Chapter 2

Description of Personal Income Tax Provisions

Charities, Gifts and Contributions

Charitable Donations Credit

A tax credit is available for charitable donations. The credit is 16 per cent on the first $200 of total donations in a year and 29 per cent on donations in excess of $200. In general, the credit may be claimed on donations totalling up to 75 per cent of net income. The percentage of income restriction does not apply to certain gifts of cultural property or ecologically sensitive lands. The limit is increased by 25 per cent of the amount of taxable capital gains arising from the donations of appreciated capital property and 25 per cent of any capital cost allowance recapture arising from the donation of depreciable capital property. Donations in excess of the limit may be carried forward for up to five years.

Reduced Inclusion Rate for Capital Gains Arising From Donations to Public Charities of Ecologically Sensitive Land

The 2000 budget reduced by one-half the income inclusion in respect of capital gains arising from gifts of ecologically sensitive land. As a result of this measure and the subsequent reduction in the general rate of capital gains inclusion in the October 2000 Economic Statement and Budget Update, the inclusion rate for ecogifts is now 25 per cent.

It is important to note that the tax expenditure shown under this heading includes only the impact of the reduced inclusion rate on capital gains arising from these donations. To be consistent with the methodology used elsewhere in this document, the data under this heading do not include the additional forgone revenue arising from the corollary increased use of the charitable donations credit. When this increased use of the charitable donations credit is taken into account, the total tax expenditure cost may be considerably greater.

Reduced Inclusion Rate for Capital Gains Arising From Donations to Public Charities of Listed Publicly Traded Securities

The 1997 budget introduced, on an experimental basis, a 50-per-cent reduction in the ordinary inclusion rate on capital gains arising from certain donations of eligible securities to charities (other than private foundations), where the donation was made before the end of the year 2001. Eligible securities qualifying for this treatment are those for which a current value can readily be obtained, generally securities that are traded publicly on a prescribed stock exchange. The 2000 budget provided parallel treatment of gifts of shares acquired through employee stock option plans. As a result of the success of the experimental measure, the half inclusion rate measure was made permanent in 2001. Following the reduction in the general rate of capital gains inclusion in the October 2000 Economic Statement and Budget Update, the inclusion rate for donations of listed securities is now 25 per cent.

It is important to note that the tax expenditure shown under this heading includes only the impact of the reduced inclusion rate on capital gains arising from these donations. To be consistent with the methodology used elsewhere in this document, the data under this heading do not include the additional forgone revenue from increased use of the charitable donations credit. When this increased use of the charitable donations credit is taken into account, the total tax expenditure cost may be considerably greater.

Non-Taxation of Capital Gains on Gifts of Cultural Property

Certain objects certified by the Canadian Cultural Property Export Review Board as being of cultural importance to Canada are exempt from capital gains tax if donated to a designated museum or art gallery. Recipient organizations are required to hold the objects for a minimum of 10 years.

Non-Taxation of Gifts and Bequests

Gifts and bequests are not included in the income of the recipient for tax purposes.

No data are available.

Political Contribution Tax Credit

A non-refundable tax credit is available for contributions to registered federal political parties, candidates and registered electoral district associations.

Prior to January 1, 2000, the political contribution tax credit was earned at a rate of 75 per cent on the first $100 contributed, 50 per cent on the next $450 and 33 ^1/3 per cent on the next $600. The maximum credit was $500 and was available when the taxpayer had contributed $1,150.

From January 1, 2000 to December 31, 2003, the credit was earned at a rate of 75 per cent on the first $200 contributed, 50 per cent on the next $350 and 33 ^1/3 per cent on the next $525. The maximum credit was $500 and was available when the taxpayer had contributed $1,075.

Effective January 1, 2004, the political contribution tax credit is 75 per cent of the first $400 contributed, 50 per cent of the next $350 contributed and 33 ^1/3 per cent of the next $525 contributed. The maximum credit is $650 and is available when the taxpayer has contributed $1,275. This structure applies equally to donations by individuals and by corporations.

Culture

Assistance for Artists

Artists may deduct the costs of creating a work of art in the year the costs are incurred rather than in the year the work of art is sold.

Artists may also elect to value a charitable gift from their inventories at any amount up to its fair market value. This value is included in the artist’s income. The percentage of income limit for the charitable donations tax credit does not apply.

No data are available.

Employed musicians are able to claim the cost of maintenance, rental, insurance and capital cost allowance on musical instruments against employment income earned as a musician. Employed artists are also entitled to deduct expenses related to their artistic endeavours up to the lesser of $1,000 or 20 per cent of their income derived from employment in the arts.

No data are available.

Adult Basic Education—Tax Deduction for Tuition Assistance

In computing their taxable income, individuals may deduct the amount of tuition assistance received for adult basic education or other programs that do not qualify for the tuition tax credit, to the extent that this assistance has been included in their income. In order to be eligible, the tuition assistance must be provided under:

• Part II of the Employment Insurance Act (or a similar program provided by a province or territory under a Labour Market Development Agreement); or

• another training program established under the authority of the Minister of Human Resources and Skills Development, such as the Multilateral Framework for Labour Market Agreements for Persons with Disabilities or the Opportunities Fund for Persons with Disabilities.

This measure was made retroactive to 1997 and subsequent taxation years.

Apprentice Vehicle Mechanics’ Tools Deduction

Starting in 2002, registered apprentice vehicle mechanics can deduct the extraordinary portion of the cost of new tools they purchase in the taxation year or in the last three months of the previous taxation year if the apprentice is in his or her first year of on-the-job training. Extraordinary tool costs are those that exceed $1,000 or 5 per cent of the taxpayer’s income, whichever is greater.

These estimates are based on Statistics Canada data on the number of apprentices in eligible trades and on the typical tool cost they incur.

Education Credit

Students who are enrolled in post-secondary education or in occupational training certified by the Minister of Human Resources and Skills Development are entitled to claim a tax credit of 16 per cent of the relevant monthly education amount. For full-time students, the amount was $200 in 1999 and 2000, and $400 in 2001 and subsequent taxation years. For part-time students, the amount was $60 per month in 1999 and 2000, and $120 in 2001 and subsequent taxation years.

Moreover, Budget 2001 extended the education tax credit to students who receive financial assistance for post-secondary education under certain government training programs, effective January 2002.

Budget 2004 proposed that beginning in taxation year 2004, the education tax credit be extended to students who pursue post-secondary education related to their current employment, provided that their employer does not reimburse the cost of education in whole or in part.

Tuition Fee Credit

A 16-per-cent tax credit is available for tuition fees for post-secondary education and for occupational training certified by the Minister of Human Resources and Skills Development. A credit is available for all tuition fees paid if the total tuition fees exceed $100. The credit also applies to most mandatory ancillary fees imposed by post-secondary institutions.

Carry-Forward of Education and Tuition Fee Credits

The 1997 budget allowed students to carry forward indefinitely for their own use education and tuition fee amounts that have not been either already used by the student or transferred to a supporting individual.

Transfer of Education and Tuition Fee Credits

The unused portions of the education and the tuition fee amounts may be transferred to a supporting spouse, parent or grandparent. The maximum transfer for the two amounts in any one year is $5,000.

Partial Exemption of Scholarship, Fellowship and Bursary Income

From 1972 to 1999, the first $500 of scholarship, fellowship and bursary income was exempt from income tax. The 2000 budget increased this tax exemption to $3,000 for amounts received in connection with a student’s enrolment in post-secondary education or certified occupational training programs eligible for the education credit. The tax expenditures reported in the table are understated since no data are available on individuals receiving scholarship, fellowship or bursary income in amounts less than the exemption.

Registered Education Savings Plans

A taxpayer may contribute to a registered education savings plan (RESP) on behalf of a designated beneficiary (usually the taxpayer’s child). Contributions to RESPs are not deductible, but the investment return on these funds is not taxable until they are withdrawn for the education of the named beneficiary. This tax deferral constitutes the tax expenditure associated with RESPs.

When RESP beneficiaries do not pursue higher education, RESP subscribers can withdraw the investment income from their plan either as a direct payment or as a transfer to a registered retirement savings plan (RRSP). The income received directly is subject to regular tax plus an additional tax of 20 per cent, while the amount transferred to an RRSP is subject to the availability of RRSP contribution room.

