There are two ways to look at a tax credit: what it saves the taxpayer, and what it costs the government.
Canadian tax filers will figure out what all the deductions, credits and exemptions mean for their households over the next few weeks.
The Department of Finance has already estimated what they’re worth on the federal books.
With final decisions imminent on this spring’s federal budget, the 2017 report on federal tax expenditures looks at what’s on Finance Minister Bill Morneau’s desk as he considers personal income tax changes.
Before they were elected in October 2015, the Liberals promised to review taxes and “target tax loopholes that particularly benefit Canada’s top one per cent.” They projected savings of $500,000 in 2016-17, rising to $3 billion by 2019-20.
This review started last summer, but no conclusions have been released. Maybe that’s what the budget’s for?
Only some moves are large enough to affect the “decades of deficits” Morneau faces.
But size isn’t everything. Even inexpensive tax breaks may be worth phasing out if the Liberals are serious about simplifying the tax code.
Too few claimants? Unmet policy goals? High administration costs? There can be many reasons to shut something down.
The story so far
First came the middle-class tax cut. But Morneau’s first budget didn’t stop there.
Here’s some of what was cut, and what each was worth:
- Income splitting for families with children (also known as the family tax cut) cost about $1.7 billion in each of the two years it was available (2014 and 2015).
- The education tax cut for full-time and part-time post-secondary students is projected to cost $770 million and the textbook tax credit is projected to cost $125 million in their final year (2016.) (The Liberals said this money would be used to boost student grants and loans).
- The children’s arts tax credit, partly phased out for 2016, is worth $30 million, down from $45 million in 2015.
- The children’s fitness tax credit, also partly phased out for 2016, is worth $145 million, down from $210 million in 2015.
The child tax credit, established by the then Conservative government in 2007, was eliminated too. Its $1.6 billion was added to the envelope for the new Canada Child Benefit.
The budget also brought in new measures:
- Exempting feminine hygiene products from the Goods and Services Tax (GST) — the “tampon tax” — costs the government $35 million.
- Introducing the refundable school supplies tax credit for teachers and early childhood educators is worth $25 million.
- Restoring the labour-sponsored venture capital corporation tax credit for purchases of provincially registered funds has an estimated cost of $150 million.
- Boosting the northern residents deduction adds another $50 million for 2016.
So, what’s next?
The Liberals haven’t come through on other campaign pledges.
For instance, their first budget deferred lowering the preferential tax rate for small businesses to nine per cent, from its current 10.5 per cent.
Taxing the first $500,000 that a small business earns at a lower rate than the going corporate tax rate already costs $3.5 billion. Keeping this promise would pack a larger punch.
The Liberals also campaigned on capping the stock option deduction.
They said about three-quarters of the total deductions were going to about 8,000 high-income Canadians who deduct an average of $400,000 from their taxable incomes.
But because stock options help startup companies attract and reward talent, the Liberals took some heat for this idea.
Could they cap annual deductions at $100,000, as they promised, without hurting new business growth?
Left as is, stock option deductions are projected to cost $695 million in foregone revenue in 2016.
Close the boutique?
Then there’s the advice the Department of Finance might be getting.
Two members of Morneau’s tax review panel — Kevin Milligan from the University of British Columbia and Jennifer Robson from Carleton University in Ottawa — published papers arguing against “boutique” tax credits.
Targeted writeoffs for specific groups headlined the former Conservative government’s early budgets.
They may score political points, but they’ve made the tax system more complex, less efficient and more regressive.
Here’s what some of these cost (2016 projections):
- Public transit tax credit: $190 million.
- Canada employment credit (for work-related expenses): $2.3 billion.
- Deduction for tradespeople’s tool expenses: $2 million.
- Volunteer firefighters tax credit: $15 million, and search and rescue volunteers tax credit: $2 million.
The fiscal impact of pension income splitting, also introduced in 2007, is currently about $1.2 billion — but is it too popular among seniors to cut?
Milligan has written in favour of ending the age and pension credits for seniors, and boosting the guaranteed income supplement or old age security instead.
Non-refundable tax credits like these don’t help low-income seniors (who already pay little or no tax.) To avoid only helping wealthier seniors, tax credits need to be refundable.
Finally, there’s the rumour from late last year that the government may start taxing employer-paid health and dental insurance premiums.
It’s easy to see the temptation: Not taxing these benefits may cost the coffers $2.6 billion in 2016.
But Prime Minister Justin Trudeau ruled this out last month.