Tax Expenditures and Evaluations: 2001: 3

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Tax Expenditures and Evaluations: 2001: 3
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Table 2
Corporate income tax expenditures* ^†

Estimates

Projections¹

1996² 1997 1998 1999 2000 2001 2002 2003

($ millions)

Tax rate reductions

Low tax rate for small businesses³ 2,585 2,820 2,880 3,255 4,045 3,910 3,515 3,215

Low tax rate for manufacturing and processing (M&P)⁴ 1,390 1,735 1,710 1,825 2,280 2,030 1,425 810

Low tax rate on general income of small businesses⁵ – – – – – 65 80 50

Low tax rate for credit unions⁶ 41 41 39 43 48 46 41 36

Exemption from branch tax for transportation, communications, and iron ore mining corporations n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Exemption from tax for international banking centres n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Tax credits

Investment tax credits

Scientific research and experimental development investment tax credit 985 1,080 1,085 1,140 1,195 1,255 1,315 1,385

Atlantic investment tax credit⁷ 130 66 105 110 115 120 125 135

Investment tax credits carried back 87 62 79 84 90 95 100 110

Investment tax credits claimed in current year but earned in prior years 725 645 730 775 825 880 935 995

Political contribution tax credit S S S S S S S S

Canadian film or video production tax credit 43 78 87 97 105 110 115 120

Film or video production services tax credit⁸ - S 12 13 14 15 15 16

Exemptions and deductions

Partial inclusion of capital gains⁹ 665 1,130 715 755 1,135 2,005 2,125 2,030

Royalties and mining taxes

Non-deductibility of Crown royalties and mining taxes¹⁰ -385 -340 -405 -440 -1,075 -1,280 -1,155 -845

Resource allowance¹⁰ 520 415 490 530 1,265 1,410 1,265 930

Earned depletion¹¹ 71 33 40 30 20 10 S S

Deductibility of charitable donations 150 165 175 185 210 200 200 210

Deductibility of gifts to the Crown 20 19 14 15 20 19 18 19

Interest on small business financing loans S S S S S – – –

Non-deductibility of advertising expenses in foreign media n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Non-taxation of provincial assistance for venture investments in small business n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Deferrals

Accelerated write-off of capital assets and resource-related expenditures¹² n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Allowable business investment losses¹³ 35 26 34 33 30 25 26 26

Holdback on progress payments to contractors¹⁴ 9 8 10 30 30 30 30 30

Available for use n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Capital gains taxation on realization basis n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Expensing of advertising costs¹⁵ 18 47 47 48 52 53 55 58

Deductibility of contributions to mine reclamation and environmental trusts S S S S S S S S

Deductibility of countervailing and anti-dumping duties¹⁶ – – n.a. n.a. n.a. n.a. n.a. n.a.

Deductibility of earthquake reserves¹⁶ – – 3 5 5 5 5 5

Cash basis accounting n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Flexibility in inventory accounting n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Deferral of income from grain sold through cash purchase tickets 3 S -14 -7 -4 S S S

Deferral of income from destruction of livestock S S S S S S S S

Deferral through use of billed-basis accounting by professionals n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

International

Non-taxation of life insurance companies’ world income n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Exemptions from non-resident withholding tax¹⁷

Copyright royalties 22 24 25 26 27 29 30 32

Royalties for the use of, or right to use, other property 49 52 54 57 60 63 66 69

Interest on deposits 365 390 405 410 420 415 415 430

Interest on long-term corporate debt 690 730 760 765 785 775 780 805

Dividends 110 140 140 155 170 185 205 225

Management fees 22 23 24 25 26 28 29 30

Exemption from Canadian income tax of income earned by non-residents from the operation of a ship or aircraft in international traffic n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Other items

Transfer of income tax room to provinces in respect of shared programs 715 860 895 935 1,215 1,250 1,255 1,330

Interest credited to life insurance policies 74 75 79 81 84 87 90 93

Non-taxation of registered charities n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Non-taxation of other non-profit organizations (NPO)¹⁸ 92 86 89 94 100 105 105 105

Income tax exemption for provincial and municipal corporations n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Non-taxation of certain federal Crown corporations n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Aviation fuel excise tax rebate¹⁹ – n.a. n.a. n.a. n.a. – – –

Surtax on the profits of tobacco manufacturers²⁰ -66 -68 -75 -70 -70 -80 -85 -85

Resource sector tax rate²¹ – – – – – n.a. n.a. n.a.

