One Comment About Taxation – The 2024 Report on Federal Tax Expenditures Released!

  

Last week, on February 29, 2024, the 2024 annual Report on Federal Tax Expenditures was released.  For tax geeks like me, it was an exciting day!  I’m guessing most Canadians don’t read this data rich report that “reports on the estimated fiscal cost of federal tax expenditures, sets out the approach used in developing these estimates and projections, and provides detailed information on each tax expenditure.”  In plain English, when a tax measure that is not revenue raising (but instead will cost the Canadian people money by providing tax relief of some sort) is enacted into law, what do these measures cost?

The report provides very brief historical and policy background on most of the various tax expenditures.  It is far from a perfect report and provides many caveats to its financial estimates (such as not providing any projections for behavioral changes if a particular measure was to be taken away or modified).  But it is still an interesting read and benchmark.

Every year, I look to see what the biggest tax expenditures are.  The highlight ones for me are RPP / RRSP contributions (estimated to cost the federal fisc $54.41 billion in 2024 and $52.31 billion in 2025) and the principal residence exemption ($5.47 billion in 2024 and $6.455 billion in 2025 but overall this is a drop from the estimated high of $13.355 billion in 2021?).

I also look for the small numbers and every year I get frustrated at how small some of the various personal tax credit expenditures are.  For example, the new “multi-generational renovation tax credit” introduced in the 2022 federal budget for the 2023 and subsequent taxation years, provides a 15% refundable credit on a maximum of $50,000 of “qualifying expenditures” (meaning a maximum refundable credit of $7,500) to assist with the cost of renovating an “eligible dwelling” to establish a secondary unit that enables a “qualifying individual” to live with a “qualifying relation”.

Each of the phrases in the above quotation marks are definitions in the Income Tax Act that must be carefully met in order to be eligible for the credit.  Like most rules in the Act, they are detailed and can be difficult to achieve with precision.  The 2024 Report on Federal Tax Expenditures estimates that this new credit will cost the federal fisc $25 million in 2024 and 2025.

While $25 million is a material amount for most Canadians, comparatively it is a pimple on the total federal budget expenditures of roughly $500 billion.  The cost to even produce and to administer measures like this is very significant (but not reported on).  In addition, it is often left to the accounting community to determine eligibility, report, file and then deal with subsequent reviews by the Canada Revenue Agency (all of these significant costs borne by taxpayers are certainly not part of the $25 million referred to above).  My conclusion on small dollar personal credits (and some other tax expenditures) is that these are obvious examples of politics entering the taxation system.  In an ideal world, silly political measures like this would be non-existent or administered outside of the taxation system.

I also keenly look at the “not available” disclosures in the Report for a significant number of tax measures that are apparently not tracked or data available.  It leads to my obvious question of “why not”?  Do we not have enough resources and / or people in the burgeoning federal civil service to track obvious expenditures to make the Report more complete, transparent and accurate?

All of the above leads to a few brief observations about the Report:

• Reports like this can be very helpful and useful in determining future taxation policy and for “clean-ups” of our Income Tax Act;
• Regular reviews of the big and small dollar amount expenditures is a good thing and should be regularly done. Unfortunately, politics often gets in the way.  For example, the principal residence exemption is “sacred” for many Canadians but are there some clean-ups that could be done to better target this measure?  For sure (a subject for a future column) but it takes political courage to properly assess and take action.  Conversely, the small dollar and low-value tax expenditures like many personal tax credits should be eliminated; and
• Canadians are sorely uninformed about how their taxation dollars are both spent and “expended” by way of tax expenditures. In my view, and in an ideal world, this Report should and would be “front-page” headlines with many Canadians taking a keen interest in their financial futures.

Every year I read the annual Report, it is a stark reminder that Canada is long overdue for comprehensive tax review and reform.  Many in our taxation community, including me, have been loudly advocating for this for years. How Canada taxes and how it contributes / detract from our country’s overall productivity and economic future needs a detailed review.  The last comprehensive review was commenced in 1962 with The Royal Commission on Taxation.  It released its outstanding – but controversial – report and recommendations in 1966.  I’m guessing that a significant percentage of the readers of this article were not born in 1962 nor 1966 and obviously lots has changed in Canadian society since that time.

After significant debate, major tax reform was implemented in Canada effective January 1, 1972.  Not all of the Royal Commission’s recommendations were accepted in such reform but it certainly was the impetus for it.

