Archived - Report on Federal Tax Expenditures - Concepts, Estimates and Evaluations 2023: 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 2017 to 2024. 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 2022 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, 2022, changes announced in Budget 2023 are not listed below or taken into account in the estimates and projections.

Personal Income Tax

Canada Workers Benefit

The 2022 Fall Economic Statement proposed to automatically issue advance payments of the Canada Workers Benefit to people who qualified for the benefit in the previous year, starting in July 2023 for the 2023 taxation year. Workers would receive a minimum entitlement for the year through advance payments based on income reported in the prior year's tax return, and any additional entitlement for the year would be provided when filing their tax return for the year.

Labour Mobility Deduction for Tradespeople

Budget 2022 introduced a Labour Mobility Deduction for Tradespeople, which provides tax recognition on up to $4,000 per year in eligible travel and temporary relocation expenses to eligible tradespersons and apprentices working in a construction activity.

Eligible expenses include temporary lodging near a temporary work location, transportation for one round trip from the ordinary residence to the temporary lodging, and meals in the course of travel. An eligible temporary relocation requires that the temporary lodging be at least 150 kilometres closer than the ordinary residence to the temporary work location. This measure applies to the 2022 and subsequent taxation years.

Disability Tax Credit

Budget 2021 amended the list of mental functions necessary for everyday life for qualifying for the Disability Tax Credit to include: attention; concentration; memory; judgement; perception of reality; problem-solving; goal-setting; regulation of behaviour and emotions; verbal and non-verbal comprehension; and adaptive functioning.

Budget 2021 also amended rules pertaining to the life-sustaining therapy category, in order to reduce the minimum required frequency of therapy and to recognize more types of activities as related to life-sustaining therapy.

All individuals with type 1 diabetes are deemed to automatically meet the eligibility criteria under the life-sustaining therapy category.

These changes apply for the 2021 and subsequent tax years.

Medical Expense Tax Credit

Budget 2022 amended the Income Tax Act to allow medical expenses incurred in Canada related to a surrogate mother or a sperm, ova, or embryo donor, as well as fees paid to fertility clinics and donor banks in Canada in order to obtain donor sperm and ova, to be eligible under the Medical Expense Tax Credit. These changes will apply to the 2022 and subsequent taxation years.

Home Accessibility Tax Credit

Budget 2022 doubled the Home Accessibility Tax Credit's annual qualifying expense limit from $10,000 to $20,000, to provide a tax credit of up to $3,000. All other rules regarding the credit remain the same. This change applies to expenses incurred in the 2022 and subsequent taxation years.

Multigenerational Home Renovation Tax Credit

Budget 2022 introduced a new refundable Multigenerational Home Renovation Tax Credit. This credit provides recognition of eligible expenses for a qualifying renovation. A qualifying renovation is one that creates a secondary dwelling unit to permit an eligible person—a senior or a person with a disability—to live with a qualifying relation. The value of the credit is 15% of up to $50,000 in eligible expenses, such as the cost of labour and professional services, building materials, fixtures, and equipment rentals. This measure will apply for the 2023 and subsequent taxation years.

Goods and Services Tax/Harmonized Sales Tax Credit

As announced on September 13, 2022, the government is providing temporary support to Canadians by doubling the 2022-23 Goods and Services Tax/Harmonized Sales Tax Credit for six months and paying out the extra amounts as a one-time, lump-sum payment starting on November 4, 2022.

Tax Measures for Kinship Care Providers

Budget 2022 clarified that a kinship care provider may be considered to be the parent of a child in their care for the purposes of the Canada Workers Benefit amount for families and the Canada Child Benefit, regardless of whether they receive financial assistance from an Indigenous governing body (acting on behalf of an Indigenous community exercising its jurisdiction over child and family services), provided they meet all other eligibility requirements.

Budget 2022 also clarified that financial assistance payments for the care of a child received by kinship care providers or foster parents from an Indigenous governing body are neither taxable, nor included in income for the purposes of determining entitlement to income-tested benefits and credits.

These measures are retroactive to January 1, 2020, when An Act respecting First Nations, Inuit and Métis children, youth and families came into force.

Tax-Free First Home Savings Account

Budget 2022 introduced the Tax-Free First Home Savings Account (FHSA). The FHSA is a new registered plan that will help individuals save for their first home.

Starting at some point in 2023, Canadian residents 18 years and older who are first-time home buyers will be able to open an FHSA. The annual contribution limit will be $8,000 (fully available in 2023), with a lifetime contribution limit of $40,000. Any unused annual contribution room will be carried forward, up to a maximum of $8,000. The carry-forward amounts will only start accumulating after an individual opens an FHSA for the first time. FHSA contributions will be tax-deductible and income earned in an FHSA will not be subject to tax. Qualifying FHSA withdrawals, used to purchase a first home in Canada, will be non-taxable. All non-qualifying withdrawals will be subject to taxation.

Critical Mineral Exploration Tax Credit for Flow-Through Share Investors

Budget 2022 announced a new Critical Mineral Exploration Tax Credit. This measure will provide a 30% non-refundable tax credit for specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors.

