Archived - Report on Federal Tax Expenditures - Concepts, Estimates and Evaluations 2017: part 2

Table of Contents

Part 2 presents the estimates of the fiscal cost of federal tax expenditures for the years 2011 to 2018. It presents estimates for a wide range of tax expenditures, measures that are not considered tax expenditures (i.e., measures that are considered part of the benchmark tax system), and refundable tax credits that are classified as transfer payments. The estimates are followed by a second set of tables that present background statistics on total tax revenues by tax base, as well as some other useful statistics, such as the number of filers and tax paid by income tax bracket. Finally, key changes that have been made to tax expenditures since the last edition are described.

New tax measures were introduced and others modified since the last edition of this report. In addition to tax measures for which legislation is already in force, this report also considers announced measures that have a coming-into-force date in the 2017 taxation year or earlier, even if the enacting legislation of the measure has not received Royal Assent by the time of production of this report. Changes affecting estimates and projections of tax expenditures are described below.

Canada Child Benefit

To simplify and consolidate the previous system of federal benefits for families with children under the age of 18, while ensuring that help is more generous and better targeted to those who need it most, Budget 2016 introduced the Canada Child Benefit.

Canada Child Benefit payments began in July 2016, replacing the Canada Child Tax Benefit, including the National Child Benefit supplement, and the Universal Child Care Benefit. The Canada Child Benefit provides a maximum benefit of $6,400 per child under the age of 6 and $5,400 per child aged 6 through 17. On the portion of adjusted family net income between $30,000 and $65,000, the benefit is phased out at a rate of 7% for a one-child family, 13.5% for a two-child family, 19% for a three-child family and 23% for larger families. Where adjusted family net income exceeds $65,000, remaining benefits are phased out at rates of 3.2% for a one-child family, 5.7% for a two-child family, 8% for a three-child family and 9.5% for larger families, on the portion of income above $65,000. Indexation to inflation of the maximum benefit amounts and phase-out thresholds is to begin for the 2020–21 benefit year.

To recognize the additional costs of caring for a child with a severe disability, Budget 2016 continues to provide an additional amount of up to $2,730 per child eligible for the Disability Tax Credit, effective July 1, 2016. The phase-out of this additional amount is made to generally align with the Canada Child Benefit. Specifically, it is phased out at a rate of 3.2% for families with one eligible child and 5.7% for families with more than one eligible child, on adjusted family net income in excess of $65,000. This additional amount is included in the Canada Child Benefit payments made to eligible families.

Entitlement to the Canada Child Benefit for the July 2016 to June 2017 benefit year is based on adjusted family net income for the 2015 taxation year.

Family Tax Cut

A non-refundable income splitting tax credit (referred to in this report as the Family Tax Cut) was available for couples with at least one child under the age of 18. The credit allowed a higher-income spouse or common-law partner to notionally transfer up to $50,000 of taxable income to their spouse or common-law partner for the purpose of reducing the couple’s total income tax liability by up to $2,000.

Budget 2016 eliminated this income splitting tax credit for couples with at least one child under the age of 18 for the 2016 and subsequent taxation years.

Northern Residents Deductions

Individuals who live in prescribed areas in northern Canada for at least six consecutive months beginning or ending in a taxation year may claim the Northern Residents Deductions in computing their taxable income for that year. The amounts that a taxpayer may deduct under the Northern Residents Deductions depend on whether the taxpayer resides in the Northern Zone or the Intermediate Zone. Residents of the Northern Zone are eligible to deduct the full amounts, while residents of the Intermediate Zone may deduct half of the amounts.

Budget 2016 increased the maximum residency deduction that each member of a household may claim from $8.25 to $11 per day and, where no other member of the household claims the residency deduction, from $16.50 to $22 per day for the 2016 taxation year. Residents of the Intermediate Zone will be entitled to deduct half of these increased amounts.

Labour-Sponsored Venture Capital Corporations Credit

Prior to 2015, individuals acquiring shares in a Labour-Sponsored Venture Capital Corporation (LSVCC) qualified for a 15% federal tax credit for investments of up to $5,000 each year. The federal LSVCC tax credit was reduced to 10% for the 2015 taxation year and to 5% for the 2016 taxation year. The credit was scheduled to be eliminated for the 2017 and subsequent taxation years.

To support provinces that use LSVCC programs, Budget 2016 restored the federal LSVCC tax credit to 15% for share purchases of provincially registered LSVCCs for the 2016 and subsequent taxation years.

