This provision encourages home ownership and activity in the housing market.
■
Tax Measures: Supplementary Information, 1994.
■
Budget Papers, 1992.
Tax-free RRSP withdrawals for lifelong learning
The 1998 budget proposed this measure to allow Canadians greater access to
funds for retraining.
■
Budget Plan, 1998.
Deferred profit-sharing plans
This treatment was introduced to allow for additional retirement savings, and
to foster co-operation between employers and their workers by encouraging
employees to participate in their employer’s business.
■
Budget Speech, 1960.
134
OBJECTIVES OF TAX EXPENDITURES
Non-taxation of RCMP pensions/compensation
in respect of injury, disability or death
This treatment recognizes that these benefits represent to a large extent
compensation for a capital loss suffered by members of Canada’s national
police force, injured in the course of their duties, and their families.
■
Section 81(1)(i), Income Tax Act.
Non-taxation of up to $10,000 of death benefit
This provision was introduced to alleviate the hardship faced by dependants
upon the death of a supporting individual.
■
Budget Speech, 1959.
Non-taxation of investment income on life insurance policies
The tax treatment of investment income earned on certain life insurance
policies was introduced for reasons of administrative convenience.
■
From existing description in the Tax Expenditures report.
Small Business
$500,000 lifetime capital gains exemption
for small business shares
This measure was introduced to bolster risk taking and investment in small
businesses, allow small business owners to accumulate funds for retirement,
and facilitate intergenerational transfers.
■
Budget Papers, 1985.
■
The Lifetime Capital Gains Exemption: An Evaluation,
Department of Finance, 1995.
Deduction of allowable business investment losses
This measure recognizes that small businesses often have difficulty obtaining
adequate financing, and provides special assistance for risky investments in
such businesses.
■
Budget Papers, 1985.
Labour-sponsored venture capital corporations credit
This measure was introduced to encourage investment by individuals in
labour-sponsored venture capital organizations, set up to maintain or create
jobs and stimulate the economy.
■
Budget Papers, 1985.
135
Chapter 7
Deferral through 10-year capital gain reserve
This provision, while limiting the tax deferral opportunities, recognizes that
where proceeds are receivable over time, fully taxing gains in the year of sale
could result in significant liquidity problems for taxpayers. The longer period of
deferral for gains on the sale of small business shares was introduced to ease
the transfer of these assets between family members.
■
Explanatory Notes for Act to Amend the Income Tax Act, December 1982.
Other Items
Non-taxation of capital gains on principal residences
This exemption recognizes that principal homes are generally purchased to
provide basic shelter and not as an investment. The exemption also increases
flexibility in the housing market by allowing families to more easily move from one
principal residence to another in response to their changing circumstances.
■
Summary of 1971 Tax Reform Legislation, 1971.
■
1981 budget information kit.
Non-taxation of income from the Office of the Governor General
This exemption recognizes that the income from the Office of the Governor
General, who is a direct representative of the Crown, is not subject to tax.
■
The exemption was introduced in the 1917 Income War Tax Act.
Assistance for prospectors and grubstakers
This treatment was introduced to encourage the development of Canada’s
natural resources by allowing prospectors and grubstakers to transfer their
property claims or interests to a corporation in exchange for shares in that
corporation on a tax-deferred basis.
■
Budget Supplementary Information, May 1974.
Charitable donations credit
This incentive is designed to support the important work of the charitable
sector in meeting the needs of Canadians.
■
Introduced in 1930.
■
Report of the Royal Commission on Taxation, 1966, vol. 3.
■
Budget Plan, 1996, p. 69. Budget Plan, 1997.
136
OBJECTIVES OF TAX EXPENDITURES
Reduced inclusion rate for capital gains arising
from certain charitable donations
This measure was introduced to facilitate the transfer of certain publicly traded
securities to charities to help them respond to the needs of Canadians, and to
provide a level of tax assistance for donations of eligible appreciated capital
property that is comparable to that in the United States.
■
Budget Plan, 1997.
Gifts to the Crown credit
This measure was introduced to recognize the contributions made by
taxpayers to Canadian governments of all levels. The limitation of eligible
contributions to 75 per cent of net income allows all charities to attract
donations on a level playing field. The measure has evolved from the provision
in the 1917 Income War Tax Act that permitted the deduction of contributions
to the Patriotic and Canadian Red Cross Funds and any other patriotic and
war funds approved by the Minister of Finance.
■
The Income War Tax Act, 1917.
■
Report of the Royal Commission on Taxation, 1966, vol. 3.
■
Budget Plan, 1997.
Political contribution credit
This provision is intended to ensure that registered political parties, vital to
the maintenance of Canada’s parliamentary system, have a broad base of
financial support.
■
Report of the Royal Commission on Taxation, 1966, vol. 3.
Non-taxation of income of Indians on reserves
This exemption reflects provisions under section 87 of the Indian Act.
■
From the description in the Tax Expenditures report.
Non-taxation of gifts and bequests
This exemption recognizes the difficulties associated with the valuation and
reporting of the many small gifts of a routine nature exchanged between
individuals and families.
■
Report of the Royal Commission on Taxation, 1966, vol. 3.
Memorandum Items
Non-taxation of lottery and gambling winnings
Proceeds from the sale of lottery tickets are an important source of funds for
provincial governments, charities and other not-for-profit organizations. As a
result, there is already a considerable element of taxation to lottery and
137
Chapter 7
gambling proceeds. The federal government has vacated this area in favour
of the provinces.
■
From footnote in 1997 Tax Expenditures report.
Non-taxation of allowances to certain public officials
This provision recognizes the additional costs incurred by certain public
officials in the course of their public duties.
■
Budget Speech, 1946.
Non-taxation of allowances for diplomats and
other government employees posted abroad
This provision recognizes the additional costs incurred by diplomats and other
government personnel employed outside Canada.