The tax credit applies to certain exploration expenditures targeted at nickel, lithium, cobalt, graphite, copper, rare earth elements, vanadium, tellurium, gallium, scandium, titanium, magnesium, zinc, platinum group metals, or uranium, and renounced as part of a flow-through share agreement entered into after April 7, 2022 and on or before March 31, 2027.

Corporate Income Tax

Additional Tax on Banks and Life Insurers

Budget 2022 introduced an additional tax of 1.5% of the taxable income for members of bank and life insurer groups. Bank and life insurer groups subject to the additional tax are permitted to allocate a $100 million taxable income exemption by agreement amongst group members.

The additional tax applies to taxation years that end after April 7, 2022. For a taxation year that includes April 7, 2022, the additional tax is prorated based on the number of days in the taxation year after April 7, 2022.

Canada Recovery Dividend

Budget 2022 introduced the Canada Recovery Dividend (CRD) in the form of a one-time 15% tax on bank and life insurer groups. A group would include a bank or life insurer and any other financial institution (for the purposes of Part VI of the Income Tax Act) that is related to the bank or life insurer.

The CRD is determined based on the average of 2020 and 2021 taxable income. A proration rule is provided for short taxation years. Bank and life insurer groups subject to the CRD are permitted to allocate a $1 billion taxable income exemption by agreement amongst group members.

The CRD liability will be imposed for the 2022 taxation year and will be payable in equal amounts over five years.

Preferential Tax Rate for Small Businesses 

Small businesses may benefit from a reduced federal tax rate of 9% on their first $500,000 of taxable income, compared to a general federal corporate tax rate of 15%. A Canadian-controlled private corporation (CCPC) no longer has access to this lower rate once the combined taxable capital employed in Canada of the CCPC and its associated corporations reaches $15 million.

Budget 2022 modified the rules to phase out access to the small business tax rate more gradually, with access to be fully phased out when the combined taxable capital employed in Canada of the CCPC and its associated corporations reaches $50 million, rather than at $15 million.

This measure applies to taxation years that begin on or after April 7, 2022.

Flow-through Share Deductions 

Budget 2022 announced the elimination of the flow-through share regime for fossil fuel sector activities. This will be done by no longer allowing expenditures related to oil, gas, and coal exploration and development to be renounced to flow-through share investors for flow-through share agreements entered into after March 31, 2023.

Investment Tax Credit for Clean Technologies

The 2022 Fall Economic Statement proposed a refundable tax credit for the capital cost of investments in certain clean technologies:

• Certain Electricity Generation Systems, including small modular nuclear reactors, solar, wind, and water (small hydro, run-of-river, wave, and tidal); 
• Stationary Electricity Storage Systems that do not use fossil fuels in their operation;
• Certain Low-Carbon Heat Equipment, including active solar heating, air-source heat pumps, and ground-source heat pumps; and
• Non-road zero-emission vehicles and related charging or refueling equipment.

A 30% tax credit rate will be available to businesses that adhere to certain labour conditions, while other businesses will be eligible for a 20% tax credit rate. Additional details on labour conditions will be announced in Budget 2023.

The credit will be available starting on or after the day of the 2023 Budget and no longer in effect after 2034, subject to a phase-out starting in 2032.

Carbon Capture, Utilization and Storage (CCUS) Investment Tax Credit.

Budget 2022 proposed a refundable investment tax credit for businesses that incur eligible CCUS expenses, starting in 2022. The investment tax credit would be available to CCUS projects to the extent that they permanently store captured CO2 through an eligible use. Eligible CO2 uses include dedicated geological storage and storage of CO2 in concrete, but does not include enhanced oil recovery.

From 2022 through 2030, the investment tax credit rates would be set at:

• 60% for investment in equipment to capture CO2 in direct air capture projects;
• 50% for investment in equipment to capture CO2 in all other CCUS projects; and
• 37.5% for investment in equipment for transportation, storage and use.

To encourage the industry to move quickly to lower emissions, these rates will be reduced by 50% for the period from 2031 through 2040.

Expansion of the Eligibility for Immediate Expensing to a Broader Range of Taxpayers

As announced on February 4, 2022, the government has expanded eligibility for the $1.5 million temporary immediate expensing measure to investments in eligible property made by unincorporated businesses carried on directly by Canadian resident individuals (other than trusts) and certain eligible partnerships. This measure is effective for investments made on or after January 1, 2022 that become available for use before 2025 (in the case of an individual or a partnership all members of which are individuals) or before 2024 (for other partnerships).

Rate Reduction for Zero-Emission Technology Manufacturers

Budget 2022 extended the 50% reduction in the general corporate and small business income tax rates for zero-emission technology manufacturers to include the manufacturing of air-source heat pumps used for space or water heating.

The reduced tax rates apply to taxation years that begin after 2021. The reduced rates will 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 2022 expanded the accelerated capital cost allowance for clean energy generation and energy efficient equipment under Classes 43.1 and 43.2 to include air-source heat pumps primarily used for space or water heating. The expansion of Classes 43.1 and 43.2  applies in respect of property that is acquired and that becomes available for use on or after April 7, 2022, where it has not been used or acquired for use for any purpose before that date.

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