Report on Federal Tax Expenditures - Concepts, Estimates and Evaluations 2021: part 2

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Tax Expenditure Estimates and Projections

Introduction

Part 2 presents the estimates of the fiscal cost of federal tax expenditures for the years 2015 to 2022. It presents estimates for a wide range of tax expenditures, measures that are not considered tax expenditures (i.e., measures that are considered part of the benchmark tax system), and refundable tax credits that are classified as transfer payments. To increase transparency in government reporting on support to the fossil fuel sector, a second table grouping tax expenditures that provide such support is also presented. These estimates are followed by a third set of tables that present background statistics on total tax revenues by tax base, as well as some other useful statistics, such as the number of filers and tax paid by income tax bracket. Finally, key changes that have been made to tax expenditures since the last edition are described.

Tax Expenditures Supporting the Fossil Fuel Sector

Canada has routinely published estimates of its tax expenditures for over two decades, including those that favour the fossil fuel sector. In 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, beginning in 2019, the 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.

Changes to Tax Expenditures Since the 2020 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, 2020, changes announced in Budget 2021 are not listed below or taken into account in the estimates and projections.

Personal Income Tax

Goods and Services Tax/Harmonized Sales Tax Credit

As part of the Government of Canada’s COVID-19 Economic Response Plan, a one-time special supplemental payment under the GST/HST Credit was made beginning April 9, 2020.  This top-up payment doubled the 2019‑20 GST/HST Credit amounts and paid out the resulting difference in an individual’s benefit entitlement as a lump sum.

Canada Child Benefit

As part of the Government’s COVID-19 Economic Response Plan, an additional one-time Canada Child Benefit payment of up to $300 per child was provided to eligible families on May 20, 2020.

Quarterly Payments for Families with Young Children

As part of the Government’s COVID-19 Economic Response Plan, the Government proposed in the 2020 Fall Economic Statement to provide temporary support for families with children under the age of 6 in 2021. This temporary support would automatically be delivered to families entitled to the Canada Child Benefit  with adjusted family net income at or below $120,000 as a tax-free payment of $300 per child under the age of 6 in each of the months of January, April, July, and October 2021. Families entitled to the Canada Child Benefit with adjusted family net income above $120,000 would receive a tax-free payment of $150 per child under the age of 6 in each of those months. This temporary assistance would benefit about 1.6 million families in respect of about 2.1 million children, and would cost about $2.4 billion in 2021.

Impact of additional support measures for students

In April 2020, the Government introduced additional support measures for post-secondary students impacted by COVID-19. This included making the following changes to the Canada Student Loans Program:

• Broadening eligibility for student financial assistance by removing the expected student’s and spouse’s contributions in 2020-21;
• Raising the maximum weekly amount that can be provided to a student in 2020-21 from $210 to $350; and
• Doubling the Canada Student Grants for all eligible full-time students to up to $6,000 and up to $3,600 for part-time students in 2020-21, and doubling Canada Student Grants for Students with Permanent Disabilities and Students with Dependents.

Furthermore, the Government suspended repayments on all Canada Student Loans and Canada Apprentice Loans from March 30 to September 30, 2020, with no federal interest accruing during this period, and announced in the 2020 Fall Economic Statement the intention to eliminate the interest on the federal portion of Canada Student Loans and Canada Apprentice Loans for 2021-22.

These changes are expected to affect the estimated tax expenditures for the exemption of scholarship, fellowship, and bursary income and the Student Loan Interest Tax Credit. Increased availability of Canada Student Grants is expected to increase the estimated tax expenditure associated with the exemption of scholarship, fellowship, and bursary income, under which such grants are generally exempt from income tax. The suspension of interest payments will also, in the short run, lower the estimated cost of the Student Loan Interest Tax Credit.

Employee Stock Options

As part of the Government’s ongoing effort to improve the fairness of the tax system, the 2020 Fall Economic Statement proposed the following changes to the employee stock option tax rules:

• A $200,000 annual limit will apply on employee stock option grants that can qualify for the employee stock option deduction. This limit will be based on the fair market value of the shares underlying the options, at the time the options are granted.
• Employee stock options granted by Canadian-controlled private corporations (CCPCs) and by non-CCPC employers with annual gross revenues of $500 million or less will not be subject to the new limit.

The new rules will apply to employee stock options granted on or after July 1, 2021.

Deduction of Other Employment Expenses

Home Office Expense Deduction

The 2020 Fall Economic Statement announced that the Canada Revenue Agency will allow employees working from home in 2020 due to COVID-19 with modest expenses to claim up to $400, based on the amount of time working from home, without the need to track detailed expenses.

Income Tax Expenditures Available to Trusts

As part of the Government’s efforts to enhance the reporting on federal tax expenditures, this edition includes 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 editions prior to the 2020 report. 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

Expanding Tax Support for Business Investment in Zero-Emission Vehicles

On March 2, 2020, the Government proposed a 100% tax write-off for business investments in a variety of other zero-emission automotive equipment and vehicles. Eligible equipment and vehicles include fully electric or hydrogen powered off-road, rail, aerial or marine automotive equipment and vehicles that are acquired on or after March 2, 2020 and that become available for use before 2028, subject to a phase-out for equipment and vehicles that become available for use after 2023. Additionally, as of March 2, 2020, the Government proposed to expand the 100% write-off for on-road zero-emission vehicles to include eligible vehicles that have been previously used.

