Archived -Report on Federal Tax Expenditures - Concepts, Estimates and Evaluations 2022: part 2

Tax Expenditure Estimates and Projections

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Introduction

Part 2 presents the estimates of the fiscal cost of federal tax expenditures for the years 2016 to 2023. 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, 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 2021 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, 2021, changes announced in Budget 2022 are not listed below or taken into account in the estimates and projections.

Personal Income Tax

Canada Workers Benefit

Budget 2021 enhanced the Canada Workers Benefit (CWB) for taxation years after 2020. The enhancement raised the phase-out threshold from $13,194 to $22,944 for single individuals without children, and from $17,522 to $26,177 for families (both for 2021) and increased the phase-in and phase-out rates. Corresponding changes were also made to the CWB Disability Supplement.

Budget 2021 also introduced a secondary earner exemption to the CWB, a special rule for individuals with an eligible spouse. This exemption allows the spouse or common-law partner with the lower working income to exclude up to $14,000 of their working income in the computation of their adjusted net income for the purpose of the CWB phase-out.

Northern Residents Deduction

Budget 2021 proposed that northern residents no longer be required to receive an employer-provided travel benefit in order to claim the travel component of the Northern Residents Deduction. All northerners would have the option to claim a standard travel expense deduction of up to $1,200 in respect of themselves and their eligible family members. This measure would apply to the 2021 and subsequent tax years.

Child Care Expense and Disability Supports Deductions

As part of the Government of Canada’s COVID-19 Economic Response Plan, the Government announced on January 19, 2021 that it would temporarily (for the 2020 and 2021 taxation years) expand the definition of income for the Child Care Expense Deduction and the Disability Supports Deduction to include Employment Insurance (EI) benefits (including EI special benefits, as well as Quebec Parental Insurance Plan benefits). These changes were needed to align the tax treatment of EI benefits with that of the Canada Emergency Response Benefit and other federal COVID-19 emergency income benefits for these two federal deductions.

For those individuals entitled to EI and COVID-19 emergency income benefits in 2020 or 2021, the requirement that the eligible expenses under the two deductions be incurred to earn employment or business income, pursue education, or perform research was also temporarily waived.

Home Office Expense Deduction

The 2021 Economic and Fiscal Update announced that the Canada Revenue Agency will extend the simplified approach to claiming home office expenses, first announced in the 2020 Fall Economic Statement, and allow employees working from home in 2021 or 2022 due to COVID-19 with modest expenses to claim up to $500, based on the amount of time working from home, without the need to track detailed expenses.

Teacher and Early Childhood Educator School Supply Tax Credit

The 2021 Economic and Fiscal Update proposed to increase the credit rate of the Eligible Educator School Supply Tax Credit to 25% from 15%; to ensure that purchased supplies may be eligible no matter where they are used; and to expand the list of eligible durable supplies to include certain electronic devices. These changes would apply to the 2021 and subsequent tax years.

Corporate Income Tax

Canada Emergency Wage Subsidy

On March 27, 2020, as part of Canada’s COVID-19 Economic Response Plan, the Government introduced the Canada Emergency Wage Subsidy (CEWS) to encourage employers to keep employees on the payroll and enable them to rehire workers who were laid off as a result of the pandemic.

The program has been modified over time in response to the evolving pandemic. Since the last edition of this report was published, various changes have been made:

• Budget 2021 extended the program until September 25, 2021, with gradually declining subsidy rates, beginning July 4, 2021. The subsidy rates were scheduled to decline from a maximum of 75% starting on June 6, 2021 to 20% starting on August 29, 2021. In addition, starting on July 4, 2021, eligibility was restricted to employers experiencing revenue declines of more than 10%. The wage subsidy for furloughed employees was also extended until August 28, 2021.
• Budget 2021 also announced a new requirement whereby any publicly listed corporation receiving the wage subsidy and found to be paying its top executives more in 2021 than in 2019 would need to repay the equivalent in wage subsidy amounts received for any qualifying period starting after June 5, 2021 and until the end of the wage subsidy program.
• On July 30, 2021, the Government announced that the CEWS for active employees was being further extended for one period until October 23, 2021 and that the maximum subsidy rate was increased from 20% to 40% for the period between August 29 and September 25, 2021. Technical changes to provide increased flexibility in the revenue decline calculation were also announced for organizations that started their operations on or after March 1, 2019.
• The broad-based CEWS program ended on October 23, 2021 and was replaced with three new targeted subsidy programs (see further information under Tourism and Hospitality Recovery Program, Hardest-Hit Business Recovery Program and Local Lockdown Program below).

