Table 1
Personal Income Tax Expenditures* †

Notes:

^[1]  The decline in the tax expenditure in 2001 reflects both the decline in capital markets after the year 2000 and the reduction in the normal capital gains inclusion rate from three-quarters to one-half in 2000.

The total tax expenditure cost to the Government of this measure has two components: the revenue forgone as a result of the reduced inclusion rate (which is shown in the main table) and the increased cost of the charitable donations credit from any increase in donations that result from the measure. If all donations of listed securities and ecologically sensitive land would have been made in the absence of this measure, then (as shown in the main table) the total cost ranges from $6 million to $19 million between 1999 and 2006. If, on the other hand, all donations of listed securities and ecologically sensitive land came about as a result of the reduced inclusion rate on capital gains, and if in the absence of the measure the shares and land would have been sold instead of donated, then the cost of the measure ranges from $42 million to $80 million between 1999 and 2006, as shown below (in millions of dollars):

The true costs fall somewhere between the lower and upper bounds set by the ranges indicated. [Return]

^[2] The tax expenditure after 1999 reflects the reduction in the normal capital gains inclusion rate from three-quarters to one-half in 2000.

The total tax expenditure cost to the Government of this measure has two components: the revenue forgone as a result of the reduced inclusion rate (which is shown in the main table) and the increased cost of the charitable donations credit from any increase in donations that result from the measure. If all donations of cultural property would have been made in the absence of this measure, then (as shown in the main table) the total cost ranges from $9 million to $14 million between 1999 and 2006. If, on the other hand, all donations of cultural property came about as a result of the reduced inclusion rate on capital on capital gains, and if in the absence of this measure the property would have been sold instead of donated, then the cost of the measure ranges from $38 million to $72 million between 1999 and 2006, as shown below (in millions of dollars):

The true costs fall somewhere between the lower and upper bounds set by the ranges indicated. [Return]

^[3]  The increase in 2000 reflects two factors. First, starting in 2000, the first credit threshold was increased from $100 to $200. Second, there was a federal general election in 2000 and, as historical data show, the level of political contributions increases significantly during an election year. The projected increase in 2004 reflects three factors. First, starting in 2004, the three credit thresholds are increased by $200 each. Second, An Act to amend the Canada Elections Act and the Income Tax Act, which received Royal Assent on May 14, 2004, enables additional political parties to become registered and eligible for the tax credit. Finally, there was a federal general election in 2004. [Return]

^[4] The October 2000 Economic Statement and Budget Update increased the education credit to $400 per month for full-time students and $120 per month for part-time students, effective January 1, 2001. The 2001 budget introduced a measure that extends the education credit, beginning in 2002, to people who receive taxable assistance for post-secondary education under certain government programs. Budget 2004 proposed that beginning in taxation year 2004, the education 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. [Return]

^[5] The 2000 budget raised the exemption for scholarship, fellowship and bursary income from $500 to $3,000 for students eligible for the education credit. In addition, for 2000 and later tax years, the tax expenditure reflects the additional funds made available to students under the Canada Millennium Scholarship Foundation. [Return]

^[6] The tax expenditure equals the tax revenue forgone on the tax-sheltered income earned on RESP assets, minus the revenue from taxing withdrawals of income from RESPs (as an Educational Assistance Payment or Accumulated Income Payment). The estimates and projections for RESPs are higher than in last year’s publication due to better data on the income levels of RESP subscribers. The projections include the anticipated impact of the Canada Learning Bond, starting in 2004, and an enhanced Canada Education Savings Grant, starting in 2005, which were proposed in the 2004 budget. [Return]

^[7] This measure was proposed in the 2004 budget. [Return]

^[8] Increases in the tax expenditure after 1999 reflect the higher value of the stock option deduction, which was increased to 50 per cent in 2000 to reflect the reduced inclusion rate for capital gains. The results for 2000 and, to a lesser extent, 2001 were also affected by market appreciation, especially in the technology sector, as well as increased take-up. Projections for 2003 and subsequent years reflect an assumption of reduced market volatility and reduced take-up due to non-tax considerations. [Return]

