Prime Minister Stephen Harper uses a nail gun while touring a home undergoing renovations in Ottawa on Jan. 28, 2009.CHRIS WATTIE/Reuters
Upgrade tax credit downgraded
Persuading Canadians to spend money on a new deck or other upgrades in the depths of the recession proved more challenging than planned, and take-up for the one-year Home Renovation Tax Credit came in much lower than expected.
In a report outlining the billions of dollars Ottawa gives up in targeted or "boutique" tax credits, Department of Finance officials said only three-quarters of the $3-billion set aside for the high-profile renovation program was claimed by taxpayers for 2009.
Fewer Canadians than expected took advantage of the renovation credit in spite of the extensive free advertising the program received from Home Depot and other private businesses that stood to gain.
The 15-per-cent incentive created a tax break of up to $1,350 on a $10,000 project. Ottawa had guessed that 4.6-million taxpayers would file claims averaging $650. Instead, 3.1 million Canadians claimed the credit.
Reno credit just one of 266 "tax expenditures"
The latest figures are in a report released this week by the Department of Finance outlining the fiscal cost of so-called "tax expenditures." These are tax breaks big and small that are accounted for in terms of their cost to Ottawa's bottom line.
The case of the Home Renovation Tax Credit illustrates the challenge in predicting the future cost of the targeted tax breaks. After making headlines on budget day, the measures often fade away in the public's consciousness. The initial cost projections of these items are essentially a guess by finance officials. As a result, their actual cost can end up significantly higher or lower than budgeted.
Many - such as the $2.1-billion in tax credits for charitable donations - are relatively uncontroversial and aimed at encouraging a public good or addressing a social need. But Parliamentarians almost never review their effectiveness.
Kevin Lynch, a former deputy minister of finance who served as a Clerk of the Privy Council under Prime Minister Stephen Harper, recently urged that "tackling inefficient tax expenditures" should be part of the government's plan to reduce the debt and deficit.
Lucrative loopholes
Toby Sanger, senior economist with the Canadian Union of Public Employees, warns that these credits pepper the tax system with holes and make tax filing more complicated.
"A number of the most expensive tax preferences and loopholes are also highly regressive and - I would argue - damaging for the economy," Mr. Sanger wrote this week in an essay analyzing the latest figures from the Department of Finance.
Mr. Sanger said the most "egregious" of these is the employee stock option deduction, a $590-million expense that allows employees receiving company stock options to pay tax at half the rate that would apply if the benefit were in wages. Mr. Sanger said it allows Canada's top CEOs and executives to save millions in taxes.
Don Drummond, who was a senior finance official in 2000 when the Liberals brought in the credit, said it was simply a matter of aligning stock options with the broader rules on capital gains. He said it wouldn't be fair to tax stock options the same as wages because they carry more risk and are subject to inflation.
Nonetheless, Mr. Drummond said he agrees with the "policy wonks" who think it's better to have fewer tax credits and reduce taxes across the board - but politicians like the attention that comes with small tax breaks. Also, beyond a handful of officials at finance, no one reviews them.
"I don't think they should come under any less scrutiny than expenditure does. They're still a dollar out of the public purse," he said. "These tax expenditures are huge."
Other tax credits on the books and whether they are on budget:
Working Income Tax Benefit
Launched in 2007 to encourage welfare recipients to enter the workforce
Original projected cost: $555-million
Cost in 2009: $1.1-billion
Cost in 2010: $1.1-billion
Tax Free Savings Account
Launched in 2008 to encourage more personal savings
Original projected cost: $50-million
Cost in 2009: $45-million
Cost in 2010: $155-million
Children's Fitness Tax Credit (launched in 2006 to help parents enroll kids in fitness programs)
Original projected cost: $160-million
Cost in 2009: $110-million
Cost in 2010: $115-million
First-Time Home Buyers' Tax Credit: Launched in 2009 to help the housing market and encourage home purchases.
Original Projected Cost: $180-million
Cost in 2009: $135-million
Cost in 2010: $145-million
Public Transit Tax Credit (launched in 2006 to encourage use of public transit)
Original projected cost: $220-million
Cost in 2009: $140-million
Cost in 2010: $145-million