The federal government supplements contributions to RESPs with a 20-per-cent grant (the Canada Education Savings Grant [CESG]), subject to annual and lifetime limits. Budget 2004 proposed the introduction of a Canada Learning Bond (CLB) for children in low-income families, and an enhanced CESG for low- and middle-income families. While the CLB and the CESG do not directly represent tax expenditures, they increase the cost of the tax expenditure to the extent that they encourage increased use of RESPs.

Estimates are based on the data and projections provided by Human Resources and Skills Development Canada, the administrator of the CESG program.

Student Loan Interest Credit

In order to ease the burden of student debt, the 1998 budget introduced a tax credit at the lowest tax rate (currently 16 per cent) on the interest portion of student loan payments made in 1998 and subsequent years. The credit, which is applicable to interest payments on loans approved under the Canada Student Loans Program and similar provincial programs, may be claimed in the year in which the credit is earned or in any of the subsequent five years.

Deduction for Income Earned by Military and Police Deployed to High-Risk International Missions

Budget 2004 proposed that members of the Canadian Forces or a Canadian police force who serve on high-risk international missions (determined based on Department of National Defence risk assessment) may claim an offsetting deduction for their income earned on the mission, to the extent that this employment income is included in income. The deduction is capped at the highest amount of income payable to a non-commissioned member of the Canadian Forces.

Estimates are based on the number of individuals serving on eligible missions and their average income.

Deduction of Home Relocation Loans

An offsetting deduction from taxable income is provided for the benefit received by an employee in respect of a home relocation loan. The amount of the deduction is the deemed interest benefit on the first $25,000 of a low-interest loan.

Deferral of Salary Through Leave of Absence/Sabbatical Plans

Employees may be entitled to defer salaries through a leave of absence/sabbatical plan. Provided certain conditions are met by the plan, these amounts are not subject to tax until received.

No data are available.

Employee Benefit Plans

In certain circumstances, employers may make contributions to an "employee benefit plan" on behalf of their employees. The employee is not required to include in income the contributions to the plan or the investment income earned within the plan until amounts are received. Employers may not deduct these contributions to the plan until these contributions are actually distributed to the employees.

No data are available.

Employee Stock Options

Provided certain conditions are met, the benefit provided to an employee under a stock option is subject to special tax treatment. A deduction is available to reduce the income inclusion associated with the taxable benefit. The deduction was increased to one-half of the benefit effective October 18, 2000. For employees of Canadian-controlled private corporations (CCPCs), the stock option benefit is included in income when the share acquired with the option is disposed of. The 2000 budget extended similar treatment to employees of publicly traded companies who exercise options after February 27, 2000, on up to $100,000 in options that vest each year. For other options granted by non-CCPCs, the stock option benefit is included in income when the option is exercised.

Estimates reflect the stock option deduction, but not the deferred income inclusion for certain stock option benefits.

Non-Taxation of Certain Non-Monetary Employment Benefits

Fringe benefits provided to employees by their employers are not taxed when it is not administratively feasible to determine the value of the benefit. Examples include merchandise discounts, subsidized recreational facilities offered to all employees and special clothing.

No data are available.

Non-Taxation of Strike Pay

Statistics Canada has ceased collecting information on the amount of strike pay.

Northern Residents Deductions

Individuals living in prescribed areas in Canada for a specified period may claim the northern residents deductions. The benefits consist of a residency deduction of up to $15 a day, a deduction for two employer-provided vacation trips per year and unlimited employer-provided medical travel. Residents of the Northern Zone are eligible for full benefits, while residents of the Intermediate Zone are eligible for 50 per cent of the benefits.

Overseas Employment Credit

A tax credit is available to Canadian employees working abroad for more than six months in connection with certain resource, construction, installation, agricultural or engineering projects. The credit is equal to the tax otherwise payable on 80 per cent of the employee’s net overseas employment income taxable in Canada, up to a maximum income of $80,000.

Tax-Free Amount for Emergency Service Volunteers

The 1998 budget provided an exemption of up to $1,000 for amounts received by emergency service volunteers who, in their capacity as volunteers, are called upon to assist in emergencies or disasters.

Family

Canada Child Tax Benefit

The Canada Child Tax Benefit (CCTB) has two components: the CCTB base benefit, which is targeted to low- and middle-income families, and the National Child Benefit (NCB) supplement, which provides additional assistance to low-income families. Both the NCB supplement and CCTB base benefit are income-tested based on family net income. CCTB payments are made monthly and are non-taxable.

The CCTB base benefit is comprised of a flat amount per child, plus additional amounts for the third and subsequent children. The base benefit also includes a supplement for each child under age 7, which is reduced by 25 per cent of child care expenses claimed. The NCB supplement provides different benefit levels for the first child, second child, and third and subsequent children.

The tax expenditure for the Child Disability Benefit, which is paid as a supplement to the CCTB, is shown separately.

Since its inception, the CCTB has been significantly enriched. Most recently, the 2003 federal budget announced further substantial increases in the NCB supplement by annual amounts of $150 per child in July 2003, $185 per child in July 2005 and $185 per child in July 2006. In addition, families with children continue to benefit from CCTB measures introduced in the Five-Year Tax Reduction Plan. These include an increase in the family net income threshold at which the NCB supplement is fully phased out and the CCTB base benefit begins to be phased out to at least $35,000, and a reduction in the phase-out rate of the base benefit of the CCTB from 5 to 4 per cent (from 2.5 to 2 per cent for families with one child), effective July 2004.

For the program year July 2004 to June 2005, the CCTB base benefit provides a basic amount of up to $1,208 per child, plus $84 for the third and subsequent children. It also includes a supplement of $239 for each child under age 7. The total base benefit is reduced by 4 per cent (2 per cent for one-child families) of family net income over $35,000.

For the program year July 2004 to June 2005, the NCB supplement provides maximum benefits of $1,511 for the first child, $1,295 for the second child and $1,215 for each subsequent child. The NCB supplement is reduced by 12.2 per cent for a one-child family, 22.7 per cent for a two-child family and 32.6 per cent for larger families with incomes over $22,615. The NCB supplement is fully phased out at family incomes of approximately $35,000.

With the enrichments announced in the 2003 budget, together with full indexation restored under the Five-Year Tax Reduction Plan, the maximum CCTB benefit is projected to reach $3,243 for a first child, $3,016 for a second child and $3,020 for each additional child by July 2007.

Caregiver Credit

Introduced in the 1998 budget, the caregiver credit provides tax relief to individuals providing in-home care for a parent or grandparent 65 years of age or over, or for an infirm adult dependent relative, including a child or grandchild 18 years of age or over, brother, sister, aunt, uncle, niece or nephew. The amount the supporting relative can claim depends on the net income of the dependant.

For the 2004 taxation year, the credit is 16 per cent of $3,784. The credit is reduced when the dependant’s net income exceeds $12,921 and is fully phased out when his or her income reaches $16,705. Both the credit amount and the income threshold at which the credit starts to be reduced have been fully indexed to inflation since January 1, 2000.

Deferral of Capital Gains Through Transfers to a Spouse, Spousal Trust or Family Trust

Generally, if an individual transfers capital property to a spouse or a spousal trust there is no capital gain at the time of the transfer. The capital property is deemed to have been disposed of by the individual at its undepreciated capital cost for depreciable property or its adjusted cost base for other types of property, and to have been acquired by the spouse or spousal trust for an amount equal to those deemed amounts. This provides a deferral of the capital gain until the disposition of the property by the spouse or until the transferee spouse dies.

Property transferred to other family members or to unrelated individuals (or to trusts of which they are beneficiaries) is treated differently. The transferor is generally deemed to have disposed of the property at the time of transfer at fair market value and must include any resulting capital gain in income at that time.

In the case of property transferred to a trust (other than a spousal trust), capital gains are generally considered to be realized at the time of the transfer on the basis of the fair market value of the property at that time. In addition, the capital property of trusts (other than for spousal trusts) is generally subject to a deemed realization every 21 years at the fair market value of the assets.

No data are available.

Infirm Dependant Credit

The infirm dependant credit provides tax relief to individuals providing support to an infirm adult relative who lives in a separate residence. More specifically, the infirm dependant credit may be claimed by taxpayers supporting a child or grandchild 18 years of age or over, parent, grandparent, brother, sister, aunt, uncle, niece or nephew who is dependent due to a mental or physical infirmity. The amount the supporting relative can claim depends on the net income of the dependant.