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) and Lockdown Support. The CERS provides support for organizations that have suffered a decline in revenues through a subsidy on certain rent-and mortgage-related costs. Entities eligible for the CERS with locations that have been significantly affected by a public health order may be eligible for an additional 25% Lockdown Support subsidy.

These programs have been extended and modified over time in response to the evolving pandemic. Since the last edition of this report was published, various changes have been made:

• Budget 2021 extended the CERS until September 25, 2021, with gradually declining subsidy rates, beginning on July 4, 2021. The subsidy rate was scheduled to decline from a maximum of 65% starting on June 6, 2021 to 20% starting on August 29, 2021. In addition, starting on July 4, 2021, eligibility was restricted to employers experiencing revenue declines of more than 10%. Lockdown Support was also extended at its set rate of 25% until September 25, 2021.
• On July 30, 2021, the Government announced that the CERS was being further extended for one period until October 23, 2021 and that the maximum CERS rate was increased from 20% to 40% for the period between August 29 and September 25, 2021. Technical changes to provide increased flexibility in the revenue decline calculation were also announced for organizations that started their operations on or after March 1, 2019.
• The broad-based CERS/Lockdown Support program ended on October 23, 2021 and was replaced with three new targeted programs (see further information under Tourism and Hospitality Recovery Program, Hardest-Hit Business Recovery Program and Local Lockdown Program below).

Tourism and Hospitality Recovery Program

On October 21, 2021, the Government announced a new Tourism and Hospitality Recovery Program, which will provide organizations from the tourism and hospitality industry, such as hotels, tour operators, travel agencies, and restaurants, with a wage and rent subsidy of up to 75% until March 13, 2022. From March 13 to May 7, 2022 the maximum wage and rent subsidy rate will decrease by half. Additional details on the definition of qualifying organizations under this program were contained in legislation that received Royal Assent on December 17, 2021.

Eligible organizations are required to meet two conditions to qualify for this program:

• An average monthly revenue reduction of at least 40% over the course of the first 12 months of the pandemic; and
• A current-month revenue loss of at least 40%.

Lockdown Support under this program is available as a fixed top-up of 25% to the rent subsidy, pro-rated based on the number of days a particular location was affected by a lockdown, until May 7, 2022.

The Government also made legislative amendments to increase the aggregate monthly cap under the rent subsidy from $300,000 to $1 million starting on October 24, 2021.

Hardest-Hit Business Recovery Program

On October 21, 2021, the Government announced a new Hardest-Hit Business Recovery Program, which will provide other non-tourism and hospitality organizations that have faced deep losses with a wage and rent subsidy of up to 50% until March 13, 2022. From March 13 to May 7, 2022 the maximum wage and rent subsidy rate will decrease by half.

Eligible organizations are required to meet two conditions to qualify for this program:

• An average monthly revenue reduction of at least 50% over the course of the first 12 months of the pandemic; and
• A current-month revenue loss of at least 50%.

Lockdown Support under this program is available as a fixed top-up of 25% to the rent subsidy, pro-rated based on the number of days a particular location was affected by a lockdown, until May 7, 2022.

The Government also made legislative amendments to increase the aggregate monthly cap under the rent subsidy from $300,000 to $1 million starting on October 24, 2021.

Local Lockdown Program

On October 21, 2021, the Government announced a new Local Lockdown Program, which will provide the same level of support as the Tourism and Hospitality Recovery Program (i.e., a subsidy of up to 75% until March 13, 2022 and half the subsidy rate thereafter) to organizations that face temporary new local lockdowns, regardless of sector, until May 7, 2022.

To qualify, organizations must have one or more locations subject to a public health restriction (lasting for at least seven days in the current claim period) that requires them to cease activities that accounted for at least approximately 25% of total revenues of the employer during the prior reference period. Eligible organizations are not required to show a 12-month revenue decline over a certain threshold, but are required to show a current-month revenue loss of at least 40% to qualify for this new lockdown program.

On December 22, 2021, the government proposed to temporarily expand this program to include employers subject to capacity-limiting restrictions of 50% or more; and reduce the current-month revenue decline threshold requirement to 25%. This expansion would be in effect from December 19, 2021 until February 12, 2022.