Teacher and Early Childhood Educator School Supply Tax Credit

In recognition of costs educators often incur at their own expense for teaching supplies, Budget 2016 introduced a new Teacher and Early Childhood Educator School Supply Tax Credit. This measure will allow an eligible educator to claim a 15% refundable tax credit based on an amount of up to $1,000 in eligible supplies per year. Eligible educators will generally include teachers with a valid teacher’s certificate and early childhood educators with a certificate or diploma in early childhood education. Eligible supplies will include games and puzzles, supplementary books for classrooms, educational support software, and containers (such as plastic boxes or banker boxes for themes and kits), as well as consumable goods, such as construction paper for activities, flashcards or activity centres. This measure will apply to supplies acquired on or after January 1, 2016.

Ontario Electricity Support Program

The Ontario Electricity Support Program (OESP) is a program of the Government of Ontario that, effective January 1, 2016, provides assistance to low-income households in Ontario for the cost of electricity. The OESP reduces the cost of household electricity by providing a monthly credit on a recipient’s electricity bill. The credit depends on household income and how many people live in the household.

To ensure that income-tested benefits are not reduced as a result of OESP amounts, Budget 2016 exempted from income amounts received under the OESP. This measure will apply to the 2016 and subsequent taxation years. The impact of this change is reflected in the tax expenditure “Non-taxation of social assistance benefits”.

Mineral Exploration Tax Credit for Flow-Through Share Investors

The Mineral Exploration Tax Credit is a reduction in tax, available to individuals who invest in flow-through shares, equal to 15% of specified mineral exploration expenses incurred in Canada and transferred to flow-through share investors. The credit was introduced on a temporary basis in 2000 and has generally been extended on an annual basis since then. Budget 2016 announced an extension of the credit for an additional year, to flow-through share agreements entered into on or before March 31, 2017. Under the one-year “look-back” rule, funds raised with the benefit of the credit in 2017, for example, can be spent on eligible exploration up to the end of 2018.

Education and Textbook Tax Credits

To enhance financial assistance for students from low- and middle-income families, Budget 2016 eliminated the Education Tax Credit and Textbook Tax Credit effective January 1, 2017. Unused Education and Textbook Tax Credit amounts carried forward from years prior to 2017 remain available to be claimed in 2017 and subsequent years.

Children’s Fitness and Arts Tax Credits

Budget 2016 announced the phased-out of the Children’s Fitness Tax Credit and Children Arts Tax Credit by reducing the maximum eligible amounts from $1,000 to $500 for the Children’s Fitness Tax Credit and from $500 to $250 for the Children’s Arts Tax Credit in 2016. The supplemental amounts for children eligible for the Disability Tax Credit remain unchanged at $500 in 2016. Both credits and the supplemental amounts are eliminated effective January 1, 2017.

Preferential Tax Rate for Small Businesses

Small businesses benefit from a reduced income tax rate (relative to the general corporate tax rate of 15%) on their first $500,000 of active business income. The preferential rate was reduced to 10.5% (from 11%) as of 2016 under legislation to enact changes announced in Budget 2015. Budget 2016 announced the deferral of further reductions in the rate. In order to preserve the integration of the personal and corporate income tax systems, Budget 2016 also announced that the current gross-up factor and Dividend Tax Credit rate applicable to non-eligible dividends (generally, dividends distributed from corporate income taxed at the small business rate) would be maintained.

Deduction for Intangible Assets (Eligible Capital Expenditures)

Eligible capital property for income tax purposes includes intangible property such as goodwill and licences, franchises and quotas of indeterminate duration, as well as certain other rights. Budget 2016 announced that the eligible capital property regime will be repealed and will be replaced with a new capital cost allowance class available to businesses, effective January 1, 2017. Accordingly, the eligible capital property regime is no longer presented as a separate measure in this report.

Expensing of Incorporation Expenses

Budget 2016 announced that to reduce compliance burdens in respect of incorporation expenses, a separate business deduction will be provided for these expenditures, such that the first $3,000 of these expenditures will be treated as a current expense rather than being capitalized and depreciated over time. This measure is effective January 1, 2017.

Accelerated Capital Cost Allowance for Clean Energy Generation Equipment

Budget 2016 expanded the accelerated capital cost allowance under classes 43.1 and 43.2, which provide accelerated tax depreciation for clean energy generation and energy conservation equipment, to include certain electric vehicle charging stations and electrical energy storage equipment. These changes apply to property acquired after March 21, 2016.

Canadian Film or Video Production Tax Credit

Talk shows were made eligible for the Canadian Film or Video Production Tax Credit by removing the reference to “talk shows” from the definition of “excluded production” for the purposes of the credit. This change applies to productions for which the principal photography starts after February 16, 2016.

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