For the 2004 taxation year, the credit is 16 per cent of $3,784. The credit is reduced when the dependant’s net income exceeds $5,368 and is fully phased out when his or her income reaches $9,152. Both the credit amount and the income threshold at which the credit starts to be reduced have been fully indexed to inflation since January 1, 2000.

Spouse or Common-Law Partner Credit

A taxpayer supporting a spouse or common-law partner is entitled to a tax credit of 16 per cent of the spouse or common-law partner amount. In 2004, this amount is $6,803, and the credit is reduced by the dependant’s net income above $681. The amount and the net income threshold have been fully indexed since January 1, 2000.

Eligible Dependant Credit

An "equivalent-to-spouse" tax credit may be claimed in respect of a dependent child under age 18 or a parent or grandparent by taxpayers without a spouse or common-law partner. The amounts of the credit and limitation on the dependant’s income are the same as for the spouse or common-law partner credit. This amount has been fully indexed since January 1, 2000.

Farming and Fishing

$500,000 Lifetime Capital Gains Exemption for Farm Property

A $500,000 lifetime capital gains exemption is available for gains from the disposition of qualified farm property. Qualified farm property is property that is used in the course of carrying on the business of farming and includes real property (e.g. land and buildings); a share of the capital stock of a family farm corporation of an individual or the individual’s spouse; an interest in a family farm partnership of an individual or an individual’s spouse; and eligible capital property (e.g. milk quotas). The $500,000 limit is reduced to the extent that the basic $100,000 lifetime capital gains exemption that was eliminated in 1994 and the $500,000 lifetime capital gains exemption on small business shares have been used. Furthermore, it can be applied only to the extent that the gains exceed cumulative net investment losses incurred after 1987.

Cash Basis Accounting

Individuals engaged in farming and fishing may elect to include revenues when received rather than when earned and deduct expenses when paid rather than when the related revenue is reported. This treatment allows a deferral of income and a current deduction for prepaid expenses. As a result, the measure allows farmers and fishers to better match cash receipts with cash expenses, thereby enabling them to defer paying tax on certain income until the future.

Under the benchmark tax structure, income is taxable when it accrues, and expenses are deductible in the period in which the income to which they relate is earned. The deferral of tax under cash basis accounting, therefore, results in a tax expenditure.

No data are available.

Deferral of Capital Gains Through Intergenerational Rollovers of Family Farms

Sales or gifts of assets to children, grandchildren or great-grandchildren typically give rise to taxable capital gains to the extent that the fair market value exceeds the adjusted cost base of the property. However, capital gains arising on intergenerational transfers of certain types of farm property (i.e. farmland, depreciable property including buildings and eligible capital property such as milk quotas) and shares in a family-farm corporation or interests in a family-farm partnership, may be deferred in certain circumstances until the property is disposed of in an arm’s-length transaction, if the farm property continues to be used principally in a farming business.

No data are available.

Deferral of Capital Gains Through Intergenerational Rollovers of Commercial Woodlots

A taxpayer may make an intergenerational transfer of farm property in Canada on an income tax-deferred, or rollover, basis if the property was principally used in a farming business in which the taxpayer or a family member was actively engaged on a regular and continuous basis.

The operation of a commercial woodlot may, in certain circumstances, constitute a farming business. However, the intergenerational rollovers are generally not available for commercial woodlots because, aside from monitoring, the management of a woodlot may not demand regular and continuous activity. As a result, many commercial woodlot owners would be subject to income tax on intergenerational transfers of their woodlots. If woodlots were harvested prematurely to pay the tax, this would be detrimental to the sound management of the resource.

Where the regular and continuous activity test set out in the existing rollover rules cannot be met, an alternate test is implemented strictly for the purpose of applying those rules to commercial woodlot operations. This test allows an intergenerational rollover where the conditions of the existing rollover rules are otherwise met and the transferor or a family member is actively involved in the management of the woodlot to the extent required by a prescribed forest management plan.

Deferral of Income From Destruction of Livestock

If the taxpayer elects, when there has been a statutory forced destruction of livestock, the income received from the forced destruction can be deemed to be income in the following year. This provision allows for a deferral of income to the following year when the livestock is replaced and, under cash basis accounting, deducted against the deferred income.

The estimates are based on data provided by Agriculture and Agri-Food Canada.

Deferral of Income From Sale of Livestock During Drought Years

Taxpayers may defer recognition of a portion of the income received on the sale of breeding livestock in prescribed regions affected by drought conditions. Such deferred income must be recognized in the first taxation year beginning after the region ceases to be a prescribed drought region.

The estimates are based on data provided by Agriculture and Agri-Food Canada.

Deferral of Income From Grain Sold Through Cash Purchase Tickets

Farmers may make deliveries of grain in a particular year and receive a cash purchase ticket that results in payment for the delivered grain in the following year. This measure allows the farmer to include the value of the cash purchase ticket in income in the year after the ticket is received, when that ticket is exchanged for its cash value. As a result, the farmer is able to defer the taxes payable on the sale of the grain until the year after the cash purchase ticket is received. Under the benchmark tax system, the value of the cash purchase tickets would be included in income in the year that the tickets were received. Consequently, the deferral of taxes through this measure results in a tax expenditure.

Projections are calculated using a historical average growth rate. Since tax expenditures are estimated on a cash-flow basis, an increase in the balance of uncashed grain tickets represents additional income that is being deferred and results in a positive estimate of the tax expenditure. A decrease in the balance of uncashed grain tickets indicates that less income is being deferred and results in a negative tax expenditure. The tax expenditure estimates are based on data obtained from Statistics Canada.

Deferral Through 10-Year Capital Gain Reserve

In general, when an individual sells capital property the full payment is received at the time of the sale. In some cases, however, the individual may receive portions of the payment over a number of years. Under those circumstances, the taxpayer can defer some of the capital gains and the tax payable on them into the future. For most capital property, 20 per cent of the capital gain from the sale must be included in taxable capital gains each year (refer to the "Deferral Through Five-Year Capital Gain Reserve" measure under the "General Business and Investment" subheading). However, if the proceeds derive from the sale of a farm property to a child, grandchild or great-grandchild, only 10 per cent of the capital gain need be included in income each year (i.e. in contrast to 20 per cent over five years, which would normally be the case).

Exemption From Making Quarterly Tax Instalments

Taxpayers earning business income must normally pay quarterly income tax instalments. However, individuals engaged in farming and fishing pay two-thirds of their estimated tax payable at the end of the taxation year and the remainder on or before April 30 of the following year.

No data are available.

Flexibility in Inventory Accounting

Farmers who elect to use the cash basis method of accounting report income when it is earned and expenses when they are incurred. In some instances, however, this may lead to losses that would not have occurred under an accrual system of accounting. This happens because income and expenses are not necessarily matched under the cash basis system. As a result of loss carry-forward and carry-back limitations (i.e. 10 years forward and 3 years back), farmers under the cash basis system may not be able to use these losses to reduce taxable income in some instances. A mandatory inventory adjustment and optional inventory adjustment are provided, which act to reduce the frequency of this outcome.

The value of the tax expenditure is the amount of tax relief associated with the losses that would otherwise have been subject to the time limitations.

No data are available.

Tax Treatment of the Net Income Stabilization Account

The Net Income Stabilization Account (NISA) program allowed farmers to deposit a specified amount of money annually into an individual NISA account. No tax deduction was provided on the deposits. However, they generated matching contributions from the federal and participating provincial governments. Participants were also permitted to deposit annually a specified additional amount into the account that was not matched by governments. Program participants could withdraw funds in lower-income years.

The NISA account had two components. The individual’s deposits were held in Fund 1 and matching government contributions were held in Fund 2. Deposits in Fund 1 earned a 3 per cent interest bonus above the rate established by the financial institution holding the fund, which was deposited into Fund 2. Withdrawals from Fund 2 are taxable and must be reported as investment income (and not as farming income) for tax purposes.

The federal tax expenditure has three elements: the deferral of tax on government contributions to the account; the deferral of tax on the investment income accrued in the account; and the income inclusion of these amounts when withdrawn from the account. The tax expenditure is increased by the amount of tax deferred and reduced by the tax paid on the withdrawals. The estimates provided in the table are made on a current cash-flow basis—that is, they measure the impact on revenues in each of the years under consideration.