■
Section 6(1)(b)(iii), Income Tax Act.
Child care expense deduction
This provision recognizes the costs incurred by single parents and two-earner
families in the course of earning business or employment income, pursuing
education or performing research.
■
Budget Papers, 1992.
■
Budget Plan, 1998.
Attendant care expense deduction
This provision recognizes the costs incurred by disabled taxpayers for care by
a part-time attendant required to enable the taxpayer to earn business or
employment income. In so doing, the provision increases equity between
the able-bodied earners and those who incur additional expenses owing to
a disability.
■
Budget Papers, 1989.
Moving expense deduction
This provision facilitates labour mobility by allowing taxpayers greater flexibility
in pursuing new employment and business opportunities anywhere in Canada.
■
Budget Speech, 1971.
■
Budget Plan, 1998.
Deduction of carrying charges incurred to earn income
This provision recognizes that carrying charges are incurred for the purpose of
earning income.
■
From description in Tax Expenditures report.
138
OBJECTIVES OF TAX EXPENDITURES
Deduction of meals and entertainment expenses
The partial deduction for these expenses recognizes that, while a portion of
these expenditures is incurred in order to earn income and should be
deductible, this portion is not clearly separable from the personal component
of the expenditures.
■
From description in Tax Expenditures report.
Deduction of farm losses for part-time farmers
This provision allows for the limited deductibility of farm losses for part-time
farmers to recognize that cash basis accounting can distort the actual financial
position of a farming business.
■
Sections 31, 111(3), Income Tax Act.
Farm and fishing loss carry-overs
These measures provide increased cash flows and reduced risks to farms and
fisheries in recognition of the cyclical nature of these industries.
■
Budget Papers, 1983.
Capital loss carry-overs/non-capital loss carry-overs
These provisions support businesses and investors by reducing the risk
associated with investment and provide tax relief for cyclical businesses.
■
Budget Papers: Supplementary Information, 1983.
Logging tax credit
This provision was introduced to reduce double taxation in the
forestry industry.
■
Budget Speech, 1962.
Deduction of resource-related expenditures
This provision was introduced to encourage the development of Canada’s
natural resources.
■
Budget Speech, 1961.
Deduction of other employment expenses
This provision recognizes that certain expenses must be incurred for the
purpose of earning employment income.
■
From description in Tax Expenditures report.
139
Chapter 7
Deduction of union and professional dues
This provision recognizes that these payments are of a mandatory nature and
therefore incurred to earn income.
■
From description in Tax Expenditures report.
■
Budget Speech, 1951.
Employment insurance contribution credit/
non-taxation of employer-paid premiums
This provision recognizes that these payments are of a mandatory nature and
therefore incurred to earn income.
■
From description in Tax Expenditures report.
Canada and Quebec Pension Plan contribution credit/
non-taxation of employer-paid premiums
This provision recognizes that these payments are of a mandatory nature and
therefore incurred to earn income.
■
From description in Tax Expenditures report.
Foreign tax credit
This provision was introduced to avoid the double taxation of income that has
already been taxed in foreign countries.
■
From description in Tax Expenditures report.
Dividend gross-up and credit
These provisions contribute to the integration of the corporate and personal
income tax systems in order to reduce the double taxation effect of taxing
income at both the corporate and personal level.
■
From description in Tax Expenditures report.
Supplementary low-income credit
This provision was proposed in the 1998 budget to provide tax relief to
low-income Canadians.
■
Budget Plan, 1998.
Basic personal credit
This provision contributes to tax fairness by ensuring that no tax is paid on a
basic amount of income.
■
Report of the Royal Commission on Taxation, 1966, vol. 3.
■
Budget Speech, 1998.
140
OBJECTIVES OF TAX EXPENDITURES
Non-taxation of capital dividends
This treatment contributes to the integration of the corporate and personal
income tax systems in order to avoid double taxation.
■
From description in Tax Expenditures report.
C ORPORATE I NCOME TAX
Tax Rate Reductions
Low tax rate for small businesses
This lower tax rate is intended to provide small corporations with more
after-tax income for reinvestment and expansion.
■
Tax Measures: Supplementary Information, February 22, 1994.
Low tax rate for manufacturing and processing
This lower tax rate is intended to enhance the international competitiveness of
the manufacturing industry.
■
Tax Reform 1987: Income Tax Reform, June 18, 1987.
Low tax rate for credit unions
The purpose of the low tax rate for credit unions is to permit a credit union to
accumulate capital on a tax-preferred basis up to a maximum of 5 per cent of
deposits and capital.
Exemption from branch tax for transportation, communications,
banking and iron ore mining corporations
Exemptions from branch tax are in recognition of the fact that (certain foreign)
companies sometimes have no real alternative to the branch office form of
organization when operating in other jurisdictions. For example, this is often
the case for Canadian mining ventures that are jointly financed by Canadian
and foreign interests and require large amounts of capital investment.
■
Budget Speech, April 10, 1962.
Exemption from tax for international banking centres
In order to broaden our trade and business interests in Europe and the
Pacific Rim, this measure exempts international banking centres established in
Montreal and Vancouver. This measure is also intended to return to Canada
some banking activities previously conducted abroad and to attract
business that normally wouldn’t be conducted in Canada.
■
Department of Finance Release 87-16, January 28, 1987.
141
Chapter 7
Tax Credits
SR&ED investment tax credit
The federal income tax incentives for scientific research and experimental
development (SR&ED) provide broadly based support for all types of SR&ED
performed in every industrial sector in Canada. The rationale for this tax
support is that the benefits of SR&ED extend beyond the performers themselves
to other firms and sectors of the economy. The existence of these spillovers
or externalities mean that, in the absence of government support, firms would
likely perform less SR&ED than desirable from the economy’s point of view.
