Report on Federal Tax Expenditures - Concepts, Estimates and Evaluations 2020: part 2

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Introduction

Part 2 presents the estimates of the fiscal cost of federal tax expenditures for the years 2014 to 2021. 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. To increase transparency in government reporting on support to the fossil fuel sector, a table grouping tax expenditures that provide such support was added to this section of the report.

Finally, key changes that have been made to tax expenditures since the last edition are described.

                 

Tax Expenditures Supporting the Fossil Fuel Sector

Canada has routinely published estimates of its tax expenditures for over two decades, including those that favour the fossil fuel sector. In certain cases, a measure may be available to both fossil fuel producers and non-fossil fuel producers (for example, a measure benefitting the mining sector could benefit coal production, in addition to all other types of minerals and metals). In order to increase transparency, this year's report presents a separate table focused on tax expenditures that support the fossil fuel sector. 

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

Background Statistics

Changes to Tax Expenditures Since the 2019 Edition

New tax measures were introduced and others modified since the last edition of this report. Changes affecting tax expenditures in this report are described below. As this report considers tax expenditures as of December 31, 2019, changes announced in Budget 2020 are not listed below or taken into account in the estimates and projections.

Personal Income Tax

Basic Personal Amount Increase

On December 9, 2019, the Government of Canada announced its intention to increase the Basic Personal Amount (BPA) to $15,000 by 2023. This increase will be gradually implemented over the 2020 to 2023 period through annual increases in excess of inflation.

The new, increased portion of the BPA will be subject to an income test beginning at a level of individual net income equivalent to the fourth federal tax bracket threshold ($150,473 in 2020), and be fully phased out by the fifth federal bracket threshold ($214,368 in 2020). Individuals with net income at or exceeding the fifth bracket threshold will continue to receive the BPA, but will not benefit from the supplemental increase.

The Spouse or Common-Law Partner Credit and Eligible Dependant Credit, which are currently set equal to the BPA, will be increased in tandem. The increased portion of these credits will be subject to the same income-test as the BPA, and will continue to be reduced dollar-for-dollar by the net income of the spouse or eligible dependant.

The increase to the BPA and related credits has an impact on the projected cost of many tax expenditures in the personal income tax system through an interaction effect. By increasing the level of income at which an individual becomes taxable, it affects the cost of other tax expenditures. 

Tax Measures for Kinship Care Providers

A number of provinces and territories offer kinship and close-relationship care programs (referred to as kinship care programs) as alternatives to foster care (or other formal care by the state) for children in need of protection who require out-of-home care on a temporary basis. As part of their kinship care programs, some of these jurisdictions provide financial assistance to care providers to help defray the costs of caring for the child.

Canada Child Benefit

Budget Implementation Act, 2018, No. 2 clarified that an individual caring for a child under a kinship care program is eligible for the Canada Child Benefit in respect of that child, regardless of whether they receive financial assistance from a government under such a program (provided all other eligibility requirements are met).

This measure applies for the 2008 and subsequent taxation years.

Canada Workers Benefit

The Canada Workers Benefit is a refundable tax credit that supplements the earnings of low-income workers and improves work incentives for low-income Canadians. A higher benefit amount is provided to eligible families (couples and single parents) than to single individuals without dependants. 

Budget 2019 clarified that an individual may be considered to be the parent of a child in their care for the purpose of the Canada Workers Benefit, regardless of whether they receive financial assistance from a government under a kinship care program. Kinship care providers are now eligible for the Canada Workers Benefit amount available for families, provided all other eligibility requirements are met.

This measure applies for the 2009 and subsequent taxation years.

Tax Treatment of Financial Assistance Payments

Social assistance payments made on the basis of a means, needs or income test are not taxable but must be included in income for the purposes of determining entitlement to income-tested benefits and credits.

Budget 2019 clarified that financial assistance payments received by care providers under a kinship care program are neither taxable, nor included in income for the purposes of determining entitlement to income-tested benefits and credits.

This measure applies for the 2009 and subsequent taxation years.

Registered Disability Savings Plan

The Registered Disability Savings Plan (RDSP) is a tax-assisted savings vehicle intended to help an individual with a disability—and the individual's family—save for the individual's long-term financial security. An RDSP may be established only for a beneficiary who is eligible for the Disability Tax Credit. Budget 2019 proposed to eliminate the requirement to close an RDSP when a beneficiary no longer qualifies for the Disability Tax Credit in order to allow grants and bonds otherwise required to be repaid to the Government to remain in the RDSP. 

These rules are proposed to apply after 2020. However, Budget 2019 indicated that an RDSP issuer would not be required to close an RDSP on or after Budget Day and before 2021 solely because the RDSP beneficiary is no longer eligible for the Disability Tax Credit.   

Canada Training Credit

As part of the Canada Training Benefit, the refundable Canada Training Credit was announced in Budget 2019 to help workers pay for the cost of training. Qualifying workers between the ages of 25 and 64 will accumulate a credit balance of $250 per year, up to a lifetime limit of $5,000. The credit balance can then be used to refund up to half the costs of taking a qualifying course or training program. In order to accumulate additional Canada Training Credit balance in 2019, a worker must have earnings of $10,000 or more (including maternity or parental leave benefits) and must have net income below the upper limit of the third federal tax bracket ($147,667 in 2019). The annual accumulation will start based on eligibility in respect of the 2019 taxation year, and the credit will be available to be claimed for expenses in respect of the 2020 and subsequent taxation years.