Temporary tax on the capital of large deposit-taking institutions²² -51 -55 -61 -63 -54 – – –

Memorandum items

Refundable taxes on investment income of private corporations

Additional Part I taxes²³ -315 -500 -505 -520 -515 -510 -635 -800

Part IV tax -1,030 -950 -965 -985 -1,035 -1,080 -1,120 -1,160

Dividend refund 1,510 1,740 1,765 1,805 1,875 1,895 1,955 2,025

Net expenditure 165 290 295 300 325 305 200 65

Refundable capital gains for investment corporations and mutual fund corporations²⁴ 250 370 480 505 465 330 305 270

Loss carry-overs²⁵

Non-capital losses carried back 800 925 935 880 835 990 1,085 1,070

Non-capital losses applied to current year 1,965 2,865 2,480 3,165 3,390 2,915 2,945 3,015

Net capital losses carried back 41 86 80 90 95 85 85 85

Net capital losses applied to current year 285 350 295 315 330 300 295 280

Farm losses applied to current year 8 19 16 17 18 19 19 20

Deduction of meals and entertainment expenses 225 255 255 270 290 280 280 280

Large corporations tax

Threshold 530 545 560 570 580 595 605 615

Exempt corporations n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Patronage dividend deduction²⁶ 215 180 245 275 340 320 310 315

Logging tax credit²⁷ 30 30 28 46 48 49 50 55

Deductibility of provincial royalties (joint venture payments) for the Syncrude project (remission order)²⁸ n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Deductibility of royalties paid to Indian bands n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Non-resident-owned investment corporation refund²⁹ 160 165 170 190 210 210 210 210

Investment corporation deduction S S S S 4 3 S S

Deferral through capital gains rollovers n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Deduction for intangible assets n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Tax exemption on income of foreign affiliates of Canadian corporations n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Notes:

* The elimination of a tax expenditure would not necessarily yield the full tax revenues shown in the table. See the document entitled
Tax Expenditures: Notes to the Estimates/Projections, published in 2000 and available on the Department of Finance Web site (http://www.fin.gc.ca), for a discussion of the reasons for this.