Federal tax policy objectives in supporting SR&ED are to:
–
encourage SR&ED to be performed in Canada by the private sector
through broadly based support;
–
assist small businesses to perform SR&ED;
–
provide incentives that are, as much as possible, of immediate benefit;
–
provide incentives that are as simple to understand and comply with and
as certain in application as possible; and
–
promote SR&ED that conforms to sound business practices.
Federal income tax incentives for SR&ED assist the private sector in
developing new products and processes, improving productivity,
enhancing competitiveness and growth, and creating jobs for the benefit
of all Canadians.
■
Budget Plan, March 6, 1996.
Regional investment tax credits
The three regional investment tax credits are the Atlantic investment tax credit,
special investment tax credit and Cape Breton investment tax credit. Regional
tax credits are intended to stimulate new incremental investment in
these areas.1
a) Atlantic investment tax credit
The Atlantic investment tax credit (AITC) was introduced in the March 1977
federal budget. Its objective was to promote economic development
(i.e. investment and thereby productivity and employment) in the Atlantic
provinces and the Gaspé region. The 1994 budget reduced the rate to
10 per cent.
b) Special investment tax credit
The special investment tax credit (SITC) was introduced in 1980. Its objective
was to promote regional development by encouraging foot-loose
manufacturing activities to locate within qualifying regions of low growth and
high unemployment across Canada. The SITC was eliminated in the 1994
budget, effective January 1, 1995.
142
OBJECTIVES OF TAX EXPENDITURES
c) Cape Breton investment tax credit
In the 1985 budget, the government announced the closure of the heavy
water plants in Glace Bay and Port Hawkesbury. However, the government
said it would not abandon the people or the region of Cape Breton.2
In recognition of the economic situation of Cape Breton Island, the budget
announced a new tax initiative to encourage investment on Cape Breton
Island. This tax initiative formed a key part of the general adjustment program
for this area.3
The approach followed in Cape Breton reflected the basic philosophy of
this government with respect to the problems of adjustment in both the private
and public sectors. To continue supporting non-competitive economic activity
drains resources and energy from more productive job-creating activity but
adjustment had to take place in a humane way.4 The credit was terminated
after 1992.
■
1
Tax Measures: Supplementary Information, February 22, 1994.
■
2
Budget Speech, May 23, 1985.
■
3
Budget Papers, May 23, 1985.
■
4
Budget Speech, May 23, 1985.
Small business investment tax credit
This tax credit was provided as an incentive for small businesses to accelerate
investment spending.
■
Economic and Fiscal Statement: Additional Information,
December 2, 1992.
Political contribution tax credit
The political contribution tax credit is intended to help ensure that political
organizations, so vital to the maintenance of the parliamentary system, have a
broad base of financial support.
■
Report of the Royal Commission on Taxation, 1966, vol. 3.
Canadian film or video production tax credit
The film tax credit is intended to subsidize the Canadian film and video
production industry. A refundable tax credit for the production of Canadian
films and videos was introduced in 1995 as a replacement for a system of tax
shelter deductions for accelerated capital cost allowance. Film financing
mechanisms formerly used to provide tax benefits principally to higher-income
individuals were replaced by a fully refundable tax credit for eligible films
produced by qualified Canadian corporations.
■
Budget Speech, February 27, 1995 and Budget Plan, February 27, 1995.
143
Chapter 7
Exemptions and Deductions
Partial inclusion of capital gains
Only part of capital gains are taxed in order to provide incentives to
Canadians to save and invest and to put them on roughly the same footing as
foreigners investing in Canada.
■
A Review of the Taxation of Capital Gains in Canada, November 1980.
Non-deductibility of Crown royalties and mining taxes
Prior to 1974, royalties in respect of the production of natural resources had
traditionally been deductible as a business expense.1 On May 6, 1974, the
federal government announced that it would deny the deduction of Crown
royalties and provincial mining taxes. This action was taken in order to ensure
that provincial royalties, provincial mining taxes and other arrangements having
similar effects do not unreasonably erode the corporate income tax base. 2
Although these payments were made non-deductible, the government
introduced a resource tax abatement of 10 percentage points for petroleum
profits and 15 percentage points for mining income.
■
1
Budget Speech, November 18, 1974.
■
2
Budget Speech, May 6, 1974.
Resource allowance
The resource allowance was introduced in 1976. It replaced the resource tax
abatements noted above. It was viewed as a better way of recognizing that
provinces, in one way or another, impose taxes or royalties and to take that
fact into account within reasonable limits in determining taxable income.
In addition, the resource allowance was designed to offer more incentives to
those who explore and develop in Canada and to impose a greater tax liability
on those who do not.
■
Budget Speech, June 23, 1975.
Earned depletion
Earned depletion was proposed in the tax reform of 1969 to replace automatic
(or percentage/operators) depletion. This latter type of depletion provided a
rate reduction of 331⁄3 per cent. Automatic depletion was to be phased out by
1976 and depletion earned on expenditures up to 1976 was to be banked for
deduction subsequent to 1976.
The earned depletion incentive was designed to encourage taxpayers to undertake
more exploration and development than they otherwise would. For certain
exploration and development expenditures incurred in the mining and petroleum
industries, taxpayers were permitted an earned depletion allowance which,
together with other existing write-offs, permitted a total deduction of
144
OBJECTIVES OF TAX EXPENDITURES
1331⁄3 per cent to 150 per cent of the amounts actually spent. The amount of
earned depletion that could be claimed in a year was made subject to a limit
of 25 per cent.
In 1974, the phase-in period for earned depletion was shortened. This was
because the existing tax incentives were considered to be more generous than
was needed to encourage natural resource development.
As part of the government’s 1987 tax reform initiative, the ability to earn new
earned depletion allowance deductions was phased out by June 30, 1989.
■
Proposals for Tax Reform 1969; Budget Speech, May 6, 1974;
Budget Speech, November 18, 1974; and
The White Paper, Tax Reform 1987.
