Table 2
Corporate Income Tax Expenditures*

Notes:

^[1]  Unless otherwise indicated in the footnotes, changes in the projections from those in last year’s edition of this document result from changes in the explanatory economic variables upon which the projections are based. Projections for 2001 and subsequent years reflect the impact of the reduction in the general corporate income tax rate from 28 per cent to 27 per cent on January 1, 2001, 25 per cent on January 1, 2002, 23 per cent on January 1, 2003, and 21 per cent on January 1, 2004. The corporate surtax raises these rates by 1.12 percentage points. [Return]

^[2]  2000 estimates are based on preliminary data. [Return]

^[3]  This treatment should result in a negative tax expenditure since the deduction of an expense incurred to earn income is denied. Under the benchmark tax system, advertising expenses in foreign media incurred to gain or produce income from a business or property would be deductible whether targeted at foreign or domestic markets. [Return]

^[4] This is a tax expenditure because under the benchmark system capital gains would be taxed on an accrual basis. [Return]

^[5]  The tax deferral associated with taxation of capital gains upon disposition of property, rather than on an accrual basis, represents a deviation from the benchmark tax system and is therefore a tax expenditure. [Return]

^[6]  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 for 2000 and 2001 reflect increased capital gains and the reduction in the capital gains inclusion rate. The decline in 2002 reflects a projected decrease in capital gains as well as the reduction in the corporate income tax rate. [Return]

^[7]  This treatment results in a positive tax expenditure because advertising expenses can provide benefits in more than one year. Under the benchmark tax system, advertising expenses would be amortized over the benefit period. The amount of this tax expenditure can fluctuate significantly from year to year depending upon advertising expenses claimed. Therefore it is projected at its historical average. [Return]

^[8]  The tax expenditure amount is the investment tax credit earned and claimed in the year. [Return]

^[9]  The amount of this tax expenditure can fluctuate from year to year depending upon the amount of current-year losses and the availability of income against which to apply these losses. [Return]

^[10]  The increase in the expenditure from 1999 to 2001 is attributable to an increase in taxable income. The reduction in the tax expenditure from 2001 to 2004 results from reductions in the general statutory rate of corporate income tax (the benchmark rate) and a lower growth track for projected taxable income. Projections after 2002 include the positive impact for this tax expenditure of the 2003 budget increase in the amount of income eligible for the small business deduction, and the 2004 budget proposal to accelerate this increase. [Return]

^[11]  This measure was announced in the 2000 budget and became effective January 1, 2001. On that date the general federal corporate income tax rate on income between $200,000 and $300,000 earned by a Canadian-controlled private corporation from an active business carried on in Canada was reduced to 21 per cent. The lower rate on the general income of small businesses and the change in the general federal tax rate effective January 1, 2001, only partially affect the projection for tax year 2001 since many firms reporting income in the 2001 tax year earned a portion of that income in the 2000 calendar year, before the rate reductions were introduced. Declines in the tax expenditure after 2002 are a result of the reduction in the general corporate income tax rate and the increase, announced in the 2003 budget, in the amount of income eligible for the small business deduction. This measure was effectively eliminated on January 1, 2004, when the general corporate income tax rate was reduced to 21 per cent. Some tax expenditure occurs in 2004, however, as many firms reporting income in the 2004 tax year will earn a portion of that income in the 2003 calendar year. [Return]

^[12]  Estimates and projections were computed on the basis of an analysis of payments to non-residents and withholding tax collections available for 1999 to 2002. [Return]

^[13]  The decline in 2002 reflects changes in the payments and exemptions as observed from newly available data. Projections for the 2003 to 2006 period have been revised accordingly. [Return]

^[14]  This category includes interest paid to non-resident persons or organizations that would be exempt from income tax in Canada were they residents in Canada. Also included is interest paid under certain securities-lending arrangements exempt under subparagraph 212(1)(b)(xii) of the Income Tax Act, and interest exempt under certain other domestic and treaty provisions. [Return]

^[15]  This tax credit was introduced in the 2003 budget and applies to 2003 and subsequent tax years. It is phased in starting at 5 per cent in 2003, 7 per cent in 2004 and 10 per cent in subsequent years. [Return]

^[16]  Additions to earned depletion pools were eliminated as of January 1, 1990. Determination of the tax expenditure reflects the projected use of existing earned depletion pools. [Return]

^[17]  The tax expenditure is calculated as the revenue cost of the resource allowance net of non-deductible Crown royalties and provincial mining taxes. Over a five-year period beginning in 2003, the resource allowance is being phased out and a deduction for Crown royalties and mining taxes phased in so that, by 2007, the tax expenditure is effectively reduced to zero. See the technical paper Improving the Income Taxation of the Resource Sector in Canada, Department of Finance, March 2003, for further details. [Return]

^[18]  Budget 2003 announced an extension to resource income of the lower general corporate tax rate, to be phased in over five years beginning in 2003. By 2007, when the resource rate equals the general rate, the tax expenditure amount will be reduced to zero. See the technical paper Improving the Income Taxation of the Resource Sector in Canada, Department of Finance, March 2003. [Return]

^[19]  Projections for 2003 and subsequent years reflect the impact of the 2003 budget proposal to increase the rate of the credit from 11 per cent to 16 per cent. [Return]