Under the Agricultural Policy Framework, NISA and the Canadian Farm Income Program were replaced by the Canadian Agricultural Income Stabilization program (CAIS). Government contributions under NISA, as well as other program elements, ceased as of December 31, 2003. As part of the transition to CAIS, NISA program participants must wind down their NISA accounts commencing March 31, 2004. All funds in participant accounts must be paid out by March 31, 2009. Figures in the tax expenditure report reflect the termination of NISA and the wind-down schedule.

Logging Tax Credit

The 1962 budget noted that as a result of provincial taxes on logging profits (then existing in British Columbia and Ontario), corporations and unincorporated businesses in the forestry industry bore a higher burden of taxation than other industries. The budget proposed a federal tax credit equal to two-thirds of the amount of provincial logging tax paid and expressed the hope that provinces imposing a logging tax would provide a provincial tax credit equal to one-third of the logging tax.

The logging tax credit reduces federal taxes payable by the lesser of two-thirds of any tax on income from logging operations paid to a province and 6²/₃ per cent of income from logging operations in that province. Two provinces currently impose logging taxes that are prescribed by regulation for the purpose of this credit—British Columbia and Quebec. Both provinces also provide a partial credit against provincial income tax in respect of their logging tax.

Quebec Abatement

Under the contracting-out arrangements that were offered to provinces in the mid-1960s for certain federal transfer programs, provinces could elect to receive part of the federal contribution in the form of a tax abatement. Quebec was the only province to elect this arrangement at the time and this has resulted in a 16.5-percentage-point abatement of federal tax for Quebec residents. The 16.5 percentage points are the total of both the 13.5 percentage points of personal income tax abated as an Alternative Payment for Standing Programs and 3 personal income tax percentage points abated for the discontinued Youth Allowance Program.

Transfer of Income Tax Points to Provinces

In 1967, the federal government transferred four tax points of personal income tax collections and one percentage point of the corporate tax to all provinces in place of certain direct cash transfers under the cost-shared program for post-secondary education.

With the 1972 income tax reform, the transferred personal income tax points were equivalent to 4.357 tax points of personal income tax. In 1977, an additional 9.143 percentage points of personal income tax were provided to the provinces in respect of post-secondary education, hospital insurance and medicare programs. In 1996, the value of the personal and corporate income tax points was assigned to be part of a block transfer, along with a cash transfer, called the Canada Health and Social Transfer (CHST). The CHST supported health care, post-secondary education, social assistance and social services, including early childhood development. As part of a restructuring of the CHST effective April 1, 2004, 62 per cent of the value of the CHST tax transfer was assigned to the new Canada Health Transfer (CHT), which provides transfer payments in support of health care. The remaining 38 per cent was assigned to the new Canada Social Transfer (CST), which provides transfer payments in support of post-secondary education, social assistance and social services, including early childhood development.

$200 Capital Gains Exemption on Foreign Exchange Transaction

The first $200 of net capital gains on foreign exchange transactions is exempt from tax.

No data are available.

$1,000 Capital Gains Exemption on Personal-Use Property

Personal-use property is held primarily for the use and enjoyment of the owner rather than as an investment. In calculating the capital gain on personal-use property, if the proceeds of disposition are less than $1,000, no capital gain needs to be reported. If the proceeds exceed this amount, the adjusted cost base (ACB) will be deemed to be a minimum of $1,000, thus reducing the capital gain in situations where the true ACB is less than $1,000.

The 2000 budget introduced rules that prevent the $1,000 deemed adjusted cost base and deemed proceeds of disposition for personal-use property from applying if the property is acquired after February 27, 2000, as part of an arrangement in which the property is donated as a charitable gift.

No data are available.

Deduction of Accelerated Capital Cost Allowance

Capital assets contribute to an unincorporated business’s earnings over several years. Under the benchmark tax system, unincorporated businesses would not be permitted to deduct the entire cost of the asset in the year of acquisition. Instead, they would have an annual deduction for their use of capital assets in order to write off the cost of the asset over its useful life. Determination of the useful life of an asset involves the assessment of a variety of factors, including statistical estimates of the rate of economic depreciation applying to the asset; industry data on the engineering life of the asset and the repairs needed to keep it operating; and the treatment generally accorded to the asset for financial accounting purposes.

For tax purposes, firms calculate their deductions for depreciable capital assets under the statutory limitations provided in the Income Tax Act and Regulations. The rate at which certain assets can be written off for tax purposes is, in some cases, more rapid than would be permitted under the benchmark. This results in a deferral of tax.

Deferral Through Use of Billed Basis Accounting by Professionals

Under accrual accounting, costs must be matched with their associated revenues. In computing their income for tax purposes, however, professionals are allowed to elect either an accrual or a billed basis accounting method. Under the latter method, the costs of work in progress can be written off as incurred even though the associated revenues are not brought into income until the bill is paid or becomes receivable. This treatment gives rise to a deferral of tax.

No data are available.

Deferral Through Capital Gains Rollovers

In certain circumstances, taxpayers may defer the reporting of capital gains for tax purposes. General business rollover provisions may be categorized into three groups:

Involuntary Dispositions

Capital gains resulting from an involuntary disposition (e.g. insurance proceeds received for an asset destroyed in a fire) may be deferred if the funds are reinvested in a replacement asset within a specified period. The capital gain is taxable upon disposition of the replacement property.

Voluntary Dispositions

Capital gains resulting from the voluntary disposition of land and buildings by businesses may be deferred if replacement properties are purchased within a specified period (e.g. a business changing location). The rollover is generally not available for properties used to generate rental income.

Transfers to a Corporation for Consideration Including Shares

Individuals may transfer an asset to a corporation controlled by them or their spouses and elect to roll over any resulting capital gain or recaptured depreciation into the corporation instead of paying tax in the year of sale.

No data are available.

Deferral Through Five-Year Capital Gain Reserve

If proceeds from a sale of capital property are not all receivable in the year of the sale, realization of a portion of the capital gain may be deferred until the year in which the proceeds are received. A minimum of 20 per cent of the gain must be brought into income each year, creating a maximum five-year reserve period.

Investment Tax Credits

Tax credits are available for investments in scientific research and experimental development (SR&ED), exploration activities and certain regions. The tax credits available to individuals for current-year investments range from 10 per cent to 20 per cent. These tax credits may be carried forward up to ten years or back up to three years. The estimates treat the full investment tax credit as a tax expenditure even though tax credits reduce the capital cost of assets for capital cost allowance purposes and the adjusted cost base for capital gains purposes.

Mineral Exploration Tax Credit for Flow-Through Share Investors

Flow-through shares facilitate the financing of exploration by allowing companies to transfer unused income tax deductions to investors. The temporary investment tax credit is available to individuals (other than trusts) investing in flow-through shares before 2006.

The credit is equal to 15 per cent of specified surface "grass roots" mineral exploration expenses incurred in Canada by a corporation and renounced to an individual investor under a flow-through share agreement. A "look-back" rule provides that companies can raise funds by issuing flow-through shares in one calendar year and spend the funds in the following calendar year, while allowing the investor to claim the flow-through deduction and the tax credit in the year the investment occurs.

The credit, which is non-refundable, reduces federal personal income tax otherwise payable by the individual investor.

Partial Inclusion of Capital Gains

Only a portion of net realized capital gains are included in income. The amount of the tax expenditure is the additional tax that would have been collected had the full amount of the capital gains been included in income. The 2000 budget reduced the capital gains inclusion rate from three-quarters to two-thirds effective February 28, 2000. The October 2000 Economic Statement and Budget Update further reduced the capital gains inclusion rate to one-half, effective October 18, 2000.

Taxation of Capital Gains Upon Realization

Capital gains are taxed upon the disposition of property and not on an accrual basis. This treatment results in a tax deferral. Under the benchmark tax system, capital gains would be fully included in income as they accrue.

No data are available.

$500,000 Lifetime Capital Gains Exemption for Small Business Shares

A $500,000 lifetime capital gains exemption is available for gains in respect of the disposition of qualified small business shares. Qualified small business shares are shares of a small business corporation that have been owned by the taxpayer or the taxpayer’s spouse or common-law partner throughout the 24 months previous to the sale. They must be shares in a Canadian-controlled private corporation (CCPC) where more than 50 per cent of the fair market value of the assets of the corporation was used mainly in an active business carried on primarily in Canada or certain shares or debts of connected corporations. The $500,000 limit is available only to the extent that the basic $100,000 lifetime capital gains exemption that was eliminated in 1994 and the $500,000 lifetime capital gains exemption on qualified farm property have not been used, and to the extent that the gains exceed cumulative net investment losses incurred after 1987.