Deductibility of charitable donations
Charities play a useful and important role in our national life. Charities are
significant in the fields of education, medicine, scientific research, culture,
religion and athletics to name just a few major areas. Their role is to fill in gaps
of service and financial support where governments should not or cannot play
a significant part. To support these charities, the government provides
a deduction from income for contributions made by corporations to
registered charities.
■
Discussion Paper: The Tax Treatment of Charities, June 23, 1975.
Deductibility of gifts to the Crown
Gifts made to Canada or a province are deductible, within certain limits, to
encourage such contributions.
Note: The Income War Tax Act, 1917, permitted the deduction of contributions
to the Patriotic and Canadian Red Cross Funds and any other patriotic fund
approved by the Minister.
Interest on small business financing loans
This measure was intended to help small businesses in financial difficulty,
including farmers, to obtain loans at lower interest rates.
■
Budget 1992: Budget Speech, February 25, 1992.
Non-deductibility of advertising expenses in foreign media
This measure ensures that control of periodicals and newspapers will
remain in the hands of Canadians1 and supports the continued existence of
a viable and original Canadian magazine industry. 2
■
1
House of Commons Debates, vol. 3, 1965.
■
2
Finance Canada News Release 95-050, June 15, 1995.
145
Chapter 7
Non-taxation of provincial assistance
for venture investments in small business
Provinces have established venture capital corporations to provide investment
capital for small businesses. The non-taxation of provincial assistance for
venture investments in small business assists the successful working of such
provincial plans.
■
Budget Papers, December 11, 1979.
Deferrals
Accelerated write-off of capital assets
and resource-related expenditures
Accelerated capital cost allowances are provided for capital assets
since faster write-offs are one way in which incentives can be given
to investment.1
Accelerated capital cost allowances are also provided for certain energy
conservation and electrical generating equipment. Initially, this acceleration
was provided as a temporary incentive during the mid-1970s in response to
the international escalation of oil prices and partly to promote “off-oil” initiatives.
An incentive for installation of pollution abatement equipment is also provided
to taxpayers at facilities in place before new environmental regulations
concerning air and water pollution came into effect in the early 1970s.2 This
incentive remains in place for property acquired until the end of 1998.
In addition, it is recognized that the exploration for and development of mines
and oil and gas deposits involve more than the usual industrial risks and that
the scale of these risks is quite uncertain in most cases. As a result,
accelerated write-offs are provided for certain exploration and development
expenses so that these costs can be deducted for tax purposes early
enough so that taxes will be applied only when it is clear that a project will
be profitable.3
■
1
The Corporate Income Tax System: A Direction for Change, May 1985.
■
2
Tax Measures: Supplementary Information, February 22, 1994.
■
3
Proposals for Tax Reform, 1969.
Allowable business investment losses
Small businesses often have difficulty obtaining adequate financing. The
allowable business investment loss rules provide special assistance for risky
investments in small business.
■
Budget Papers, May 23, 1985.
146
OBJECTIVES OF TAX EXPENDITURES
Holdback on progress payments to contractors
In the construction industry, contractors are typically given progress payments
as construction proceeds. However, a portion of these progress payments
(e.g., 10 per cent to 15 per cent) is often held back until the entire project is
completed satisfactorily. Such holdbacks are considered to become receivable
by contractors or payable to subcontractors only upon satisfactory completion
of the project. This departure from the accrual method of accounting is
provided in order to alleviate potential cash-flow difficulties for this sector.
Available for use
Taxpayers may claim capital cost allowance and tax credits on eligible property
at the earlier of the time it is put in use or in the second taxation year following
the year of acquisition. Permitting capital cost allowance and tax credits to be
claimed in the second taxation year following the year of acquisition even
though the property may not have been put into use is intended to reduce the
potential impact of the rule upon projects with long construction periods.
■
Supplementary Information Relating to Tax Reform Measures,
December 16, 1987.
Capital gains taxation on realization basis
Some properties are both unique and infrequently traded, so that it is difficult
and expensive to estimate their market value at a particular point in time.
Probably the most important and difficult valuation problems are posed by
closely held businesses. In addition, taxing changes in the value of assets that
have not been sold would in some cases create liquidity problems, for it may
be necessary for taxpayers to dispose of part of their assets in order to obtain
cash to meet the tax liability. As a result, capital gains are generally taxed on
a realization basis rather than as they accrue.
■
Report of the Royal Commission on Taxation, 1966, vol. 3.
Expensing of advertising costs
It is often difficult to identify specific costs with specific revenue and,
moreover, there is no certainty that any revenue will result from many types
of expenditures. As a result, for tax and accounting purposes, it is usual to
write off against income most of these expenditures when incurred. Therefore,
advertising expenses are deductible on a current basis even though some of
these expenditures provide a benefit in the future.
■
Report of the Royal Commission on Taxation, 1966, vol. 4.
Deductibility of contributions to mine reclamation
and environmental trusts
Contributions to mine reclamation and environmental trusts have been made
deductible in order to assist firms that are required to make such contributions.
Prior to this change, the mandatory contributions, in combination with previous
147
Chapter 7
income tax rules, led to two problems for companies. First, they could give
rise to cash-flow problems and secondly, some companies, particularly
single-mine companies, may have been unable to fully utilize the deduction
of actual reclamation expenses, since the majority of these expenses occur at
the end of the life of the mine, when it no longer produces income.1
This measure also assists companies subject to environmental regulations to
meet their obligations under the relevant federal or provincial statutes without
distorting governments’ choices of instrument used to provide assurance
that adequate funds are available to conduct restoration activities at the end
of operations.2
■
1
Tax Measures: Supplementary Information, February 22, 1994.
■
2
Budget Plan, February 18, 1997.