^[20]  Credit unions are eligible for the lower federal tax rate of 12 per cent provided to small businesses. The projected increase in 2001 is due to higher taxable income of credit unions. The projections are lower after 2003 due to the increase in the income eligible to the small business tax rate, as announced in the 2003 and 2004 budgets, and the reductions in the general corporate income tax rate. [Return]

^[21]  Although this tax expenditure was eliminated on January 1, 2004, when the general corporate tax rate was reduced to 21 per cent, many firms reporting income in the 2004 taxation year will earn a portion of that income in the 2003 calendar year, before the tax expenditure was effectively eliminated. [Return]

^[22]  This measure expired on October 31, 2000. [Return]

^[23]  The 1999 to 2001 estimates and projections are based on 1999 to 2001 data from the Office of the Superintendent of Financial Institutions and correspond to the estimates and projections published in last year’s tax expenditure publication. [Return]

^[24]  The amount of this tax expenditure can fluctuate significantly from year to year depending primarily upon the level of construction activity. Therefore, it is projected based on its historical average. [Return]

^[25]  This measure allows a public corporation that qualifies as an investment corporation to benefit from elements of the integration system, which are usually available only to private corporations. [Return]

^[26]  The increase in the 2000 tax expenditure is due to a significant increase in the capital gain dividends distribution. The projections decline starting in 2001 due to the reduction in the capital gains inclusion rate, and fall further in 2004 due to declining capital gains. [Return]

^[27]  This tax expenditure includes the additional 6 2/3 per cent refundable tax on investment income as well as, for years after 2000, the Part I tax paid on investment income in excess of the benchmark rate. The increase in this expenditure after 2001 results from the increase in the difference between the Part I tax on investment income and the benchmark rate. [Return]

^[28]  The cost of the Syncrude Remission Order ("Order Respecting the Remission of Income Tax for the Syncrude Project," P.C. 1976-1026, May 6, 1976 [C.R.C. 1978 Vol. VII, c. 794]) is published annually in the Public Accounts of Canada (ISBN 0-660-177792-7). The order expired on December 31, 2003. [Return]

^[29]  The impact of loss carry-overs can fluctuate significantly from year to year depending upon the amount of current and prior years’ losses and the availability of income against which to apply these losses. [Return]

^[30]  The aviation fuel excise tax rebate, which was effective for calendar years 1997 to 2000, provided an excise tax rebate on the aviation fuel used by airline companies. The rebate was limited to $20 million per year per associated group of companies. In order to receive a rebate, a company had to agree to reduce its income tax losses by $10 for every $1 of rebate. [Return]

^[31]  This measure was repealed in 2000. To allow for an orderly restructuring of their operations, however, existing NROs were entitled to retain their status until the end of their last tax year that began before 2003. [Return]

^[32]   Fifty per cent of these expenses are deductible for income tax purposes, given that a portion of meal and entertainment expenses is incurred to earn income and is therefore a legitimate business expense, while the remaining portion reflects personal consumption. The estimates and projections provided reflect the additional tax revenue that would be received if no deduction were allowed. [Return]

^[33]  Patronage dividends are somewhat discretionary and vary from year to year. The projections are generally lower after 2000 to take into account the phased-in reductions in the general corporate income tax rate. The large increase in the 2002 projection is due to larger-than-usual patronage dividends in that year. [Return]

Table 3
GST Tax Expenditures*

Notes:

^[1] The public sector body rebates are based on Canada Revenue Agency administrative data for the years up to and including 2002. The projected values for 2003 onwards are based on the Sales Tax Model of the Department of Finance. This projection methodology differs from that in last year’s publication, and this explains some of the revisions in the projections for 2003 and later years. [Return]

^[2] These refunds are paid to Aboriginal governments that have an agreement providing for a GST/HST refund for goods and services acquired for self-government activities. [Return]

^[3] Final consumers and businesses pay no tax on exempt goods and services. Vendors, however, are not entitled to claim input tax credits to recover the GST/HST paid on inputs to these products. [Return]

^[4] The Sales Tax Model used to generate these estimates and projections is based on the 2000 national input-output tables from Statistics Canada and the latest release of the National Income and Expenditure Accounts. [Return]

^[5] Certain importations are tax-free including, for example, duty-free personal importations by Canadian travellers. [Return]

^[6] The methodology for estimating this tax expenditure was derived as part of the review of the Visitors’ Rebate Program conducted during 1997 and has been updated to reflect more recent information. The reduction in rebates for foreign visitors in 2003 reflects a reduction in the number of foreign visitors to Canada in that year. [Return]

^[7] Final consumers and businesses pay no tax on zero-rated goods and services. Vendors of zero-rated products are entitled to claim input tax credits to recover the GST/HST paid on inputs to these products. [Return]

^[8] Based on personal income tax data. [Return]

^[9] Estimates for the housing rebate are based on information provided by Statistics Canada. The increase in rebates for new housing in 2002 is larger than the increases in 2000 and 2001, reflecting higher numbers of new homes sold as well as increases in the average price of new homes in 2002. For 2003 and subsequent years, the increases in rebates for new housing reflect projected increases in expenditures on new homes. [Return]

^[10] The new residential rental property rebate was introduced in the 2000 budget for new construction or substantial renovation commencing after February 27, 2000. [Return]

^[11] The rebate rate for municipalities was increased from 57.14 per cent to 100 per cent effective February 1, 2004. [Return]

^[12] This item includes the apprentice vehicle mechanics’ tools deduction. [Return]

^[13] Based on tax expenditure estimates and projections reported for the personal and corporate income tax systems. [Return]

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