Deduction of Allowable Business Investment Losses

Under the benchmark system, capital losses arising from the disposition of shares and debt instruments are generally deductible only against capital gains. However, a portion of capital losses in respect of shares or debts of a small business corporation (allowable business investment losses) may be used to offset other income. The portion of capital losses that may be so used is the same as the portion of capital gains included in income (i.e. one-half since October 2000). Unused allowable business investment losses may be carried back three years and forward seven years. After seven years, the loss reverts to an ordinary capital loss and may be carried forward indefinitely.

The estimated tax expenditure is the amount of tax relief provided by allowing these losses to be deducted from other income in the year. The tax expenditure is overestimated since it does not reflect the future reduction in tax revenues that would occur if those losses were instead deducted from future capital gains.

Deferral Through 10-Year Capital Gain Reserve

If proceeds from the sale of small business shares to children, grandchildren or great-grandchildren are not all receivable in the year of sale, recognition of a portion of the capital gain realized may be deferred until the year in which the proceeds become receivable. However, a minimum of 10 per cent of the gain must be brought into income each year creating a maximum 10-year reserve period. This contrasts with the treatment of most other property, where the maximum reserve period is five years.

Labour-Sponsored Venture Capital Corporations Credit

Labour-sponsored venture capital corporations (LSVCCs) are investment funds, sponsored by unions or other labour organizations, that make venture capital investments in small and medium-sized businesses. A tax credit is provided to individuals for the acquisition of shares of LSVCCs. For 1998 and subsequent years, the rate of the federal tax credit is 15 per cent, to a maximum credit of $750. With the exception of Alberta and Newfoundland, provinces also provide tax credits for investment in LSVCCs.

Rollovers of Investments in Small Businesses

Individuals are permitted to defer the tax on a capital gain arising from the disposition of shares in a qualified small business investment, to the extent the proceeds are reinvested in shares of another qualified small business. This deferral was previously restricted to $2 million of investment, but this restriction was eliminated in the 2003 budget. An eligible small business investment consists of shares issued from treasury in an active Canadian-controlled private corporation with assets not exceeding $50 million. The reinvestment must take place within a specified period.

No data are available.

Child Disability Benefit

Introduced in the 2003 budget in recognition of the special needs of low- and modest-income families caring for a child with a disability, the Child Disability Benefit (CDB) is a supplement to the Canada Child Tax Benefit (CCTB), and is paid for children who meet the eligibility criteria for the Disability Tax Credit.

The full CDB is provided for each eligible child to families having a net income below the amount at which the National Child Benefit (NCB) supplement is fully phased out. Beyond that income level, the CDB is reduced based on family income at the same rates as the NCB supplement. The CDB amount and income thresholds at which benefits begin to be reduced are indexed to inflation.

For the July 2004 to June 2005 program year, the full CDB is $1,653. The family net income threshold at which the CDB begins to be phased out is $35,000. Benefits are reduced at the same rates as those for the July 2003 to June 2004 program year.

Disability Tax Credit

The Disability Tax Credit (DTC) provides tax relief to individuals who, due to the effects of a severe and prolonged impairment, require extensive therapy to sustain a vital function or are markedly restricted in their ability to perform a basic activity of daily living as certified by a qualified medical practitioner. Individuals are markedly restricted if, even with therapy or the use of appropriate devices and medication, they are blind or unable to perform a basic activity of daily living, or if they require an inordinate amount of time to perform the activity, all or substantially all of the time. The basic activities of daily living are walking; feeding or dressing oneself; perceiving, thinking and remembering; speaking; hearing; and eliminating bodily waste.

This credit can be transferred to a supporting spouse, parent, grandparent, child, grandchild, brother, sister, aunt, uncle, nephew or niece of the individual. For 2004, the credit is 16 per cent of $6,486. The credit amount is indexed to inflation.

Beginning with the 2000 taxation year, families caring for children with severe and prolonged impairments may receive additional tax relief through a supplement to the DTC. The amount of the supplement depends on the amount of child care expenses or attendant care expenses claimed for tax purposes. Both the expense threshold and the supplement amount are indexed to inflation.

For the 2004 taxation year, the supplement is equal to 16 per cent of $3,784 and is reduced dollar-for-dollar by the amount of child care or attendant care expenses in excess of $2,216 claimed for tax purposes.

The tax expenditure estimates and projections reflect both the DTC and the DTC supplement for children.

Medical Expense Tax Credit

The medical expense tax credit (METC) provides a 16-per-cent credit for qualifying above-average medical- or disability-related expenses incurred by taxpayers on behalf of themselves, a spouse, common-law partner or dependent relative. For the purposes of the METC, a dependant is defined as a child, grandchild, parent, grandparent, brother, sister, uncle, aunt, niece or nephew who is dependent on the taxpayer for support.

For the 2004 taxation year, medical expense claims made on behalf of a spouse or common-law partner or, based on Budget 2004 proposals, minor children will be pooled with the medical expenses of the taxpayer, subject to the taxpayer’s minimum expense threshold (the lesser of 3 per cent of the taxpayer’s net income and $1,813). For these expenses, there is no upper limit on the amount that can be claimed. The dollar threshold (i.e. $1,813) is indexed to inflation.

Under the Budget 2004 proposals, beginning with the 2004 tax year, taxpayers will be able to claim qualifying medical expenses paid on behalf of other dependent relatives (e.g. grandparent, niece, nephew, etc.) that exceed the lesser of 3 per cent of the dependant’s net income and $1,813 (i.e. the threshold for the METC that would apply if the dependant claimed the expenses). The maximum eligible amount that can be claimed on behalf of such dependent relatives will be $5,000.

Non-Taxation of Business-Paid Health and Dental Benefits

Employer-paid benefits for private health and dental plans are not taxable. The 1998 budget provided for the deduction from business income of premiums paid for the coverage of self-employed persons, subject to certain restrictions. The estimates are based on data from Statistics Canada and from an annual survey, Health Insurance Benefits in Canada, conducted by the Canadian Life and Health Insurance Association.

Refundable Medical Expense Supplement

Introduced in the 1997 budget, the refundable medical expense supplement provides assistance for above-average disability and medical expenses to low-income working Canadians. Individuals claiming the refundable medical expense supplement may also claim the non-refundable medical expense tax credit (METC).

For 2004, the maximum supplement is the lesser of $562, or 25 per cent of the allowable portion of expenses that can be claimed under the METC, plus, based on Budget 2004 proposals, expenses claimed under the disability supports deduction. The minimum earnings requirement is $2,809, and the family net income threshold at which the supplement begins to be reduced is $21,301. The supplement amount, the minimum earnings threshold and the family net income threshold are indexed to inflation.

Income Maintenance and Retirement

Age Credit

The age credit is provided to individuals age 65 and over. Individuals may claim a tax credit of 16 per cent on an amount of $3,912 for 2004. The credit is income-tested: the age amount is reduced by 15 per cent of net income in excess of $29,124 for 2004. The age amount is indexed to inflation. Any unused portion of the credit may be transferred to a spouse or common-law partner.

Deferred Profit-Sharing Plans

As for registered pension plans (RPPs) and registered retirement savings plans (RRSPs), a deferral of tax is provided on savings in deferred profit sharing plans (DPSPs). Employers may make tax-deductible contributions to a DPSP on behalf of their employees: the contribution is not immediately taxed in the hands of the employee, and the investment income is not taxed as it is earned. Withdrawals are taxable in the hands of the employee. Employer contributions are limited to 18 per cent of the employee’s earned income up to one-half of the money purchase RPP dollar limit for the year ($8,250 for 2004). Total contributions to a DPSP and money purchase RPP are limited to 18 per cent of the employee’s earned income up to the money purchase RPP dollar limit for the year ($16,500 for 2004).

No data are available.

Non-Taxation of Certain Amounts Received as Damages in Respect of Personal Injury or Death

Amounts received in respect of damages for personal injury or death and awards paid pursuant to the authority of criminal injury compensation laws are not taxable. In addition, investment income earned on personal injury awards is excluded from income until the end of the year in which the person reaches the age of 21.