Canada Recovery Hiring Program

Budget 2021 introduced the Canada Recovery Hiring Program for eligible employers that continue to experience qualifying declines in revenues relative to before the pandemic. Eligible employers received a subsidy of up to 50% on the incremental remuneration paid to eligible employees between June 6, 2021 and November 20, 2021. The subsidy rate was scheduled to be gradually reduced from a maximum of 50% (from July 4 to July 31, 2021) to 20% (from October 24 to November 20, 2021).

On October 21, 2021, the Government announced that the subsidy rate would be increased to 50% starting on October 24, 2021 and that the program would be extended at that same rate until May 7, 2022.

Immediate expensing for small businesses

Budget 2021 proposed to introduce immediate expensing in respect of certain property acquired by a Canadian-controlled private corporation (CCPC). This immediate expensing would be available for eligible property acquired by a CCPC on or after April 19, 2021 and that becomes available for use before January 1, 2024, up to a maximum amount of $1.5 million per taxation year. The $1.5 million limit would be shared among associated members of a group of CCPCs. The half-year rule would be suspended for property for which this measure is used. Eligible property would be capital property that is subject to the capital cost allowance rules, other than property included in Classes 1 to 6, 14.1, 17, 47, 49 and 51.

Rate Reduction for Zero-Emission Technology Manufacturers

Budget 2021 proposed a temporary measure to reduce corporate income tax rates for qualifying zero-emission technology manufacturers. Specifically, taxpayers would be able to apply reduced tax rates on eligible zero-emission technology manufacturing and processing income of:

• 7.5%, where that income would otherwise be taxed at the 15% general corporate tax rate; and
• 4.5%, where that income would otherwise be taxed at the 9% small business tax rate.

The reduced tax rates would apply to taxation years that begin after 2021. The reduced rates would be gradually phased out starting in taxation years that begin in 2029 and fully phased out for taxation years that begin after 2031.

Changes to the Accelerated Capital Cost Allowance for Clean Energy Generation Equipment

Budget 2021 proposed to expand the accelerated capital cost allowance for clean energy generation and energy efficient equipment under Classes 43.1 and 43.2 to include equipment used in pumped hydroelectric energy storage, renewable fuel production, hydrogen production by electrolysis of water, and hydrogen refuelling. Certain existing restrictions related to investments in water current, wave and tidal energy, active solar heating, and geothermal energy technologies would also be removed. The expansion of Classes 43.1 and 43.2 would apply in respect of property that is acquired and that becomes available for use on or after April 19, 2021, where it has not been used or acquired for use for any purpose before that date.

Additionally, Budget 2021 proposed to update the eligibility criteria for Classes 43.1 and 43.2 such that certain fossil-fuelled and low efficiency waste-fuelled electrical generation equipment would no longer be eligible. This would apply in respect of property that becomes available for use after 2024.

Small Businesses Air Quality Improvement Tax Credit

The 2021 Economic and Fiscal Update proposed a refundable Small Businesses Air Quality Improvement Tax Credit of 25 per cent on eligible air quality improvement expenses incurred by small businesses between September 1, 2021, and December 31, 2022. Businesses would receive the credit on eligible expenses related to the purchase or upgrade of mechanical heating, ventilation and air conditioning (HVAC) systems and the purchase of devices designed to filter air using high efficiency particulate air (HEPA) filters, up to a maximum of $10,000 per location and $50,000 in total.

Goods and Services Tax

Small Suppliers’ Threshold: Implication of GST/HST Collection by Electronic Platforms

The 2020 Fall Economic Statement announced a number of changes to the GST/HST system to ensure that the GST/HST applies fairly and effectively to the growing digital economy. As part of this announcement, GST/HST is payable on all supplies to Canadians of goods that are located in Canadian fulfillment warehouses and all platform-based short-term rental accommodation supplied in Canada. Under these changes, an electronic platform that facilitates the supply of goods located in Canadian fulfillment warehouses or short-term accommodation in Canada by underlying vendors that are not registered for the GST/HST would be deemed to be the supplier of the goods or accommodation for purposes of the GST/HST and required to collect and remit tax in respect of these supplies. As a result, the small suppliers’ threshold no longer operates to relieve the tax on these supplies.

The changes were effective July 1, 2021. However, the Canada Revenue Agency is providing flexibility for platform operators who are unable to comply with the new requirements by that date. Therefore, the effects of this measure may not be fully visible until the second half of 2022.

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