1995 BUDGET REPORTS

Tax Expenditures

Introduction

A tax expenditure is defined as using the tax system to provide a benefit to a specific group of taxpayers. This usually occurs by offering reduced tax rates, exemptions, or tax credits to the group receiving the benefit. Governments introduce tax expenditures primarily to implement social policy objectives such as transfers to lower income taxpayers or to promote economic development.

The major reason for reporting tax expenditures is to improve government accountability by providing a more complete picture of government spending. To meet this objective, British Columbia's major tax expenditures are presented in the following tables. Reporting on tax expenditures is also consistent with recommendations contained in the latest report of the Auditor General.

Tax expenditure reporting is relatively common. The Canadian federal government, the American federal government, some American states, several European national governments, and on occasion some Canadian provinces issue reports on tax expenditures. British Columbia last reported on tax expenditures in 1982.

The Role of Tax Expenditure Programs

The main reason governments use the tax system to deliver programs is to reduce administration costs for government and compliance costs for recipients. In certain situations, the tax system allows intended beneficiaries to be readily identified from information that is already collected. In these cases setting up a separate expenditure program would result in costly overlap and duplication of effort. An example is the provincial sales tax credit, which is delivered through the income tax system. If this were a direct provincial expenditure program, a provincial agency or office would have to be established to duplicate much of the work already done by Revenue Canada. In addition, it would require individuals to undergo a separate time-consuming application process in order to qualify for the benefit.

There are, however, several drawbacks to tax expenditure programs. First their overall cost receives less public scrutiny than is the case for spending programs because annual budget approvals are not typically required. Second, some tax expenditure programs confer the greatest benefits on those who pay the most taxes, which means that the major beneficiaries are often high-income earners. Sales tax exemptions, for example, often provide a greater absolute benefit to those with higher incomes because they have more to spend on consumer products. This can create the perception that the tax system is unfair. Finally, costs are often more difficult to control under a tax expenditure program because the benefits tend to be more open ended and enforcement is often more difficult than for spending programs.

Tax Expenditure Reporting

Two criteria were used to choose which tax expenditures to report. First, the emphasis is on tax preferences that are close equivalents to spending programs. This approach focuses on items that would not be out of place on a list of spending programs. By implication, the list does not include tax measures designed specifically to ensure fairness in the tax system, or simplify the administration of the tax. The list does not include items that are generally excluded from a particular tax base. For example, the revenue loss from not extending provincial sales tax to additional services is not included because most services are not subject to the sales tax.

Second, smaller items of less than $2 million were not included.

As a result, in this report, tax expenditures include major government programs delivered through the tax system, but do not include all items traditionally considered to be tax expenditures. Items such as the basic personal income tax credit are excluded because they are designed primarily to improve fairness in the tax system.

As with any definition of tax expenditures, these criteria leave some grey areas. Future tax expenditure reports will continue to refine and clarify the criteria used to define provincial tax expenditures.

British Columbia Tax Expenditure Programs

For presentation purposes, British Columbia tax expenditures are separated into two categories.

The personal income tax expenditures that are included cover a range of policy objectives, including support for charitable activities, health care and education. Most corporation income tax expenditures, such as accelerated write-offs for Canadian development and exploration expenses, are intended to achieve economic development objectives.

The individual tax preferences should not be added together to reach a total for provincial tax expenditures for two reasons. First, in some cases the preferences interact with one another so that eliminating one preference could increase or decrease the cost of another preference. Second, eliminating certain preferences could change the choices taxpayers make, which in turn would affect the cost estimates.


TABLE F1
TAX EXPENDITURE

                                                                                                1994/95
                                                                                                  Cost
                                                                                              ($ millions)
PROVINCIAL SALES TAX
Provincial Tax Preferences
   Commissions paid to retailers and hotel operators.............................................   22
Exemptions for the following items:
   o  Food (basic groceries, snack foods, candies, soft drinks and restaurant meals).............  520
   o  Residential fuels (electricity, natural gas, propane, etc.)................................  100
   o  Prescription and non-prescription drugs, vitamins and certain other health care products
      and appliances.............................................................................   55
   o  Children's clothing and footwear...........................................................   25
   o  Clothing patterns, fabrics and notions.....................................................    7
   o  Specified school supplies .................................................................   10
   o  Books, magazines and newspapers............................................................   50
   o  Basic telephone and cable service..........................................................   35
   o  Two-wheeled bicycles.......................................................................    4
   o  Exempt energy conservation equipment.......................................................   10
   o  Exempt safety equipment....................................................................    8
   o  Labour to repair major household appliances, clothing and footwear.........................    6
   o  Livestock for human consumption and agricultural feed, seed and fertilizer.................   25
   o  Exempt purchases by farmers, fishers and aquaculturalists..................................   16

