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 benchmark resulting from the change in the general corporate income tax rate from 28% to 27% on January 1, 2001, 25% on January 1, 2002, 23% on January 1, 2003, and 21% on January 1, 2004. The corporate surtax raises these rates by 1.12 percentage points. [Return]

² 1999 estimates are based on preliminary data. [Return]

³ The increase from 1998 to 2000 is attributable to a large increase in taxable income during this period. The reduction starting in 2001 results from reductions in the benchmark rate and a lower growth track for projected taxable income. Projections for 2003 and subsequent years also reflect the impact of the 2003 budget proposal to increase the amount of income eligible for the small business deduction from $200,000 to $225,000 in 2003, $250,000 in 2004, $275,000 in 2005, and $300,000 in 2006. [Return]

⁴ Although this tax expenditure will be effectively eliminated on January 1, 2004, when the general corporate income tax rate is reduced to 21%, 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 is effectively eliminated. [Return]

⁵ 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%. 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. Subsequent declines in the tax expenditure 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 is effectively eliminated on January 1, 2004, when the general corporate income tax rate is reduced to 21%. 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]

⁶ Credit unions are eligible for the lower federal tax rate of 12% provided to small businesses. [Return]

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

⁸ Projections for 2003 and subsequent years reflect the impact of the 2003 budget proposal to increase the rate of the credit from 11% to 16%. [Return]

⁹ The increase in 2000 and 2001 reflects a projected increase in capital gains and the reduction in the capital gains inclusion rate from three-quarters to one-half during 2000. The reduction after 2001 reflects a projected decrease in capital gains as well as the reduction in corporate income tax rates. [Return]

¹⁰ The tax expenditure is calculated as the revenue cost of the resource allowance net of non-deductible Crown royalties and provincial mining taxes. Budget 2003 proposed changes to the income taxation of the resource sector to be phased in over a five-year period, including the reduction in the corporate statutory rate for income tax applying to income earned from resource activities, the deductibility of royalties and the elimination of the resource allowance, commencing in 2003. During the transition period 2003-2007, the determination of the tax expenditure reflects both the declining tax rate for the resource sector and the proportions of the resource allowance and non-deductible Crown royalties and provincial mining taxes to be established in legislation, so that, by 2007, this tax expenditure amount is effectively reduced to zero. See the technical paper Improving the Income Taxation of the Resource Sector in Canada, Department of Finance Canada, March 2003, for further details. [Return]

¹¹ Additions to depletion pools were eliminated as of January 1, 1990. As a result, the declining value of this tax expenditure reflects the fact that these pools are being drawn down, albeit subject to successor rule limitations where applicable. [Return]

¹² The decline in the tax expenditure in 2001 results from the reduction in the benchmark rate and a decline in the projected taxable income. [Return]

¹³ The non-deductibility of advertising expenses in foreign media represents a negative tax expenditure since the deduction of an expense incurred to earn income is denied. [Return]

¹⁴ The tax measures in this section allow a deferral of income taxes from the current to a later tax year. The publication Tax Expenditures: Notes to the Estimates/Projections provides details on each deferral item. [Return]

¹⁵ 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]

¹⁶ 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 at its historical average. [Return]

¹⁷ This item is referred to as “Available for use” in the publication Tax Expenditures: Notes to the Estimates/Projections. [Return]

¹⁸ 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]

¹⁹ 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]

²⁰ This measure was introduced in 1998. The numbers are now based on data for 1998, 1999 and 2000 received from the Office of the Superintendent of Financial Institutions. [Return]

²¹ Estimates and projections were computed on the basis of an analysis of payments to non-residents and withholding tax collections available for 1999, 2000 and 2001, the last three years for which complete data is available. Figures for 1998 and from 2002 to 2005 are, respectively, backward estimates and forward projections based on the 1999 to 2001 estimates and projections. [Return]

²² 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]

²³ 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]

²⁴ This measure was first introduced in the 1995 budget and extended in subsequent budgets. The temporary tax was not extended beyond its scheduled expiry date of October 31, 2000. [Return]

²⁵ This item includes the additional 6 2/3% 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 after 2001 results from the increase in the difference between the Part I tax on investment income and the benchmark rate. [Return]

²⁶ The larger amounts in 1998 and 2000 are due to a significant increase in the capital gain dividends distribution. The projections are lower after 2000 due to the phased-in reductions in the general corporate income tax rate and the reduction in the capital gains inclusion rate. [Return]

²⁷ 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]

²⁸ Half 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 (i.e., that there is no business purpose to the expenditure). [Return]

²⁹ The estimates are higher in 2004 to take into account the increase in the capital deduction from $10 million to $50 million. Estimates afterward are lower, reflecting the reduction in the federal capital tax rate. Both measures were announced in the 2003 federal budget. [Return]

³⁰ 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). [Return]

³¹ Bill C-22 (An Act to Amend the Income Tax Act and Related Statutes), which contained an amendment to repeal the NRO provisions for elections made after February 27, 2000, received Royal Assent on June 14, 2001 [S.C. 2001, c. 17, s. 131]. To allow for an orderly restructuring of their operations, existing NROs are entitled to retain their status until the end of their last tax year that begins before 2003. However, existing NROs are not allowed to issue new shares, other than by way of reorganization, or increase debt levels, to finance new investments, subject to grandfathering of arrangements in writing entered into before February 28, 2000. [Return]

³² 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]

³³ The taxation of capital gains is affected by provisions that permit taxpayers to defer realization for tax purposes through various rollover provisions. Since the benchmark tax structure includes various rollover provisions that permit the deferral of capital gains when a corporate structure is changed, this item is identified separately for information purposes. [Return]

Table 3 
GST Tax Expenditures* 

Notes:

¹ The national GST base model used to generate these estimates and projections has been updated and is now based on the 1999 national input-output tables from Statistics Canada and the latest release of the National Income and Expenditure Accounts. In some cases, these updates cause significant changes in the estimates and projections, relative to numbers published in preceding publications. [Return]

² This tax expenditure was revised upward as a result of a change in National Accounts methodology. [Return]

³ The upward revisions are based on more recently available municipal data used in the national input-output tables. [Return]

⁴ Rebates paid to governments are not recorded as tax expenditures-the Crown’s constitutional immunity from taxation is part of the benchmark tax system. [Return]

⁵ The housing rebate is based on information provided by Statistics Canada. Revisions from 2002 forward reflect increased investment activity in residential construction. [Return]

⁶ The new residential rental property rebate was introduced in the 2000 budget for new construction or substantial renovations commencing after February 27, 2000. [Return]

⁷ The methodology for estimating this tax expenditure, which was derived as part of a review of the Visitor Rebate Program conducted during 1997, has been updated to reflect more recent information. [Return]

⁸ The public sector body rebates are based on Canada Customs and Revenue Agency administrative data. In some cases, the use of more recent administrative data leads to revisions of these rebates. [Return]

⁹ Since the value of these rebates is influenced by provincial budgetary decisions, the projected values for the relevant years are simply the values estimated for 2001. [Return]

¹⁰ These rebates are offered to Aboriginal governments that have an agreement providing for a GST refund for goods and services acquired for self-government activities. The rebates are based on Canada Customs and Revenue Agency administrative data. [Return]

¹¹ Estimates and projections are based on personal income tax data. [Return]

¹² The numerical approach used to derive the tax expenditure figures is tightly integrated with the tax expenditure estimates and projections reported for the personal and corporate income tax system. [Return]

¹³ This item includes the apprentice vehicle mechanics’ tools deduction. [Return]

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