A tax expenditure is defined as the reduction in tax revenues that results when the costs of a government program, or the benefits provided under that program, are deducted from tax revenues rather than reported as a budgetary expenditure. This type of expenditure is usually made by offering special tax rates, exemptions, or tax credits to program beneficiaries. Governments introduce tax expenditures primarily to achieve social policy objectives such as transfers to lower income taxpayers or to promote economic development and growth.

The major reason for reporting tax expenditures is to improve government accountability by providing a more complete picture of government spending. It is for this reason that British Columbia's major tax expenditures are presented in the following tables. Reporting tax expenditures is also consistent with recommendations contained in the 1994/95 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. This is the second year in a row that the British Columbia government has reported tax expenditures.

The Role of Tax Expenditure Programs

The main reason governments use the tax system to deliver programs is to reduce their own administration costs and to reduce 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 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 runs counter to the objective of incorporating progressiveness into the tax system. 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 those features of the tax system that should be reported as tax expenditures. First, the emphasis is on tax preferences and transfers through the tax system that are close equivalents to spending programs. Under this approach, the focus is 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 to simplify the administration of the tax. The list also does not include items that are generally excluded from a particular tax base. An example is the non-taxation of most services under the sales tax, a tax which is primarily designed to apply to purchases of goods.

Second, smaller items of less than $2 million are 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 commonly considered to be tax expenditures in other reports. Many items, such as the basic personal income tax credit, are excluded because they are designed primarily to improve fairness in the tax system and are not comparable to spending under budgetary programs.

As with any definition of tax expenditure, 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

The following list, which reports 1995/96 tax expenditure estimates, does not include tax expenditures introduced with the 1996 budget. It also does not include the BC Family Bonus, which will be implemented in 1996/97.

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

For presentation purposes, British Columbia tax expenditures through the income tax system have been separated into two categories.

The personal income tax expenditures that have been included on the following list 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 of Canadian development and exploration expenses, are intended to achieve economic development objectives.



Estimated Cost
($ millions)
Commissions paid to retailers and hotel operators24
Exemptions for the following items:
Food (basic groceries, snack foods, candies, soft drinks and restaurant meals) 535
Residential fuels (electricity, natural gas, fuel oil, etc.)105
Prescription and non-prescription drugs, vitamins and certain other health care products and appliances 56
Children's clothing and footwear 25
Clothing patterns, fabrics and notions 7
Specified school supplies 10
Books, magazines and newspapers 51
Basic telephone and cable service 35
Bicycles 4
Certain energy conservation equipment 10
Certain safety equipment 8
Labour to repair major household appliances, clothing and footwear6
Livestock for human consumption and agricultural feed, seed and fertilizer 25
Certain purchases by farmers, fishers and aquaculturalists19
Tax exemption for alternative fuels29
Tax exemption for international flights carrying cargo 7
Lower rate for family farm trucks (on road)3
Provincial Measures(1)
Sales tax credit 55
Venture capital tax credit 11
Employee venture capital tax credit 6
Political contributions tax credit 3
Federal Measures (1)
Deduction and inclusion of alimony and child support payments 17
Charitable donations tax credit 76
Tax credits for tuition and education 31
Tax credits for disabilities and medical expenses421
Pension income tax credit 25
Credit for persons older than 65 years94
Exemption from capital gains up to $500,000 for small businesses and family farms 90
Tax deduction for residents of northern and isolated areas 15
Non-taxation of employer-paid insurance premiums for group private health and welfare plans97
Registered Retirement Savings Plans(2):
exemption for
- contributions 317
- investment earnings 237
taxation of - withdrawals (81)
Total 473
Registered Pension Plans (2):
exemption for
- contributions 429
- investment earnings 662
taxation of - withdrawals (394)
Total 697
Provincial Measures (1)
International financial business tax refund(3) 5
Federal Measures(1)
Charitable donations deduction 6
Accelerated write-offs for Canadian development and exploration expenses (4) 55
Accelerated write-off for capital equipment used in research and development (4) 2
Allowable business investment loss8
Non-taxation of life insurance companies' world income 6
Exemption for family farm corporations 2
Exemption for cooperative corporations 2
Two-year tax holiday for eligible British Columbia investment expenditures 18
Home owner grant 437
School tax assessment reduction on current values for farm buildings and farm land, and residences in the agricultural land reserve 15
Assessment of farm land at farm use values(6) 83
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 14
Exemption for first-time home buyers 25
Exemptions for the following items:
Property transfers between related individuals 22
Property transfers to municipalities, regional districts, hospital districts, library boards, school boards, water districts and educational institutions 5
Property transfers to charities registered under the Income Tax Act (Canada) 2
Oil and gas royalty holiday 4
Horse Racing Tax - transfer of revenues to the British Columbia Racing Commission 10

  1. The provincial revenue loss estimates are based on estimates of the federal losses contained in Government of Canada: Tax Expenditures, December 1994. The federal estimates are based on 1991 and 1992 personal incomes and 1990 and 1991 corporation incomes. Certain tax expenditure 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 capital cost allowance (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 1995 calendar year, and include only school and rural area property taxes levied by the province.
  6. Currently, the value of farm land and residential land in the Agricultural Land Reserve is reduced by 50 per cent for school tax purposes. The $83 million estimate assumes the 50 per cent reduction to value would not be applied to farm land assessed at market value. If, on the other hand, this reduction were applied, the tax expenditure from not assessing farm land at market value would be only $43 million.

Budget '96 (Province of B.C.)

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