The values reported in the tables understate the tax expenditure since they are based on awards paid by provinces’ Criminal Injuries Compensation Boards only. No data were available for compensation awards paid by other sources, or regarding the investment income earned on awards by individuals under age 22.

Non-Taxation of Guaranteed Income Supplement and Allowance Benefits

The Guaranteed Income Supplement (GIS) is an income-tested benefit payable to Old Age Security (OAS) pensioners. The Allowance also provides income-tested benefits to an eligible spouse, common-law partner, widow or widower aged 60 to 64. GIS and Allowance benefits are non-taxable. Although these benefits must be included in income, an offsetting deduction from net income is provided. This approach effectively exempts such payments from taxation while ensuring that they are taken into account in determining other income-tested credits and benefits.

The estimates are based on tax data and information from the Department of Social Development.

Non-Taxation of Investment Income on Life Insurance Policies

The investment income earned on some life insurance policies is not taxed as income to the policyholder. Instead, for reasons of administrative convenience, insurance companies are subject to tax on such earnings.

No data are available.

Non-Taxation of RCMP Pensions/Compensation in Respect of Injury, Disability or Death

Pension payments and other compensation received in respect of an injury, disability or death associated with service in the Royal Canadian Mounted Police are non-taxable.

No data are available.

Non-Taxation of Social Assistance Benefits

Social assistance benefits must be included in income. However, an offsetting deduction from net income is provided. This approach effectively exempts such benefits from taxation while ensuring that they are taken into account in determining income-tested credits and benefits.

Non-Taxation of Up to $10,000 of Death Benefits

Up to $10,000 of death benefits paid by an employer to the spouse or common-law partner of a deceased employee is non-taxable.

No data are available.

Non-Taxation of Veterans’ Allowances, Civilian War Pensions and Allowances, and Other Service Pensions (Including Those From Allied Countries)

These amounts are not included in income for tax purposes.

The estimates are based on Public Accounts data.

Non-Taxation of Veterans’ Disability Pensions and Support for Dependants

These amounts are not included in income for tax purposes.

The estimates for this item are based on Public Accounts data.

Non-Taxation of Workers’ Compensation Benefits

Workers’ compensation benefits have been non-taxable since the first Workers’ Compensation Boards were established in 1915. Prior to 1982, workers’ compensation payments were excluded from income. Since the 1981 budget, workers’ compensation benefits must be included in income. However, an offsetting deduction from net income is provided. This approach effectively exempts such benefits from taxation while ensuring that they are taken into account in determining income-tested credits and benefits.

Pension Income Credit

A 16-per-cent tax credit is provided on the first $1,000 of qualifying pension income. Any unused portion of the credit may be transferred to a spouse or common-law partner.

Registered Pension Plans and Registered Retirement Savings Plans

A deferral of tax is provided on contributions to registered pension plans (RPPs) and registered retirement savings plans (RRSPs) in order to encourage and assist Canadians to save for retirement. Contributions to these plans are deductible from income, the investment income is not taxed as it accrues, and all withdrawals and benefit payments are included in income and taxed at regular rates.

Annual contributions to RRSPs and money purchase (or defined contribution) RPPs are limited to 18 per cent of earned income up to a dollar maximum of $15,500 and $16,500 respectively for 2004. For defined benefit plans, the maximum annual pension limit per year of service is 2 per cent of earnings up to $1,833. The dollar limits on RPP and RRSP contributions will increase to $18,000 by 2005 and 2006 respectively. The maximum pension benefit for defined benefit RPPs will increase to $2,000 in 2005. The limits will be indexed to average wage growth in subsequent years.

The 18 per cent of earnings limit is comprehensive and applies to all tax-deferred saving, whether in RPPs, RRSPs or both. This is achieved through the pension adjustment (PA), which reduces an RPP member’s RRSP limit by the amount of annual saving in the RPP. Unused RRSP room may be carried forward to future years.

Table 1 of the annual Tax Expenditures and Evaluations report provides cash-flow estimates of the tax expenditure on RPPs and RRSPs, and supplements those estimates with a present-value estimate. The cash-flow tax expenditure is a measure of the net revenue forgone by the government in a given year, taking into account the tax forgone on the contributions and investment income and the tax collected on withdrawals in that year. The present-value tax expenditure is a measure of the net revenue forgone in today’s dollars due to the contributions made in a given year, taking into account the fact that the deferred tax will be collected in the future when the contributions and investment income earned on them are withdrawn. More precisely, the estimate adds together the cost of the deduction incurred today for the contributions and the discounted cost of the non-taxation of the accrued investment income earned on those contributions, and then it subtracts the discounted revenue stream received when the contributions and the investment income are withdrawn. The methodology underlying the present-value tax expenditure estimates is set out in detail in the 2001 Tax Expenditures and Evaluations report.

The cash-flow estimates are based on actual levels of RPP and RRSP contributions and withdrawals reported for individuals in the tax data and on employer RPP contributions reported in the Statistics Canada publication Canada’s Retirement Income Programs (74-507-XPE). Changes in actual asset levels—after accounting for contributions and withdrawals—are used to derive the amount of investment income for the year. RPP and RRSP asset levels are based on estimates reported by Statistics Canada in Canada’s Retirement Income Programs and on data from the Survey of Financial Security (SFS).

For the cash-flow projections, past growth trends are used to project values of contributions and withdrawals. Estimates of the 10-year government bond rate are used to grow asset values over the projection period. The projected values of RPP and RRSP contributions used for the cash-flow tax expenditure projections are also used for the projections of the present-value tax expenditure.

The tax rates used to compute the estimates and projections are federal average tax rates. That is, they reflect, for example, the amount of tax that would have been paid on RRSP and employee RPP contributions, as a percentage of those contributions, had the contributions not been deductible. The average tax rate on employee RPP contributions is applied to total RPP contributions, including the employer portion, since ultimately employer contributions to RPPs can be viewed as forgone employee compensation. This may slightly understate the tax expenditure on RPP contributions since the employer portion is not included in the determination of the average tax rate (it would be difficult to properly impute employer contributions to individuals). For plan payouts, the tax rates reflect the amount of tax paid on withdrawals as a percentage of those withdrawals. The average tax rates used to compute the tax forgone on investment income are those applied to the contributions, adjusted to reflect the fact that a portion of the investment income accrues to retired individuals who face lower average tax rates than contributors.

Subject to specified limits and repayment periods, the Home Buyers Plan (HBP) and the Lifelong Learning Plan (LLP) allow tax-exempt withdrawals from RRSPs to promote home ownership and skills enhancement respectively. The HBP allows first-time homebuyers to withdraw up to $20,000 to purchase a home. Participants are required to repay the amount withdrawn to their RRSPs in equal instalments over 15 years. Any amount not repaid for a year is included in the participant’s income for tax purposes. The LLP allows individuals to withdraw up to $20,000 over four years to finance full-time training or education. Amounts withdrawn must be repaid in equal instalments over 10 years. As under the HBP, any amount not repaid for a year is included in the participant’s income for tax purposes. The tax expenditure costs of both the HBP and the LLP are reflected in the overall RRSP tax expenditure, since it would be difficult to attribute specific portions of aggregate RRSP contributions to the existence of these two programs.

Saskatchewan Pension Plan

Contributions to the Saskatchewan Pension Plan are deductible up to the lesser of $600 or the amount of unused registered retirement savings plan room in a particular year.

Treatment of Alimony and Maintenance Payments

As of May 1, 1997, child support paid pursuant to a written agreement or court order made on or after that day is neither deductible to the payer nor included in the income of the recipient. Child support paid pursuant to a court order or written agreement made before that date continues to be deductible to the payer and included in the income of the recipient, unless the agreement is varied. Spousal support payments remain deductible by the payer and are included in the income of the recipient.

The estimates for this item are computed as the value of the deduction to the payer, less the tax collected from the recipient.

Other Items

Deduction Related to Vows of Perpetual Poverty

Where, during a taxation year, an individual is a member of a religious order and has taken a vow of perpetual poverty, the individual may deduct in computing taxable income an amount equal to the total of their superannuation or pension benefits and earned income for the year, if that amount is paid in the year to the order. These amounts do not qualify for the charitable donations tax credit.