Deductibility of countervailing and anti-dumping duties
The deduction of these duties when paid, rather than waiting to deduct the
exact amounts upon final resolution of the dispute, assists firms. This
assistance recognizes that these firms are required to pay amounts that
are not under the control of the taxpayer and although these amounts
may be subsequently refunded, in whole or in part, this process can take
several years.
■
Budget Plan 1998, February 24, 1998.
Deductibility of earthquake reserves
In 1997, the Office of the Superintendent of Financial Institutions introduced
new guidelines that require federally regulated insurance companies selling
earthquake protection to meet target levels of preparedness to ensure they
have sufficient financial capacity to pay insured earthquake losses when they
occur. This measure helps to ensure that sufficient capacity is achieved in a
timely fashion.
■
Budget Plan 1998, February 24, 1998.
Cash basis accounting
It would create some hardship to require farmers and fishers to adopt the
accrual method because of the accounting and liquidity problems which this
might involve for those with relatively small incomes. As a result, farming and
fishing corporations are permitted to use the cash basis of accounting.
■
Report of the Royal Commission on Taxation, 1966, vol. 4.
Flexibility in inventory accounting
For farmers reporting their incomes on a cash basis, the early years of
operation can result in heavy start-up expenses with substantial losses.
In many cases, the loss cannot be used within the period allowed for the
148
OBJECTIVES OF TAX EXPENDITURES
carry-forward of losses. By permitting farmers to include the value of inventory
in income, the amount of reported losses is reduced, thereby overcoming the
problem of ‘unusable’ losses in the early years and allowing those start-up
expenses to be taken into account in later, profitable years.
■
Supplementary Information on the Budget, February 19, 1973.
Deferral of income from grain sold
through cash purchase tickets
By permitting the deferral of the reporting of income on grain sales, this
measure facilitates the orderly delivery of grain to elevators ensuring that
Canada meets its grain export commitments.
Deferral of income from destruction of livestock
Farmers whose cattle contract one of several contagious diseases can be
ordered to destroy some or all of their livestock. These farmers may also be
prohibited from housing other animals in the same premises for several
months. As most farmers report their income on a cash basis, there could be
substantial tax paid by a farmer who is reimbursed for the destruction of an
entire herd in one year but is unable to acquire a replacement herd in the same
year. This measure allows such farmers to defer taxation on these payments
to the year following the year of destruction to permit adequate time to replace
their herds.
■
Budget Papers: Budget Paper E Supplementary Information,
May 25, 1976.
Deferral of tax from use of billed-basis accounting
by professionals
Because of the difficulty that professionals have in valuing unbilled time,
work in progress need not be brought into income unless the taxpayer
chooses to do so.
■
Summary of 1971 Tax Reform Legislation.
International
Non-taxation of life insurance companies’ world income
To ensure that life insurance companies can compete in foreign markets,
foreign income is exempted from tax in Canada. Canadian insurers could not
compete in other countries if Canada imposed the normal tax rules on profits
earned in a country which taxes on the basis of premiums or investment
revenue only.
■
Supplementary Budget Papers, March 31, 1977.
149
Chapter 7
Exemptions from non-resident withholding tax
Over time, as the benefits of freer trade in capital, goods, and services have
been increasingly recognized, countries including Canada have adjusted their
tariff and tax structures to remove impediments to international transactions.
Part of this adjustment has been the reduction in non-resident withholding tax
on certain payments.
Lower withholding taxes can reduce the cost of Canadian business of
accessing capital and other business inputs from abroad. For example, a
lower Canadian withholding tax on interest payments to non-residents can
reduce the cost of accessing foreign capital in certain situations. Similarly, a
reduced withholding tax on royalty payments can reduce the cost of accessing
foreign technology and other property and services, and thereby enhance the
competitiveness of Canadian businesses requiring these inputs.
■
Tax Expenditures, 1997.
Exemption from Canadian income tax of income earned
by non-residents from the operation of a ship or aircraft
in international traffic
The international shipping tax exemption is a reciprocal tax exemption
provided for income earned by a non-resident person in Canada from the
operation of a ship or aircraft in international traffic. This exemption, whose
purpose is the avoidance of international double taxation, was first introduced
in the Income War Tax Act earlier this century at a time when Canada had few
bilateral double taxation agreements.
Other Tax Expenditures
Transfer of income tax room to provinces
in respect of shared programs
One percentage point of corporate tax is transferred to the provinces as part
of the federal contribution under the Canada Health and Social Transfer. This
transfer assists provinces in providing services in the areas of health, postsecondary education and social assistance.
Interest credited to life insurance policies
This tax expenditure represents the excess of the tax that would have been
collected if income of exempt policies were reported on the accrual basis over
the 15-per-cent investment income tax collected. Not requiring the reporting of
income of exempt policies on the accrual basis reduces complexity for
policyholders and insurance companies.
150
OBJECTIVES OF TAX EXPENDITURES
Non-taxation of registered charities and
other non-profit organizations
Charities play a useful and important role in our national life. Charities are
significant in the fields of education, medicine, scientific research, culture,
religion and athletics to name just a few major areas. Their role is to fill in gaps
of service and financial support where governments should not or cannot play
a significant part. To support these charities, the government exempts
registered charities from income tax.
■
Discussion Paper: The Tax Treatment of Charities, June 23, 1975.
Income tax exemption for provincial and municipal corporations
Section 125 of the Constitution Act states that no lands or property belonging
to Canada or any province shall be liable for taxation. This provision means
that Crown corporations created at one level of government are exempt from
paying taxes imposed by the other level of government, or by governments at
the same level. This immunity from taxation extends to all agents of Canada or
a province.
■
Section 125 of the Constitution Act.
Non-taxation of certain federal Crown corporations
Federal Crown corporations that carry on significant commercial activities are
subject to federal income tax, which ensures that they compete on a level
playing field with similar businesses in the private sector. Other federal Crown
corporations are exempt from taxation. Their exempt status avoids the
compliance and administration costs associated with filing an income tax
return. Furthermore, the net financial position of the federal government would
be unchanged if these Crown corporations were required to pay income taxes
– the payment of taxes would merely be a transfer of funds from the Crown
corporation to consolidated revenues.