Relief for flow-through share issuers during COVID-19

On July 10, 2020, the Government proposed to support junior mining exploration and other flow-through issuers during the pandemic by extending by 12 months the period to incur eligible flow-through share expenses under the general rule and the look-back rule. The Government also proposed to apply Part XII.6 tax as if expenditures were incurred up to one year earlier than the date they were actually incurred. If amounts are not actually expended by the end of 2021 (where the agreement was entered into in 2019) or 2022 (where the agreement was entered into in 2020), the additional 10% tax under Part XII.6 would apply and the tax payable by investors would be adjusted accordingly. The 12-month extension would apply to agreements entered into on or after March 1, 2018 and before 2021, when using the general rule. The 12-month extension would apply to agreements entered into in 2019 or 2020 when using the look-back rule. The relief in respect of Part XII.6 tax would apply to agreements entered into in 2019 or 2020.

10% Temporary Wage Subsidy for Employers

On March 18, 2020, the Government introduced the 10% Temporary Wage Subsidy for Employers. The Temporary Wage Subsidy was a 3-month measure that allowed eligible small employers to reduce the amount of payroll income tax deductions they need to remit to the Canada Revenue Agency. The subsidy was equal to 10% of the remuneration paid from March 18 to June 19, 2020, up to $1,375 for each eligible employee, and $25,000 per employer.

Canada Emergency Wage Subsidy  

On March 27, 2020, as part of the Canada’s COVID-19 Economic Response Plan, the Government introduced the Canada Emergency Wage Subsidy (CEWS).

An employer’s entitlement to the CEWS is based on 4-week claim periods. For Periods 1 to 4 (March 15 to July 4, 2020), the CEWS provided a subsidy of 75% of eligible remuneration paid by a qualifying eligible employer to each eligible employee, up to a maximum of $847 per week. The subsidy was available to employers that experienced a drop of at least 15% of their revenue in Period 1 (March 15 to April 11, 2020) and a revenue drop of at least 30% in subsequent periods.

As of the start of Period 5 (July 5, 2020), the CEWS for active employees consists of two parts:

• A base subsidy available to all eligible employers that are experiencing a decline in revenues, with the subsidy amount varying depending on the scale of revenue decline; and
• A top-up subsidy of up to an additional 25% for those employers that have been most adversely affected by the COVID-19 crisis. 

The maximum base CEWS rate is defined for each period and is provided to employers with a revenue drop of 50% or more, and the rate decreases gradually for employers with a year-over-year monthly revenue drop of less than 50%. The top-up CEWS is available to employers that have experienced a year-over-year monthly revenue drop (prior to September 27, 2020, a three-month average revenue drop) of more than 50%, up to a maximum top-up CEWS rate of 25%, which is attained at a 70% revenue drop or more. For Periods 11-13 (December 20, 2020 to March 13, 2021), the maximum top-up CEWS rate is 35%. Both the base CEWS rate and the top-up CEWS rate apply to remuneration of up to $1,129 per week. A separate CEWS rate structure applies to furloughed employees.

The Government has extended the CEWS until June 2021.

Canada Emergency Rent Subsidy and Lockdown Support

On October 9, 2020, as part of Canada’s COVID-19 Economic Response Plan, the Government announced the introduction of the Canada Emergency Rent Subsidy (CERS). The CERS provides support for businesses and other organizations that have suffered a decline in revenues through a subsidy on certain rent- and mortgage-related costs. The measure came into effect on September 27, 2020, and will be available until June 2021.

In alignment with the Canada Emergency Wage Subsidy program, eligible entities include individuals, taxable corporations and trusts, partnerships consisting of eligible entities, non-profit organizations and registered charities. For the first 24 weeks of the program, eligible entities that experience a decline in revenues of 70% or more can receive a maximum subsidy of 65% of their eligible costs; this declines to a 40% subsidy for those with a revenue drop of 50%, with the subsidy rate gradually falling to zero for those that have not experienced a decline in revenues. Eligible costs are capped at $75,000 per location and subject to an overall cap of $300,000 across all locations, shared among affiliated entities.

Additionally, entities eligible for the CERS with locations that have been significantly affected by a public health order may be eligible for the Lockdown Support. This additional support is equal to 25% of eligible costs. Together with the CERS, the Lockdown Support brings the combined maximum subsidy rate to 90%. The Lockdown Support is subject to the $75,000 cap on eligible costs per location, but not the overall cap of $300,000.

Eligible costs under these measures consist of rent, property taxes, property insurance, and interest on commercial mortgages entered into for the purpose of purchasing real property, less any subleasing revenues.

Agricultural Cooperatives: Income Tax Deferral for Patronage Dividends Paid in Shares

The 2020 Fall Economic Statement proposed an extension of the income tax deferral for patronage dividends paid in shares by agricultural cooperatives to its members. The tax deferral, which will apply in respect of eligible shares issued before 2026, is intended to help agricultural cooperatives raise the capital needed to grow.

Goods and Services Tax

Non-taxation of certain importations

Canada—United States—Mexico Agreement

Under Canada’s de minimis threshold, goods that are valued at not more than $20 and sent from other countries by mail or courier to recipients in Canada are generally relieved of the GST. As part of the Canada—United States—Mexico Agreement, Canada committed to increase its de minimis threshold in respect of taxes from $20 to $40 for courier imports from Mexico or the United States. This relief was implemented through an amendment to the GST legislation as part of the Canada—United States—Mexico Agreement Implementation Act and applies as of July 1, 2020.

Non-taxation of goods imported for emergency use

As part of the Government’s COVID-19 Economic Response Plan, certain medical goods imported for emergency use by, or on behalf of, certain health-related entities, including hospitals, first-response organizations, and care homes, do not attract GST upon importation. These include personal protective equipment such as masks and gloves. This is a temporary measure to deal with the COVID-19 crisis.

GST/HST Relief on Face Masks and Face Shields

In order to support public health during the COVID-19 pandemic, the Government has proposed as part of the 2020 Fall Economic Statement to temporarily relieve (i.e., zero rate) supplies of certain face masks and face shields from the GST/HST.

 

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