^[9] Although the program year is July-June, payments are reported on a calendar year basis. The 2000 budget and the October 2000 Economic Statement and Budget Update fully indexed the CCTB starting January 2000, increased the per-child benefit amounts and the National Child Benefit (NCB) supplement and CCTB base benefit phase-out thresholds and, effective July 1, 2004, reduced the CCTB base benefit phase-out rates. The 2003 budget increased the NCB supplement, beyond indexation adjustments, by an annual amount of $150 per child in July 2003, $185 in July 2005 and $185 in July 2006. The projections for 2003 to 2006 do not include the projections for the Child Disability Benefit, which are shown separately. [Return]

^[10] The October 2000 Economic Statement and Budget Update increased the amount on which the caregiver and infirm dependant credit are based from $2,386 in 2000 to $3,500 in 2001. The amount is indexed to inflation for subsequent years. [Return]

^[11] The spouse or common-law partner credit was previously known as the spousal credit. The eligible dependant credit was previously known as the equivalent-to-spouse credit. [Return]

^[12] The decline in this tax expenditure after 1999 reflects, in part, reductions to the inclusion rate for capital gains from three-quarters to one-half in 2000. [Return]

^[13]  The projected tax expenditure for 2004 is slightly higher than in other years due to the effects of the outbreak of avian flu in British Columbia. Because this provision is a deferral measure, the deferred income from 2004 will be reported in 2005, resulting in a negative tax expenditure that year. [Return]

^[14]  Estimates are based on Statistics Canada data available up to 2003, which include cash purchase tickets for wheat, barley, oats, canola, flax and rye. Projections after 2003 are calculated using a historical average growth rate. [Return]

^[15] The data for the Net Income Stabilization Account (NISA) program are observed up to 2003. Since NISA has been replaced by the Canadian Agricultural Income Stabilization (CAIS) program, tax expenditure projections reflect wind-down provisions that require amounts in NISA accounts be withdrawn by March 31, 2009. Projections also reflect recent data from Statistics Canada indicating that withdrawals from the government portion of NISA accounts reached record levels in the first half of 2004. Farmers extracted $703 million from their government accounts, or over three times the previous five-year average of $232 million. It should also be noted that CAIS does not result in a tax expenditure. [Return]

^[16] Data for unincorporated businesses are not available to estimate this tax expenditure with precision. [Return]

^[17]  The estimates and projections for this tax expenditure are different from those in previous publications due to a change in the methodology for calculating effective marginal tax rates. [Return]

^[18] The estimates and projections have been revised to reflect recent data and a one-year extension announced in the 2004 budget of the temporary measure. The negative figure for 2006 reflects the inclusion in income for that year of an amount equal to the credit claimed in 2005. A deduction for the full amount of the eligible exploration expenditure is allowed for the year for which the credit is claimed. An amount equal to the credit is required to be included in income the following year, however, so as to reverse the deduction in respect of the portion of the expenditure that was effectively paid for by the credit. [Return]

^[19] 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 from two-thirds to one-half, effective October 18, 2000. Increases in this tax expenditure after 1999 reflect reductions to the capital gains inclusion rate as well as anticipated increases in capital gains realizations resulting from changes to this measure. [Return]

^[20]  No data are available, as it is difficult to estimate the value of unsold assets. [Return]

^[21] The decline in this tax expenditure for 2001 and subsequent years reflects the reduction in the capital gains inclusion rate from three-quarters to one-half in 2000. The decline from 2000 to 2001 is also the result of a 28-per-cent reduction in the number of claimants making use of this measure and a 26-per-cent reduction in the average amount of capital gain that they reported for the purpose of this measure. [Return]

^[22] The projections of this tax expenditure for 2002 and 2003 are based on preliminary information on sales of shares of labour-sponsored venture capital corporations (LSVCCs) for those years; the decline in the tax expenditure is the result of reduced sales of LSVCC shares. Projections assume sales remain constant after 2003. [Return]

^[23]  The CDB is delivered as a supplement to the Canada Child Tax Benefit. The CDB came into effect in July 2003. [Return]

^[24] The 2000 budget enhanced the DTC by extending eligibility to individuals requiring extensive therapy and by expanding the list of relatives to whom the DTC can be transferred. The 2000 budget also provided a supplement of up to $500 for children eligible for the DTC. The October 2000 Economic Statement and Budget Update increased the amount on which the DTC is based from $4,293 to $6,000 effective 2001. [Return]

^[25]  The increase in the projected tax expenditure reflects anticipated growth in medical expense claims as well as enhancements to the credit announced in the 2003 and 2004 budgets. [Return]