Excise tax transportation rebate
The excise tax transportation rebate was designed to provide the
transportation industry with immediate cash-flow benefits in exchange for
reduced income tax deductions in the future.
■
Government of Canada News Release 91-133, December 6, 1991.
Aviation fuel excise tax rebate
The aviation fuel excise tax rebate was designed to provide airlines with
an immediate cash-flow benefit in exchange for a reduction in accumulated
losses that would otherwise be available to reduce income taxes in
future years.
151
Chapter 7
Surtax on the profits of tobacco manufacturers
The surtax on the profits of tobacco manufacturers is intended to maintain
federal revenues from the tobacco sector.
■
Finance Canada New Releases 96-086, November 28, 1996.
Temporary tax on the capital of large deposit-taking institutions
The temporary tax on the capital of large deposit-taking institutions was
adopted to help achieve deficit reduction targets.
■
Budget Plan, February 27, 1995.
Memorandum Items
Refundable Part I tax on investment income of private corporations
A refundable Part I tax levied on the investment income of private corporations
was intended to reduce the deferral advantage to individuals of earning
investment income through these private corporations instead of earning
such income directly. The deferral advantage arose when the corporate
tax rate applied to this income was lower than the marginal tax rate of the
individual shareholder.
■
Budget Plan, February 27, 1995.
Refundable capital gains for investment corporations
and mutual fund corporations
This item is part of an integrated system of measures that ensures that the
treatment of capital gains earned by investment corporations or mutual fund
corporations and subsequently distributed is generally comparable to the
treatment of capital gains earned directly by an individual. The rationale for this
integrated system is that investments made through these kinds of
corporations are comparable to investments made by an individual since
these special investment corporations must hold only passive investments.
Loss carry-overs
Loss carry-overs are provided to support business operations and investment
in a number of ways. Permitting the carry-over of losses provides certainty to
firms that they can benefit from tax losses sustained and that they can obtain
immediate tax relief by deducting losses against prior years’ income thus
reducing the risks faced by investors.
■
Budget Papers: Supplementary Information and Notice of Ways and
Means Motions on the Budget, April 19, 1983.
152
OBJECTIVES OF TAX EXPENDITURES
Deductible meals and entertainment expenses
Business meals and entertainment involve an element of personal
consumption and therefore some part of their cost can properly be
characterized as a personal expense that should not be deductible. While it
is difficult to ascertain what portion of the cost of meals and entertainment
represents personal consumption, it is clear that a full deduction of such
expenses simply because they are undertaken in the course of business
allows the write-off of some part of expenses that are of a personal nature.
To reflect the existence of the personal consumption element of these
expenses, only 50 per cent of meal and entertainment costs are deductible
(80 per cent before March 1, 1994). To the extent that the true personal
consumption element is less than 50 per cent, a negative tax expenditure
results. To the extent that the personal consumption portion of the cost
of meals and entertainment exceeds 50 per cent, a positive tax
expenditure results.
■
Tax Reform 1987: Income Tax Reform, June 18, 1987.
Large corporations tax – threshold
The objective of the large corporations tax threshold is to ensure that smaller
businesses will not be subject to the tax.
■
Budget Papers, April 27, 1989.
Large corporations tax – exempt corporations
Because the corporate surtax is creditable against the large corporations tax
(LCT) liability, corporations are effectively subject to the greater of the large
corporations tax and the corporate surtax. If corporations exempt from paying
Part I tax and its related corporate surtax were subject to the LCT, they would
have no way of reducing the LCT. As a result, certain corporations such as
non-resident investment corporations, deposit insurance corporations and
corporations exempt from paying Part I income tax are also exempted from
paying the LCT.
Patronage dividend deduction
The purpose of this tax expenditure is to place co-operatives in a position of
tax equality with other forms of business enterprise considering that obligated
patronage dividend payments reduce the ability to pay tax. To avoid
discrimination, similar treatment is provided for patronage dividends
distributed by ordinary companies, partnerships or individual business
enterprises. If these dividends are considered to be analogous to the
payment of a volume discount or the return of excess payments, they would
be deductible under the benchmark system and there would not be any
tax expenditure. Alternatively, if these payments could be perceived as a
distribution of earnings to members, they would not be deductible under
the benchmark system.
■
Budget Speech, 1946.
153
Chapter 7
Logging tax credit
The logging tax credit was introduced on April 10, 1962 as a means of
relieving the tax burden on the forest industry and removing the existing tax
discrimination of the forest industry corporations.
■
Budget Speech, April 10, 1962.
Deductibility of provincial royalties (joint venture payments)
for the Syncrude project (remission order)
The Syncrude project was initiated in the early 1970s when all provincial
Crown royalty charges were fully deductible in the computation of income
taxes. After a joint venture agreement with the province of Alberta was signed,
the project participants received assurances from the federal government that
the joint venture payments to the province would be treated as royalties.
In May 1976, the government granted a remission order to Syncrude
participants by Order in Council. The remission order permits participants to
deduct joint venture payments to Alberta. Income tax regulations provide a
resource allowance on the net amount when calculating federal corporate
income taxes.
The remission order provides for the deduction of joint venture payments for
production from Leases 17 and 22 until the earlier of December 31, 2003 or
when cumulative production reaches 2.1 billion barrels.
Deductibility of royalties paid to Indian bands
Royalties paid to Indian bands were deductible prior to the 1974 budget. The
government allowed these royalties to continue to be deductible after 1974 to
encourage further development of non-renewable natural resources on
Indian lands.
Non-resident-owned investment corporation refund
The general rationale for the refund provided to non-resident owned
investment corporations is to encourage the investment of foreign funds
in Canadian corporations at little tax cost to the government.