Tax Credit for Digital Subscriptions

As part of the support for Canadian journalism, Budget 2019 announced a temporary, non-refundable 15% tax credit on amounts paid by individuals for eligible digital news subscriptions. This allows individuals to claim up to $500 in costs paid towards eligible digital subscriptions in a taxation year, for a maximum credit of $75 annually. Individuals are limited to claiming the cost of eligible digital new subscriptions or in cases of combined digital and newsprint subscriptions, the cost of a stand-alone digital subscription. The credit is available in respect of eligible amounts paid after 2019 and before 2025.

Registered Journalism Organizations

As part of the support for Canadian journalism, Budget 2019 announced the addition of registered journalism organizations as a new category of tax-exempt "qualified donees". Qualified donees are able to issue official donation receipts for any gifts that they receive which, in turn, can be used by donors to claim the Charitable Donation Tax Credit (for individuals) or Deduction (for businesses). To be a registered journalism organization, an organization must apply to the Canada Revenue Agency and meet certain criteria, including being a Qualified Canadian Journalism Organization having purposes exclusively related to journalism. Information relating to donations to registered journalism organizations is included in the estimates with respect to charitable donations from individuals and businesses. This measure applies as of January 1, 2020.

Income Tax Expenditures Available to Trusts

As part of the Government's efforts to enhance the reporting on federal tax expenditures, this edition presents for the first time information on personal income tax expenditures that are available to trusts. Trusts are deemed to be individuals for income tax purposes; as such, absent a specific disposition to the contrary, trusts can benefit from the personal income tax expenditures that are available to natural persons. Descriptions of tax expenditures in Part 3 of this report have been modified to identify the tax expenditures that are available to trusts and to describe, where relevant, the rules that are of specific application to trusts. New estimates of the value of trust tax expenditures are also presented in Part 2 and Part 3 of the report, when the necessary data is available to support such an estimation. With a few exceptions, these new estimates represent amounts that were not included in the estimates published in prior editions. Details on the methodologies used to derive these new estimates can be found in Part 1 of the report, as well as in the relevant descriptions in Part 3. 

Corporate Income Tax

Canadian-Belgian Co-productions—Canadian Film or Video Production Tax Credit

Budget 2019 announced the addition of the Memorandum of Understanding between the Government of Canada and the Respective Governments of the Flemish, French and German-speaking Communities of the Kingdom of Belgium concerning Audiovisual Coproduction to the list of instruments under which a film or video production may be produced in order to qualify as a treaty co-production. This measure allows joint projects of producers from Canada and Belgium to qualify for the Canadian Film or Video Production Tax Credit. This measure applies as of March 12, 2018.

Business Investment in Zero-Emission Vehicles

Budget 2019 introduced a 100% tax write-off for zero-emission vehicles to support businesses' adoption of these vehicles. Eligible zero-emission vehicles include electric battery, plug-in hybrid (with a battery capacity of at least 7 kWh) or hydrogen fuel cell vehicles, including light-, medium- and heavy-duty vehicles acquired on or after March 19, 2019 and that become available for use before 2028, subject to a phase-out for vehicles that become available for use after 2023. Capital costs for eligible zero-emission passenger vehicles are deductible up to a limit of $55,000 plus sales tax.

Canadian Journalism Labour Tax Credit

As part of the support for Canadian journalism, Budget 2019 introduced a 25% refundable tax credit on salary or wages paid to eligible newsroom employees of qualifying Canadian journalism organizations. This credit allows qualifying organizations to claim up to $55,000 in labour costs per eligible newsroom employee per year, for a maximum credit of $13,750 per employee. The credit applies to salary or wages earned in respect of a period on or after January 1, 2019.

Scientific Research and Experimental Development Investment Tax Credit

Budget 2019 announced the repeal of the use of taxable income as a factor in determining a Canadian-controlled private corporation's (CCPC's) annual expenditure limit for the purpose of the enhanced Scientific Research and Experimental Development (SR&ED) investment tax credit As a result, small CCPCs with taxable capital of up to $10 million will benefit from unreduced access to the enhanced refundable SR&ED investment tax credit regardless of their taxable income. The expenditure limit will continue to be gradually reduced for CCPCs with taxable capital between $10 million and $50 million. The measure applies to taxation years that end on or after March 19, 2019.

Small Business Deduction—Farming and Fishing

Budget 2019 introduced a change to allow the income from sales of farming or fishing products by a CCPC to arm's length corporations to count for the small business deduction. This follows a change in Budget 2016, which prevented the small business deduction from applying to income earned from sales to another corporation, or related persons, that have a direct or indirect interest in the selling corporation, and subsequent relief in respect of income of a CCPC's farming or fishing business that arises from sales to a farming or fishing cooperative corporation.
To provide greater flexibility to farming and fishing businesses, Budget 2019 eliminated the requirement that sales be to a farming or fishing cooperative corporation in order to be excluded from Budget 2016 restrictions. As such, the exclusion now applies to the income of a CCPC from sales of the farming products or fishing catches of its farming or fishing business to any arm's length purchaser corporation. However, consistent with the existing rules, amounts allocated to a CCPC as patronage payments from a purchaser corporation do not qualify for the exclusion.

The purpose of the change in Budget 2016 was to eliminate the ability to artificially multiply the small business deduction.

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