While there have been some limited form taxation reviews since 1966, it is time to take a good hard look at how we can improve and more logically “expend” our country’s resources for the betterment of all Canadians.

In the meantime, if you’re like me, grab your favorite beverage of choice, cozy up to the fire and have a good read of the Report.  It should open your eyes.

 

One Comment About Leadership – The Passing of the Right Honorable Brian Mulroney – Former PM of Canada From 1984 – 1993 – and His Comments on Leadership

 

On February 29, 2024, one of Canada’s greatest Prime Ministers passed away at the age of 84.  While his time in office was tumultuous and he certainly was an imperfect human being like all of us, he was, as already stated, without doubt one of Canada’s greatest Prime Ministers.  While reading many tributes to him over the last week, I came across the below comment he wrote from his diary, dated June 27, 1993, that was published in his book, Memoirs.  For perspective, in 1993 on the eve of his resignation, Mr. Mulroney’s popularity had declined to one of the all-time lows for a sitting PM given a number of issues but in particular the wildly unpopular GST that he implemented:

“I actually did govern not for good headlines in ten days but for a better Canada in ten years. I paid the price in media hostility and public disapproval. But I did so knowingly and willingly. Leadership is about courage, strength, and resolve often in the face of overwhelming criticism and adversity; it is about taking positions you believe to be in Canada’s long-term interests and sticking to them. I’ll miss the job—caucus, the House, the problems, the achievements, the excitement. But I’ve achieved a degree of serenity … I leave with a happy heart and a sense of fulfillment at having done much and at all times having done my best for Canada.”

I agree with Mr. Mulroney.  Leadership is definitely about having courage, strength, and resolve often in the face of overwhelming criticism and adversity and taking positions you believe in for the long-term.  Wise words that will indeed add to his legacy. Rest in peace, Sir.

  

One Comment About Economics: The Scrapping of the CMHC’s First Time Home Buyer Incentive

 

I have been a long-time participant in the federal budget lock-up that annually occurs in Ottawa.  It’s a great time to meet old acquaintances and get an early peek at the federal budget measures before becoming publicly available later that day.  In the 2019 federal budget, one non-tax measure caught my eye during the lock-up.  It was a proposal for the Canadian Mortgage and Housing Corporation to provide prospective homeowners interest-free loans ranging from 5 to 10 % of a property’s purchase price, with the government taking an equity stake in return, subject to an annual cap of eight per cent on gains or losses.

If you participated in the program, you were required to settle the loan and a portion of any equity gains upon the sale of the property or at the 25-year mark, whichever occurred first. The program also offered the flexibility of early repayment without incurring any penalties.

I remember asking some of the government officials about the details of the program since I was concerned that there may be some tax consequences to the participants.  I also provided my initial comments that I couldn’t imagine many people would be interested in participating in such a program.  Who would want the federal government as a co-owner of their home?  Such questions were met with little answers and feedback but the program was rolled out later that year.

Last week, it was quietly announced on the CMHC’s website that the program was being scrapped.  The Financial Post reported on this matter and provided the following details:

In 2022, documents presented in Parliament at the request of the Conservatives showed the program had received 23,411 applications with only 15,925 approvals as of April 30, 2022, well short of the 100,000 expected during the first three years.

During that stretch, the program disbursed only $269 million, about one-fifth of the anticipated amount.

Clay Jarvis, an author at the personal finance website NerdWallet, said the FTHBI was plagued from the start.

“The incentive was dead on arrival. A shared-equity agreement with the federal government was never going to appeal to many people, and the program’s income limits were probably too low,” Jarvis said. “The government tried to make it more appealing by limiting the amount of equity it was entitled to, but no one cared.”

Yep, exactly my sentiment.  Good riddance.  And not surprising that no one cared and that there was very little pick-up in this silly initiative.  Who wants the government as their partner in the most personal asset that most will ever own?

What socialists don’t understand is that more often than not, less interference into the economy is “more”.  And we need a lot “more” of that right now.

 

Bonus Comment – Quote From the Right Honorable Brian Mulroney – Canada’s Prime Minister From 1984 – 1993 – About Canada

  

“This country is made up of small towns and big dreams.”

 

Yep, totally agree!  Canada is indeed more than its big cities.  Some of the most down-to-earth people come from farming and other small communities in Canada who have big dreams.  Well stated, Mr. Mulroney.

 

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