Deduction for Clergy Residence

Where a member of the clergy is supplied living accommodation by his or her employer or receives housing allowances, an offsetting deduction may be claimed to the extent that this benefit is included in income. The taxpayer must be a full-time member of the clergy or a regular minister of a religious denomination. The estimate for this item is based on the number of clergy in Canada and Statistics Canada expenditure data on rent.

Non-Taxation of Capital Gains on Principal Residences

Capital gains realized on the disposition of a taxpayer’s principal residence are non-taxable. To compute the cost of the tax expenditure, capital gains were determined using the average prices of Multiple Listing Service listed houses, adjusted to include expenditures on capital repairs and major additions and renovations, obtained from Statistics Canada’s Consumer Expenditure Survey. The holding period for principal residences was derived from 1981 census data.

Estimates for this item are provided for partial and full inclusion rates for capital gains.

Non-Taxation of Income From the Office of the Governor General

This income is exempt from personal income taxation.

The estimates are based on Public Accounts data.

Non-Taxation of Income of Indians on Reserves

Section 87 of the Indian Act exempts the personal property of status Indians and Indian bands from taxation if such personal property is situated on a reserve. Courts have held that the term "personal property" includes income. Determining whether income is situated on a reserve requires an examination of the factors that connect it to a reserve. With respect to employment income, for example, a key factor is the location (on or off a reserve) at which the employment duties were performed.

No data are available.

Special Tax Computation for Certain Retroactive Lump-Sum Payments

The 1999 budget permitted taxpayers receiving qualifying retroactive lump-sum payments to use a special mechanism to compute the tax on those payments. To be eligible for the special tax calculation, the right to receive the income must have existed in a prior year. In addition, the principal portion of the lump-sum payment must be at least $3,000, and must have been received in any year after 1994.

The tax expenditure under this item is equal to the difference between the tax that would be owed on the principal portion of eligible retroactive lump-sum payments if they were taxed in the year received and the tax computed under the special mechanism. The tax under the special mechanism is the federal tax that would have been payable if the principal portion of the retroactive lump-sum payment had been taxed in the year to which it relates, plus interest to reflect the delay in receiving the tax. There is no tax expenditure associated with the interest element of any lump-sum payment because it is fully included in income for the year in which it is received.

Memorandum Items

Avoidance of Double Taxation

Dividend Gross-Up and Credit

Dividends received from taxable Canadian corporations are "grossed up" by a factor of one-quarter and included in income. A tax credit equal to 13.33 per cent of the grossed-up amount is then provided, which fully or partially offsets the tax paid on this income at the corporate level. This results in the tax system being "fully integrated" at the small business level, as (on average across provinces) the dividend tax credit fully offsets the tax paid at the corporate level.

Foreign Tax Credit

In order to avoid double taxation, a tax credit is provided in recognition of income taxes paid in foreign countries.

Non-Taxation of Capital Dividends

Private corporations may distribute the exempt one-half of any realized capital gains accumulated in their "capital dividend account" to their shareholders in the form of a capital dividend. This dividend is non-taxable. This measure is reported as a memorandum item since it contributes to the integration of the taxation of corporate and personal income.

No data are available.

Recognition of Expenses Incurred to Earn Income

Child Care Expense Deduction

Child care expenses incurred for the purpose of earning business or employment income, taking an occupational training course, pursuing part-time education or carrying on research for which a grant is received are deductible, up to a limit. The deduction may not exceed the lesser of $7,000 per child under age 7 (or prior to 2000, a child eligible for the disability tax credit [DTC]) and $4,000 per child between 7 and 16 years of age, or older, if infirm; two-thirds of earned income for the year (not applicable to single-parent students); and the actual amount of child care expenses incurred. The 2000 budget enhanced the child care expense deduction for families with a child having a disability by increasing the deduction limit to $10,000 from $7,000 for a child eligible for the DTC.

The spouse with the lower income must generally claim the deduction. However, the higher-income parent may claim a deduction if the lower-income parent is infirm, confined to a bed or a wheelchair, in prison or attending a designated educational institution on a full-time basis.

Deduction of Carrying Charges Incurred to Earn Income

Interest and other carrying charges, such as investment counselling fees and safety deposit box charges, incurred to earn business or investment income are deductible.

Deduction of Union and Professional Dues

Union and professional dues are fully deductible from income. The mandatory nature of these payments leads to their classification as expenses incurred to earn income.

Disability Supports Deduction (Formerly the Attendant Care Deduction)

Prior to 2004, taxpayers eligible for the disability tax credit who required attendant care in order to earn business or employment income or, after 2000, to attend a designated educational institution or a secondary school were able to deduct the cost of that care under the attendant care deduction. Budget 2004 proposed to replace the attendant care deduction with a broader disability supports deduction, which will recognize attendant care as well as other disability supports expenses incurred for education or employment purposes, unless they have been reimbursed by a non-taxable payment (e.g. insurance payment). Individuals will not have to be eligible for the disability tax credit in order to claim the deduction.

For those earning employment or business income, the disability supports deduction will be limited to the lesser of:

• the amounts paid for eligible expenses; and
• the taxpayer’s earned income.

For those attending school, the deduction will be limited to the lesser of:

• the amounts paid for eligible expenses; and
• the taxpayer’s earned income plus the least of:

• the taxpayer’s non-employment income net of other deductions (i.e. the difference between the taxpayer’s net income without taking the proposed disability supports deduction into account and the taxpayer’s earned income);
• $375 times the number of weeks in school; and
• $15,000.

In other words, the deduction will generally be limited to the lesser of the amounts paid for eligible expenses and the taxpayer’s earned income, which includes wages, self-employment income and scholarships.

For students, the deduction will be limited to the lesser of the amounts paid for eligible expenses and the student’s earned income plus an additional amount equal to the lesser of $375 times the number of weeks in school (up to a maximum of 40 weeks) and the student’s other income net of other deductions.

The limit for students allows those who pay for disability supports in order to attend school with income other than earnings or scholarships to benefit from the deduction.

The effect of the new deduction will be that no income tax will be payable on income (including government assistance) used to pay for these expenses, and that this income will not be used in determining the value of income-tested benefits.

Moving Expense Deduction

Most reasonable moving expenses incurred to earn employment or self-employment income at a new location (e.g. transportation, meals and temporary accommodation, cost of selling a former residence) are deductible from earnings or business income received after the move if the taxpayer moves at least 40 kilometres closer to the new place of employment or study. The deduction has to be claimed in the year or in the following year if it exceeds earnings at the new location in the year of the move. Prior to 1998, most moving expense reimbursements provided by employers were not included in income. The 1998 budget included certain employer-provided reimbursements in income, and allowed an offsetting deduction to the same extent as permitted for self-paid expenses. The 1998 budget also expanded the definition of relocation costs eligible for deduction.

The estimates do not include non-taxable reimbursements received from employers.

Loss Offset Provisions

Capital Loss Carry-overs

Net capital losses may be carried back three years and forward indefinitely to offset capital gains of other years. The only data that are available are prior years’ losses carried forward to the current year to reduce taxes payable. The estimates do not include current-year losses carried forward or back to other taxation years, nor do they include future losses carried back to the taxation year in question.

Farm and Fishing Loss Carry-overs

Farm and fishing losses may be carried back 3 years and forward 10 years. The only data that are available are prior years’ losses carried forward to the current year. As a result, the estimates do not include current-year losses carried forward or back to other taxation years, nor do they include future losses carried back to the taxation year in question. The estimates do not include losses carried over by part-time farmers.

Non-Capital Loss Carry-overs

Non-capital losses may be carried back three years and forward seven years to offset other income. The 2004 budget proposed increasing the non-capital losses carry-forward period from seven to ten years for losses that arise in taxation years that end after March 22, 2004.

The only data that are available are prior years’ losses carried forward to the current year to reduce taxes payable. Thus, the cost estimates may understate the true amount of revenue forgone because they do not include current-year losses carried forward or back to other taxation years nor do they include future losses carried back to the taxation year in question.

Social and Employment Insurance Programs

Canada Pension Plan and Quebec Pension Plan Employee-Paid Contribution Credit/Non-Taxation of Employer-Paid Premiums

A 16-per-cent tax credit is provided for Canada Pension Plan/Quebec Pension Plan contributions by both employees and the self-employed. Employer-paid premiums are not included in the employee’s income.

