Personal tax credits sound great, but the costs quickly add up

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For tax geeks like me, the release of the annual Report on Federal Tax Expenditures is an exciting day, but I’m guessing most people don’t read this data-rich review 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.”

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But it sounds more compelling in plain English: What does a tax measure enacted into law that is not revenue raising and provides tax relief of some sort actually cost?

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The report provides a very brief historical and policy background on most of the various tax expenditures. It is far from perfect and provides many caveats to its financial estimates (such as not providing any projections for behavioural changes if a particular measure is 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 highlights for me are the contributions to registered pension plans and registered retirement savings plans (estimated to cost the federal government $54.4 billion in 2024 and $52.3 billion in 2025) and the principal residence exemption (about $5.5 billion in 2024 and $6.5 billion in 2025, but both are down from an estimated high of $13.4 billion in 2021).

I also look for the small numbers and I always 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 per cent 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.”

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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 Report on Federal Tax Expenditures estimates this new credit will cost $25 million in each of 2024 and 2025.

While $25 million is a material amount for most Canadians, it is a comparative pimple on the total federal budget expenditures of roughly $500 billion. The cost to even produce and administer measures such as these is very significant (but not reported on). 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 these significant costs borne by taxpayers are certainly not part of the $25 million referred to above).

These small-dollar personal credits (and some other tax expenditures) are obvious examples of politics entering the taxation system. In an ideal world, silly political measures such as these would be non-existent or administered outside the taxation system.

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

Overall, however, these kinds of reports can be very helpful and useful in determining future taxation policy and help clean up our Income Tax Act. Regular reviews of 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 cleanups that could be done to better target this measure? For sure, but it takes political courage to properly assess and take action. Conversely, the small-dollar and low-value tax expenditures on many personal tax credits should be eliminated.

In general, Canadians are sorely uninformed about how their taxation dollars are both spent and used by way of tax expenditures. In my view, and in an ideal world, this report should and would be front-page news and many Canadians would take a keen interest in their financial future.

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The annual report is a stark reminder that Canada is long overdue for comprehensive tax review and reform. Many in the taxation community, including me, have been loudly advocating for this for years. How Canada taxes and how it contributes/detracts from our country’s overall productivity and economic future needs a detailed review.

The last comprehensive review commenced in 1962 with the Royal Commission on Taxation. It released its outstanding, but controversial, report and recommendations in 1966. After significant debate, major tax reform was implemented in Canada effective Jan. 1, 1972. Not all the commission’s recommendations were accepted, but it certainly was the impetus for some reform. But lots has changed since that time.

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

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

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is www.linkedin.com/in/kimmoody.

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