FUEL TAX
Provincial Tax Preferences
   Tax exemption for alternative fuels...........................................................   26
   Tax exemption for international flights carrying cargo........................................    5
   Lower rate for family farm trucks (on road)...................................................    2

PERSONAL INCOME TAX
Provincial Tax Preferences
   Sales tax credit..............................................................................   50
   Venture capital tax credit....................................................................   10
   Employee venture capital tax credit...........................................................    4
   Political contributions tax credit............................................................    2

Federal Tax Preferences(1)
   Deduction and inclusion of alimony and child support payments.................................   16
   Charitable donations tax credit...............................................................   71
   Tax credits for tuition and education.........................................................   30
   Tax credits for disabilities and medical expenses.............................................   40
   Pension income tax credit.....................................................................   24
   Credit for persons older than 65 years........................................................  111
   Exemption from capital gains of up to $500,000 for small businesses and family farms..........   84
   Tax deduction for residents of northern and isolated areas....................................   15
   Non-taxation of employer-paid insurance premiums for group private health and welfare plans...   92
   Registered retirement savings plans(2):
        exemption for -- contributions....................   302
        exemption for -- investment earnings..............   226
        taxation of   -- withdrawals......................   (77)
            Total................................................................................  451
   Registered pension plans(2):
        exemption for -- contributions....................   409
        exemption for -- investment earnings..............   630
        taxation of   -- withdrawals......................  (375)
            Total................................................................................  664

CORPORATION INCOME TAX
Provincial Tax Preferences
   International financial business tax refund(3)................................................    5
Federal Tax Preferences(1)
   Charitable donations deduction................................................................    5
   Accelerated write-offs for Canadian development and exploration expenses(4)...................   55
   Accelerated write-off for capital equipment used in research and development(4)...............    3
   Non-taxation of life insurance companies' world income........................................    5

CORPORATION CAPITAL TAX
Provincial Tax Preferences
   Exemption for family farm corporations........................................................    2
   Exemption for cooperative corporations........................................................    2
   Two-year tax holiday for eligible British Columbia investment expenditures....................   17

SCHOOL AND RURAL AREA PROPERTY TAXATION(5)
Provincial Tax Preferences
   Home owner grant..............................................................................  417
   Assessment of farm land at farm use values....................................................   78
   School tax assessment reduction for farm buildings and farm land, and residences in the
     agricultural land reserve...................................................................   15
   Exemption for places of worship...............................................................    7
   Assessment exemption of $10,000 for industrial and business properties........................    2
   Pollution equipment abatement.................................................................    8
   Overnight tourist accommodation assessment relief.............................................    3
   Managed forest land classification............................................................    7
   Municipal discretionary exemptions............................................................   12

PROPERTY TRANSFER TAX
Provincial Tax Preferences
   Exemption for first-time home buyers..........................................................   26
Exemptions for the following items:
   o  Property transfers between related individuals.............................................   23
   o  Property transfers to municipalities, regional districts, hospital districts,
      library boards, school boards, water districts and educational institutions................    3
   o  Property transfers to charities registered under the Income Tax Act (Canada)...............    2

OTHER TAXES
   Horse racing tax -- transfer of revenues to the British Columbia Racing Commission............    9

1 Provincial revenue loss based on estimates of the federal loss contained in Government of Canada, Tax
  Expenditures, December 1994. Certain items have been excluded where no data were available.
2 Registered retirement savings plans and registered pension plans   are treated in the same way as in
  the federal tax expenditure report.  The tax expenditure associated with these schemes is presented
  as the amount of tax that would otherwise be paid in the year of deferral, were the deferral not
  available. However, this type of estimate overstates the true costs of these preferences because taxes
  are eventually paid, including tax on investment earnings. An estimate that does not overstate these
  costs would, however, be difficult to develop and would require some largely speculative assumptions.
3 Includes employee income tax refunds.
4 The accelerated write-offs for Canadian development and exploration expenses and for capital used in
  research and development are also reported in the same way as in the federal tax expenditure report.
  Since the write-offs allowed for income tax purposes are generally faster than would be reported on
  financial statements, there is a deferral of tax. Other tax deferrals, such as the difference between
  CCA rates and book depreciation are not reported because of the difficulty in measuring the value of
  the tax expenditure. (See Government of Canada, Tax Expenditures, December 1994 for details.)
5 Estimates are for the 1994 calendar year, and include only school and rural area property taxes levied
  by the province.


Budget '95 (Province of B.C.)

This will take you back to the Finance and Corporate Relations Homepage


If you have questions or comments about content please contact: Communications