Effective January 1, 2001, self-employed individuals may deduct the portion of Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) contributions that represents the employer’s share.

Employment Insurance Contribution Credit/Non-Taxation of Employer-Paid Premiums

A 16-per-cent tax credit is provided for employment insurance (EI) contributions. Employer-paid premiums are not included in the employee’s income.

Other

Basic Personal Credit

All taxpayers qualify for a basic personal credit equal, in 2004, to 16 per cent of $8,012. This amount is indexed to inflation.

Supplementary Low-Income Credit

The 1998 budget proposed a supplement of $500 to the basic personal, spousal and equivalent-to-spouse non-refundable tax credits for low-income tax filers. The supplementary amount for a single individual was reduced by 4 per cent of income in excess of $6,956. The total amount available to an individual with an eligible dependant was reduced by 4 per cent of the filer’s income minus the total of $6,956 and the dependant’s adjusted income. The 1999 budget extended the benefit of this credit to all taxpayers through the basic personal and spousal/equivalent-to-spouse credits effective July 1, 1999.

Deduction of Farm Losses for Part-Time Farmers

Part-time farmers who elect to use cash basis accounting report income when it is received and expenses when they are incurred. In some instances, however, this may limit their ability to match expenses and resulting farming losses to related farming income.

Consequently, part-time farmers are allowed to apply farming losses to other sources of income up to a limit. Their farming losses deductible in a year are restricted to a maximum of $8,750. The portion of their losses not usable in a year can be carried forward 10 years or back 3 years.

Estimates consist of the revenue impact of allowing losses of previous years to reduce income tax payable in the current year.

Deduction of Other Employment Expenses

Employees generally cannot deduct work-related expenses. However, specific employment expenses are deductible in certain circumstances in the computation of income. This provision is a memorandum item because it is not possible to distinguish the proportion of these expenses that is used for personal consumption and the proportion that is incurred in order to earn income.

Deduction of Resource-Related Expenditures

Individuals are entitled to deduct certain expenses associated with the exploration for, and development of, Canadian natural resources. These expenses are deductible if the taxpayer either engages directly in these resource activities or provides financing to a resource company by purchasing "flow-through shares" of the company, which in turn, flows the tax deductions to the taxpayer. Similar treatment applies to intangible costs of certain energy efficiency and renewable energy projects, such as feasibility studies and pre-construction development expenses.

Flow-through shares are a financing mechanism of particular benefit to junior exploration companies and start-up companies in the renewable energy sector, which are often unable to currently use available tax deductions because they do not have taxable income.

A tax expenditure arises when a flow-through share investor is able to use deductions for exploration and development that would otherwise be carried forward by the company that undertook the expenditures for deduction against income at a future time, or might never be utilised. It may also be the direct result of a special provision for junior oil and gas companies whereby expenses that would otherwise be deductible at 30 per cent can be deducted at 100 per cent when transferred using flow-through shares (see "Reclassification of Flow-Through Shares" below). A tax expenditure can also arise where the investor has a higher marginal tax rate than the company. A partially offsetting effect arises upon disposal of the shares due to the cost base of flow-through shares being set at zero, resulting in a higher net gain, or smaller net loss, than in the case of an ordinary share.

The available data do not permit a separation of expenses that are flowed through to investors and those that are incurred directly by individual taxpayers. They also do not reflect the value or timing of the tax deductions forgone by companies issuing flow-through shares. Accordingly, only some portion of the revenue cost of the resource-related expenditures deducted by individual taxpayers represents a tax expenditure. Further, the data for individual taxpayers does not reflect deductions claimed by corporations investing in flow-through shares.

Consequently, it is not possible to accurately estimate the tax expenditure associated with flow-through shares. The estimates reported in the table reflect the revenue cost of resource deductions claimed by individual taxpayers and are therefore classified as a memorandum item.

Reclassification of Flow-Through Shares

The costs incurred by an oil and gas company in exploring for a new reservoir of crude oil or natural gas are generally classified as Canadian exploration expense (CEE) and are deductible at 100 per cent in the year they are incurred. The costs of drilling production wells into a reservoir after it has been discovered are generally classified as Canadian development expense (CDE) and are deductible at 30 per cent on a declining balance basis.

The 1992 budget introduced a measure that allowed for reclassification into CEE of the first $2 million of eligible oil and gas CDE renounced by a company to shareholders under a flow-through share agreement. As CEE, the expense could then be deducted by shareholders at 100 per cent in the first year, rather than 30 per cent. The 1996 budget reduced the limit to $1 million and restricted reclassification to issuing corporations with less than $15 million in taxable capital employed in Canada. These changes were introduced to better focus this incentive on smaller oil and gas companies that have a relatively greater need for assistance in raising new equity capital. The limit on reclassification applies on an annual basis to each company or associated group of companies. Consistent with the treatment of CEE, eligible expenses incurred in the first 60 days of a year are treated as having been incurred in the previous year.

This item is a subset of deductions for resource-related expenditures. It reflects the revenue cost of the deductions claimed by flow-through share investors under this provision, rather than the tax expenditure associated with differences in the timing and value of deductions taken by those investors relative to those forgone by the issuing companies.

Non-Taxation of Lottery and Gambling Winnings

Lottery and gambling winnings are excluded from income for tax purposes.

A number of substantial methodological difficulties call into question the accuracy and utility of estimates of the revenue implications of non-taxation of lottery and gambling winnings. The first methodological difficulty is that the data on payouts/winnings is incomplete. There is solid information on aggregate payouts only for government-run lotteries and bingos. Data on payouts at casinos, video lottery terminals, horseracing, and racetrack slot machines, which constitute a rising share of total spending on gaming, is fragmentary. In addition, no data is available on the payouts/winnings from activities sponsored by charities and other non-government organizations. Second, even if complete information on aggregate payouts were available, the revenue implications of non-taxation still could not be determined with precision. For example, if the benchmark tax system were to include taxation of gambling and lottery winnings, consideration would have to be given to including a deduction for expenses incurred in earning this income, i.e. ticket purchases or wagers/losses. This deduction could be allowed either against all income or against only lottery and gambling winnings. A threshold below which winnings would not be taxable would also be necessary, due to the large administrative cost of taxing very small prizes. In the absence of information on the distribution of prizes and the incomes of winners, the resulting potential tax base is difficult to estimate. Further, it would be impractical to tax some forms of winnings (e.g. slot machines) because of the way in which prizes are paid out.

Another important point to note with respect to the non-taxation of lottery and gambling winnings is that under federal-provincial agreements negotiated in 1979 and 1985, the federal government, in exchange for an ongoing payment, undertook to refrain from re-entering the field of gaming and betting and to ensure that the rights of the provinces in that field are not reduced or restricted.

No estimates are provided.

Non-Taxation of Specified Incidental Expenses

Members of Parliament (MPs), Members of Legislative Assemblies (MLAs), Senators and some other public officials (such as elected municipal officials and judges) receive flat allowances for expenses incidental to their duties. These amounts are not included in income for tax purposes. This provision is a memorandum item because it is not possible to distinguish the proportion of these allowances that is used for personal consumption and the proportion that is for work-related expenses.

Data are available only for the non-taxable allowances provided to MPs, MLAs and Senators. This information is found in the publications Canadian Legislatures and The Canadian Parliamentary Guide.

Non-Taxation of Allowances for Diplomats, Military and Other Government Employees Posted Abroad

Diplomats and other government employees posted abroad receive an allowance to cover the additional costs associated with living outside Canada. These allowances are not taxable. This provision is a memorandum item because it is difficult to determine the extent to which these allowances cover expenses incurred to earn employment income abroad from the portion that contains elements of personal consumption.

Information on total allowances was obtained from the Treasury Board of Canada Secretariat.

Partial Deduction of Meals and Entertainment Expenses

Meals and entertainment expenses are considered to be a memorandum item because the amount that should be deductible under a benchmark tax system is debatable. While a portion of these expenditures is incurred in order to earn income, there is an element of personal consumption associated with these expenditures. Consequently, only a partial deduction for these expenses would be permitted under the benchmark tax system.

Generally, the deduction is limited to 50 per cent of the cost of food, beverages and entertainment in order to reflect the personal consumption portion of these costs. The estimates provided reflect the additional tax revenue that would be received if no deduction were allowed (i.e. if it were considered that there was no business purpose to the expenditure).

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