■
Report of the Royal Commission on Taxation, vol. 4, 1966.
Investment corporation deduction
Investment corporations provide an important flow of individual savings
available for investment in the ownership of Canadian industry because
qualifying investment corporations must invest in Canadian properties. The
purpose of this measure is to induce investment of these savings in Canada
rather than abroad.
■
Budget Speech, December 20, 1960.
154
OBJECTIVES OF TAX EXPENDITURES
Deferral of capital gains income through
various roll-over provisions
Roll-over provisions are provided in some situations in which it would be
unfair to collect a capital gains tax even though the taxpayer has sold or
otherwise disposed of an asset at a profit.
■
Proposals for Tax Reform, 1969.
Deduction for intangible assets
Three-quarters of eligible capital expenditures can be written off at 7 per cent
per annum on a declining-balance basis. Prior to 1972, taxpayers could not
deduct such expenditures on intangible assets in the year incurred (because
they were capital in nature) or over a number of years by way of depreciation
(because no asset was acquired on which depreciation could be claimed).
■
Summary of 1971 Tax Reform Legislation.
Tax exemption on income of foreign affiliates
of Canadian corporations
The Canadian exemption system for taxing the income of foreign affiliates is
based on the objective of eliminating double taxation while at the same time
encouraging the international competitiveness of Canadian multinationals.
G OODS
AND
S ERVICES TAX
Zero-Rated Goods and Services
Basic groceries
Basic groceries – covering the overwhelming majority of sales of food for
preparation and consumption at home – are zero-rated under the goods and
services tax/harmonized sales tax (GST/HST). However, soft drinks,
confectionery products, snack food and prepared foods are taxable. The
zero-rating of basic groceries reflects the widely held view of Canadians that,
as a general principle, basic foodstuffs should not be taxed.
■
Goods and Services Tax Technical Paper, August 1989.
Prescription drugs
Under the GST/HST, drugs that are prescribed by a physician or dentist are
zero-rated. As for basic groceries, this tax treatment is intended to ensure that
prescription drugs remain free of tax.
■
Goods and Services Tax Technical Paper, August 1989.
155
Chapter 7
Medical devices
A broad range of medical devices that are required to treat or cope with a
chronic disease or illness or a physical disability is zero-rated under the
GST/HST. This is intended to ensure that these medical devices remain
free of tax.
■
Goods and Services Tax Technical Paper, August 1989.
Agricultural and fish products and purchases
Many agricultural and fishing products are for human consumption and are
therefore zero-rated as basic groceries. In addition, a large range of generally
high-cost agricultural and fishing equipment is zero-rated to reduce cash-flow
problems for farmers and fishermen.
■
Goods and Services Tax Technical Paper, December 1989.
Certain zero-rated purchases made by exporters
Exports are destined for consumption outside Canada and, consequently, are
not subject to GST/HST, which is a tax on consumption in Canada. The
zero-rating provisions for exports are designed to ensure that goods and
services acquired in Canada for export are totally relieved of tax.
■
Goods and Services Tax Technical Paper, August 1989.
Zero-rated financial services
Financial services provided to non-residents for use outside Canada are
zero-rated, consistent with the tax treatment of other exports. This ensures
that Canadian institutions providing financial services remain competitive in
global markets.
■
Goods and Services Tax Technical Paper, August 1989.
Non-taxable importations
Under the GST/HST, goods imported into Canada are generally taxable.
However, the legislation enumerates a short list of goods of different classes –
such as basic groceries and prescription drugs – that, upon importation, do
not attract the GST/HST. This ensures that imports are treated fairly vis-à-vis
domestic-sourced goods that are zero-rated.
■
News Release, September 4, 1990.
156
OBJECTIVES OF TAX EXPENDITURES
Tax-Exempt Goods and Services
Residential and other personal-use real property
Generally, the GST/HST applies to residential property when it is first
purchased or leased and occupied by an individual. All subsequent sales of
used homes are tax exempt. Similarly, residential rents are tax exempt since
the tax has been collected from the landlord on or before the time the building
was first rented. The exemption for personal-use real property is consistent
with the tax treatment of personal property and services not supplied in the
course of commercial activities.
The objective of the housing rebates and exemptions for used homes and
residential rents is to preserve the affordability of housing while ensuring that
the tax regime is not overly complex.
■
Goods and Services Tax Technical Paper, August 1989.
Health care services
Basic health care services are generally exempt of GST/HST. This includes
most institutional (e.g., nursing home and hospital), professional
(e.g., physician, dentist, etc.) and home care.
■
Goods and Services Tax Technical Paper, August 1989.
Educational services (tuition)
Basic education is generally exempt of GST/HST. Accordingly, no GST/HST is
charged on most courses offered by schools, universities, public colleges and
vocational schools.
■
Goods and Services Tax Technical Paper, August 1989.
Child and personal care services
Under the GST/HST, no tax is charged on eligible child and personal care
services provided to individuals who are underprivileged or suffer from an
infirmity or disability.
■
Goods and Services Tax Technical Paper, August 1989.
Legal aid services
Sales tax did not apply to legal aid services provided to a province’s legal aid
society under the former federal sales tax (FST). Under the GST, a province’s
legal aid society is permitted to elect to treat contracts with private lawyers as
taxable. This ensures that legal aid societies are able to obtain the same net
benefit that existed under the former FST.
■
Goods and Services Tax Technical Paper, December 1989.
157
Chapter 7
Ferry, road and bridge tolls
Ferry, road and bridge tolls are generally exempt of GST/HST. This is
consistent with the fact that the use of Canada’s highway systems and related
infrastructure is not subject to tax.
■
Goods and Services Tax Technical Paper, August 1989.
Municipal transit
Like most other supplies by municipalities, municipal transit services are
exempt of GST/HST. In most municipalities, these services are financed from
general revenues which would not attract sales tax. The government’s policy is
that, irrespective of how municipal transit services are financed, transit services
provided by, or on behalf of, municipalities should be tax exempt.