^[26]  Although this measure does provide tax relief for individuals, it is implemented through the corporate tax system. See "interest credited to life insurance policies" under "other measures" in Table 2 of this report for an estimate of the value of this tax expenditure. [Return]

^[27]  The decline in this tax expenditure after 1999 reflects changes in the 1998 to 2000 budgets and the October 2000 Economic Statement and Budget Update to reduce tax rates for low-income individuals (e.g. increases in the personal amounts and the reduction in the lowest tax rate). [Return]

^[28]  The change in the net tax expenditure for 2001 and 2002 relative to prior years reflects lower observed asset levels and corresponding lower rates of return for those years. In particular, total adjusted assets in RPPs and RRSPs are estimated to have declined from about $1.244 trillion in 2000 to $1.239 trillion in 2001, resulting in a negative return on investment. For 2002, total adjusted RPP/RRSP assets remained virtually unchanged compared to 2001. These lower asset levels significantly lower the tax expenditure associated with the tax forgone on RPP/RRSP investment income, resulting in a substantial decline in the net tax expenditure for both RPPs and RRSPs in 2001 and 2002. This illustrates the importance of the investment income component in determining the net tax expenditure. Since the observed level of RPP and RRSP assets for 1999 to 2002 is used to determine the rate of return on investment, the tax expenditure will naturally vary from year to year, depending on the derived rate of return. Tax expenditure estimates will be higher in years where assets grow strongly, reflecting the tax forgone on that investment income, and lower in years where assets grow slowly or decline. Given the sizeable effect of rate of return variations on the tax expenditure, there could be considerable variation from year to year. [Return]

^[29] The 1999 RRSP assets are based on the estimate reported in Statistics Canada’s Survey of Financial Security (SFS). The ratio of 1999 RRSP assets reported in the SFS to 1999 RRSP assets reported in the Statistics Canada publication Pension Plans in Canada is used to adjust RRSP assets for 2000, 2001 and 2002 to reflect the more comprehensive SFS estimate, which includes funds in self-administered plans (the ratio is $408 billion/ $268 billion or 1.52). [Return]

^[30] The present-value estimates reflect the lifetime cost of a given year’s contributions. This definition is different from that used for the cash-flow estimates, and thus the two sets of estimates are not directly comparable. Further information on how these estimates are calculated is contained in the paper Present-Value Tax Expenditure Estimates of Tax Assistance for Retirement Savings, which was published in the 2001 edition of this report. [Return]

^[31] The present-value tax expenditure projections presented in this year’s report are generally lower than in last year’s report due to changes in projected RPP/RRSP contribution levels and updated estimates of applicable tax rates. [Return]

^[32] The decline in the tax expenditure for the partial inclusion rate for 2001 reflects the reduction in the capital gains inclusion rate in 2000 from three-quarters to one-half. Projected tax expenditures reflect anticipated increases in home resales and resale housing prices. The estimates for this tax expenditure can vary significantly from year to year. This is primarily the result of unanticipated year-to-year fluctuations in the number of residence resales and in the average price of residences. [Return]

^[33]  The 2000 budget increased the deduction limit from $7,000 to $10,000 for children eligible for the disability tax credit. [Return]

^[34] The 2004 budget proposes to replace the attendant care deduction with a broader disability supports deduction, beginning with the 2004 tax year. [Return]

^[35] Projections have been revised downward to reflect market conditions. [Return]

^[36]  This includes employee- and employer-paid premiums by and for self-employed workers. [Return]

^[37] Prior to 2001, self-employed individuals could claim a non-refundable credit at the lowest marginal rate on the employer share of their Canada/Quebec Pension Plan contributions. For 2001 and subsequent years, self-employed individuals may deduct the employer share of their Canada/Quebec Pension Plan contributions paid for their own coverage. The estimates and projections shown are relative to a benchmark system in which no such deduction (or credit) is provided. [Return]

^[38] 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. [Return]

^[39] This tax expenditure applies to a subset of resource-related deductions. Data are available for 1999 to 2003 on the volume of reclassified shares and are used to calculate 1999 to 2001 estimates and the 2002 and 2003 projections. Due to volatility, the projections for 2004 to 2006 are based on a three-year historical average. Return

^[40]  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 are 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. [Return]

^[41]  Allowances for members of Parliament and senators are no longer tax-exempt, effective January 2001. [Return]

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