^{† The Economic Statement and Budget Update of October 2000 set out a timetable for fulfilling the government’s commitment to reduce, by 2004, the federal corporate income tax on business income not currently eligible for special tax treatment, from 28 to 21 per cent. Including the corporate surtax, the tax rate used for the benchmark is reduced from 28.12 per cent for 2001 to 26.12 per cent for 2002, and 24.12 per cent for 2003. Since this measure represents a change in the benchmark tax system, there is no tax expenditure associated with this measure. This reduction in the benchmark rate reduces the value of exemptions, deductions and deferrals as well as non-refundable tax credits and tax reductions whose value depend on the benchmark rate.
^{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.
^{2 The 1996 figures are based on final data and may differ from the figures in last year’s edition of this document, which were based on preliminary data.
^{3 The increase in the tax expenditure from 1998 to 2000 is attributable to a large increase in projected taxable income during this period. The decline in the tax expenditure starting in 2001 results from the reductions in the benchmark rate.
^{4 The increase from 1996 to 1997 reflects an increase in the level of M&P profits. The decline in the tax expenditure starting in 2001 results from the reductions in the benchmark rate.
^{5 This measure was announced in the 2000 budget and is effective January 1, 2001. The lower rate on general income of small businesses and the change in the benchmark federal tax rate effective January 1, 2001, only partially affect estimates for taxation year 2001 since many firms reporting income in the 2001 taxation year earned a portion of that income in the 2000 calendar year, before the rate reductions were introduced.
^{6 The estimates are lower after 2000 as a result of the phased-in reductions in the general corporate income tax rate.
^{7 The decrease in 1997 reflects a lower level of earned investment tax credit.
^{8 This measure was introduced in 1997.
^{9 The increase in the tax expenditure from 1996 to 1997 reflects an increase in capital gains. The increase in 2000 and 2001 reflects the net effect of a projected increase in capital gains and the reduction in the capital gains inclusion rate from three-quarters to one-half during 2000.
^{10 Estimates for the non-deductibility of Crown royalties and mining taxes and the resource allowance are highly dependent upon the level of activity in the resource industries. Major differences between the estimates prepared in 2000 and these estimates are due to higher prices for hydrocarbons (i.e. crude oil and natural gas) and increased production in 2000 and subsequent years. Improved data for prior years have also become available. Both series decline after 2001 to reflect the fact that hydrocarbon prices are expected to fall after reaching a peak in that year.
^{11 The lower value for 1997 reflects new data received since the publication of the previous report. Additions to depletion pools were eliminated as of January 1, 1990. The declining value of this tax expenditure reflects the fact that these pools are being drawn down, albeit subject to any limitations imposed by the successor rules.
^{12 This tax expenditure consists of the fast write-off of certain capital assets, including capital equipment used for scientific research and experimental development, of resource exploration and development expenditures and of energy conservation and efficiency equipment. See the document entitled Tax Expenditures: Notes to the Estimates/Projections, published in 2000 and available on the Department of Finance Web site (http://www.fin.gc.ca), for an explanation of why no figures have been calculated.
^{13 The amount of this tax expenditure can fluctuate from year to year depending on the amount of current-year losses and the availability of income against which to apply these losses.
^{14 The amount of this tax expenditure can fluctuate significantly from year to year depending primarily upon the level of construction activity.
^{15 The amount of this tax expenditure can fluctuate significantly from year to year depending upon advertising expenses claimed.
^{16 This measure was introduced in 1998.
^{17 Estimates were computed on the basis of an analysis of payments to non-residents and withholding tax collections available for 1999, the latest year for which complete data were available. Estimates in previous publications were based on similar data for the years 1992-94. Figures for 1996-98 and 2000-2003 are, respectively, backward and forward projections based on the 1999 estimates. These estimates and projections are based on the benchmark assumption that no behavioral response would occur after the hypothetical removal of existing withholding tax exemptions. This assumption is particularly difficult to sustain for this type of tax, as indicated in the document entitled Tax Expenditures: Notes to the Estimates/Projections, published in 2000 and available on the Department of Finance Web site (http://www.fin.gc.ca). Consequently, the amounts shown in the table should not be regarded as estimates and projections of the revenue gain that would be realized from the hypothetical removal of the listed withholding tax exemptions.
^{18 Data were previously unavailable for this expenditure. With a number of years of data now available from the NPO return (introduced from January 1, 1993), it has become possible to produce a tax expenditure estimate for NPOs for the first time.
^{19 This measure was effective for the years 1997 to 2000 inclusive.
^{20 The increase in this tax expenditure from 2000 to 2002 results from the increase in the tobacco manufacturers' surtax from 40 per cent to 50 per cent of the Part I tax on profits from tobacco manufacturing, effective April 6, 2001.
^{21 Corporate income earned in the resource sector is taxed at 29.12%. The benchmark federal tax rate dropped to 28.12% on January 1, 2001, and will decline to 26.12%, 24.12%, and 22.12% on January 1, 2002, 2003, and 2004, respectively. The rate reductions will apply only to sectors that did not benefit from special tax preferences. The resource sector benefits from a number of such preferences (accelerated exploration and development expenses and fast write-offs for certain capital assets, the structure of the resource allowance) that act in conjunction to reduce the effective tax rate on this sector below comparable rates in other sectors, including manufacturing. Accurate measurement of estimates for the tax expenditures would require taking these interactions into account but this is not possible because of methodology and data constraints.
The Department has initiated consultations on options to extend the lower tax rate to this sector while at the same time improving the tax structure.
^{22 This measure was first introduced in the 1995 budget and extended in subsequent budgets. After a review of capital taxes levied on financial institutions, the temporary tax was not extended beyond its scheduled expiry date of October 31, 2000.
^{23 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 for 2002 and 2003 results from the increase in the difference between the Part I tax on investment income and the benchmark rate.
^{24 New estimates are higher than previous publications, due to the availability of new data. The increase in the 1997 tax expenditure is due to a significant increase in the capital gains dividend distribution. The estimates are lower after 2000 to take into account the phased-in reduction in the general corporate income tax rate and the reduction in the capital gains inclusion rate.
^{25 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.
^{26 Patronage dividends are somewhat discretionary and vary from year to year. The lower tax expenditure in 1997 reflects lower patronage dividend distributions. The estimates are lower after 2000 to take into account the phased-in reductions in the general corporate income tax rate.
^{27 The change between last year’s and this year’s estimates reflects improvements in the underlying data and in the forecast of economic activity.
^{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]) has not been estimated for this edition. The costs of this particular remission order are now published annually in the Public Accounts of Canada (ISBN 0-660-177792-7).
^{29 The change between last year’s and this year’s estimates reflects improvements in the underlying data used to estimate the cost of the refund.

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