■
Goods and Services Tax Consolidated Explanatory Notes, April 1997.
Exemption for small businesses
Small suppliers, persons whose total taxable supplies in the preceding year are
$30,000 or less ($50,000 or less in the case of public sector bodies), are not
required to register. Those who choose not to register do not have to charge
and remit GST, and they are not entitled to input tax credits. The objective of
the small suppliers’ threshold is to ensure that very small businesses do not
face an excessive administration burden under the GST.
■
Goods and Services Tax Technical Paper, August 1989.
Quick method accounting
Registrants using the quick method remit a prescribed percentage of GST
collected based on their total tax-included taxable supplies for the period.
The objective of the quick method is to simplify the operation of the tax for
small businesses.
■
Goods and Services Tax Technical Paper, August 1989.
Water and basic garbage collection
Like other standard municipal services, both water and garbage collection are
exempt of GST/HST. In most municipalities, these services are financed from
general revenues that would not attract sales tax.
■
Goods and Services Tax Consolidated Explanatory Notes, April 1997.
Domestic financial services
Although in some cases, the price of a financial service may be easily
identified, in many others, the price of a financial service is implicit and difficult
to isolate. Therefore, for the sake of consistency and equity, all financial
services are exempt under the GST.
■
Goods and Services Tax Technical Paper, August 1989.
158
OBJECTIVES OF TAX EXPENDITURES
Certain supplies made by non-profit organizations
Public sector bodies, which include charities and non-profit organizations, are
organizations that perform essentially a public service function, relying heavily
on financial support from governments and the voluntary efforts and
contributions of the general public to pursue their efforts. The exemption of
supplies made by non-profit organizations recognizes the important role they
play in Canadian society.
■
Goods and Services Tax Technical Paper, December 1989.
Tax Rebates
Rebate for book purchases made by qualifying institutions
The 100-per-cent GST rebate on books is available to public libraries, schools,
universities, colleges, municipalities, and qualifying charities and non-profit
organizations. The special rebate recognizes the important role played by
public libraries, educational institutions and other groups in improving literacy
levels in their communities.
■
News Release, October 23, 1996.
Housing rebate
The GST new housing rebate program was designed to ensure that the GST
does not pose a barrier to the affordability of new homes. Before the GST was
introduced, the federal sales tax component of the total price of a new home
amounted to approximately 4.1 per cent. With the GST new housing rebate,
new homes are taxed at roughly the same level as they were prior to the GST.
■
Goods and Services Tax Consolidated Explanatory Notes, April 1997.
Rebate to foreign visitors on accommodation
The Visitors’ Rebate Program provides a rebate to non-residents visiting
Canada for GST paid on most goods and short-term accommodation. It also
provides rebates for conference-related expenses for conferences attended by
non-residents. Its objective is to maintain the attractiveness of Canada as a
destination for foreign tourists and conventions.
■
Goods and Services Tax Technical Paper, December 1989.
■
Press Releases, December 18, 1990 and May 15, 1991.
159
Chapter 7
Rebates for municipalities, universities and colleges,
schools, and hospitals
Since municipalities, universities and colleges, schools and hospitals (MUSH)
provide primarily tax-exempt services, they are unable to claim input tax
credits for GST paid on most of their purchases. However, these organizations
are entitled to partial GST rebates of 57.14 per cent, 67 per cent, 68 per cent
and 83 per cent, respectively.
The MUSH rebate system was established to ensure that the sales tax burden
of these entities did not increase as a result of moving to the GST from the
previous federal sales tax.
■
Goods and Services Tax Technical Paper, August 1989.
Rebate for charities and non-profit organizations
Under the GST, registered charities are eligible to claim a 50-per-cent rebate of
the non-creditable GST paid on purchases relating to their non-commercial
activities. Other non-profit organizations may also claim the rebate, provided
they receive at least 40 per cent of their funding from government. The
objective of the rebate is to effectively reduce GST costs for these groups, in
recognition of the important role they play in Canadian society.
■
Goods and Services Tax Technical Paper, December 1989.
Tax Credits
Special credit for certified institutions
Under the former federal sales tax (FST), certain organizations certified by
Revenue Canada that employed people with mental or physical disabilities
were exempt from paying or charging sales tax on materials and manufactured
goods, respectively. Under the goods and services tax (GST), a transitional
GST credit was introduced to allow certified institutions time to adapt to the
new GST environment. Under the transitional measure, certified institutions
were to retain a proportion of the tax collected on their sales. The deductible
portion was 100 per cent for 1991, 75 per cent for 1992, 50 per cent
for 1993, and 25 per cent for 1994 and 1995, the last year of the
transitional program.
■
Goods and Services Tax Consolidated Explanatory Notes, April 1997.
The GST credit
The refundable GST low-income credit was established to replace the former
sales tax credit in place under the previous federal sales tax and to offset the
impact of the GST. At the time of the introduction of the GST, the credit was
enhanced for single parents and single individuals and the threshold at which
benefits begin to be reduced was increased. The objective of the credit is to
improve the fairness of the sales tax system.
■
Goods and Services Tax Technical Paper, August 1989.
160
OBJECTIVES OF TAX EXPENDITURES
Memorandum Items
Rebate to employees and partners
Many employees and partners who are not registrants incur expenses in the
course of carrying out their duties that may not be directly reimbursed by their
employers and partnerships. Instead, compensation is usually provided
through salaries, commissions, profits and other means that would not be
subject to tax. Consequently, employers and partnerships cannot recover the
GST paid by the employees and partners.
The employee and partner rebates recognize these existing business practices
and attempt to reduce the possible tax cascading effect that otherwise would
occur in the absence of the rebates.
■
Goods and Services Tax Technical Paper, August 1989.
161
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