The federal government’s review of tax expenditures may result in the axing of a whole parcel of so-called “boutique tax credits” that have been introduced in recent years. The argument is that targeted tax credits, such as the public transit credit or the volunteer firefighters’ credit, are inefficient, ineffective and needlessly complicate the tax system.

“They’re more trouble than they’re worth,” says Jamie Golombek, managing director of tax and estate planning with Canadian Imperial Bank of Commerce‘s wealth strategies division in Toronto.

Says Rick Robertson, associate professor with the Richard Ivey School of Business at the University of Western Ontario in London, Ont.: “These credits might make a few people happy who vote for the particular party that introduces them, but [the credits] don’t foster a healthy tax system.”

A long-running argument is that the ever-increasing complexity of the Canadian tax system raises the cost of compliance. And the recent proliferation of boutique credits has only exacerbated the problem.

The previous Conservative federal government, in particular, favoured the use of such credits, introducing programs as varied as the children’s fitness credit, the home accessibility credit and the tradesperson’s tools credit.

“We saw the tax code expand by leaps and bounds during the Harper era,” says Aaron Wudrick, federal director of the Regina-based Canadian Taxpayers Federation in Ottawa. “Some of that needs to be unwound.”

Governments often promote boutique credits as tax cuts, but they should more properly be understood as tax expenditures of the government, contends Neil Brooks, professor emeritus of tax law and policy at Osgoode Hall Law School at York University in Toronto.

“When taxpayers benefit from a tax expenditure, they are not being allowed to keep more of their own money,” Brooks wrote in a report on boutique credits published in the Canadian Tax Journal (CTJ) earlier this year. “Instead, they are receiving government money in the same sense that people who are beneficiaries of direct government spending programs are receiving government money. And it is other taxpayers who pay for the subsidy by giving up more of their hard-earned money.”

However, unlike actual spending programs, tax expenditures such as boutique tax credits don’t undergo the same sort of oversight in terms of assessing whether the tax credit program is providing enough value for money in encouraging the intended policy result, says David Macdonald, senior economist at the Canadian Centre for Policy Alternatives in Ottawa.

“The review of these expenditures is very limited compared with what you find on program spending, even though [both] result in the same thing: the government having less money,” Macdonald says.

For example, one study published in the CTJ in 2015 regarding the effectiveness of the public transit tax credit suggested there is no evidence that the program actually increases public transit ridership overall, although the credit did create an incentive for some commuters to switch from individual tickets to monthly passes.

Another argument is that tax credits tend to reward more affluent taxpayers at the expense of poorer ones. Low-income earners may have no taxes owing against which to apply a tax credit. Or a low- income family may not have enough extra cash in the first place to spend on, say, a child’s fitness program, which means tax credits to encourage these actions are of no use. And low-income taxpayers may be less likely than affluent ones to take advantage of a tax credit even if they qualify.

Tax credit programs tend to be used by “upper middle-income households, who are more likely to go to an accountant who is going to be savvy enough to apply for [those credits],” Macdonald suggests.

Despite such drawbacks, governments favour tax credits because they allow those governments to reward segments of voters in a way that those voters will notice.

“To be blunt, many of these credits have been introduced over the years to cater to special-interest lobby groups,” Golombek says. If enough of these credits are eliminated, he suggests, “maybe we could lower the tax rate on the bottom tax bracket.”

The Liberal government’s current review of the tax system, and its elimination or reduction of some credits, is gaining support. Notably, however, the Liberals introduced a new tax credit in the 2016 federal budget – the teacher and early childhood educator school supply credit – thus appearing to undercut their simplification efforts.

“[That new tax credit] is a very mixed message,” says Glen Hodgson, senior vice president and chief economist at the Conference Board of Canada in Ottawa, “and an indication of how any government can fall prey to political considerations.”

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