Hidden Spending: The Fiscal Impact of Federal Tax Concessions

Canada’s federal tax system contains many provisions – deductions, exemptions, deferrals, rebates and credits – that benefit certain taxpayers. Although Finance Canada’s annual report on these provisions is a useful catalogue, it lumps provisions with different purposes and effects under one “tax expenditures” heading. This report distinguishes categories of provisions: • One relates to basic features such as thresholds and rates, and reflects considerations of efficiency and practicality that are common to many tax systems. Measures that alleviate double taxation, such as the dividend tax credit, and relief of tax on saving or its proceeds, fall into this category • The second reflects judgements about ability to pay. Deductions – and credits that ought to be deductions – for non-discretionary expenses related to children, disability, or medical needs, for example – fall into this category. So, in our view, do some provisions such as the lower tax rate for small businesses and many exemptions and zero-rated items under the GST. • A third set – the one that deserves the “tax expenditure” label – contains measures equivalent to spending programs. As subsidies unrelated to tax payable, these should be reported as spending rather than netted against tax revenue. We identify 37 measures in this category, including the First-Time Home Buyers’ Tax Credit, the Labour-Sponsored Venture Capital Corporations Credit and the Political Contribution Tax Credit, the Age Credit, and the GST/ HST Credit. Restatements in 2006 and 2013 moved a number of provisions previously netted against revenue to spending, improving the transparency of federal budgets and public accounts. Doing the same for the 37 tax expenditures in fiscal year 2015/16 would have revealed personal income taxes $5.0 billion higher than reported, corporate income taxes $2.3 billion higher than reported, and GST revenues $9.1 billion higher than reported. Total revenue would have been $16.4 billion higher, and spending would have been higher by the same amount. The restated totals – $311.9 in revenue, not the $295.5 billion reported, and $312.8 billion in spending, not the $296.4 billion reported, more accurately reflect Ottawa’s impact on the Canadian economy. While past restatements brought important tax expenditures to view in budgets and public accounts, they did not result in parallel changes to the Estimates members of parliament vote to authorize spending. Both those measures and the 37 identified in this report should appear in the Estimates as well. Lawmakers could then review them like other program spending, and Canadians would gain a valuable tool to improve federal fiscal policy