If you spent any time at all looking at the 2015 tax returns your clients just filed, you would probably have seen the proliferation of what’s become known as “boutique” tax credits for everything from public transit passes to first-time home buyers.
The most recent federal budget announced the elimination of four of these credits come 2017, namely the children’s fitness and arts credits (50% available in 2016) as well as the education and textbook credits for students. But, perplexingly, the Liberals introduced another, new boutique credit for teachers’ classroom supplies.
Shortly after the budget, Finance Minister Bill Morneau told the Canadian Press in a roundtable interview that he was “going to embark on looking at the tax expenditures in the code and making sure they are all consistent with our approach to tax fairness.”
“Tax expenditures” describes government spending — administered via the tax system, often in the form of credits — that is used to promote certain programs, such as the arts, physical fitness or post-secondary education, or that target certain segments of the population, such as parents, seniors or pensioners.
In a paper published earlier this year entitled The Case Against Boutique Tax Credits and Similar Tax Expenditures, professor emeritus Neil Brooks of Osgoode Hall Law School at York University comes down heavily against the use of such credits. He believes that boutique tax credits, along with almost all other tax expenditures, “impair the legitimacy of the tax system and hobble it in the pursuit of its primary functions — raising revenue and redistributing income.” He argues further that boutique tax credits “violate almost every criterion of a well-designed spending program.”
During a panel discussion at the Canadian Income Tax Act Centennial Symposium in Toronto in May, which was put on jointly by the Canadian Tax Foundation and Osgoode Hall Law School, the rise in the number of these credits and what should be done about them was discussed at length.
Brooks, who was also on the panel, stated that “each newly enacted tax expenditure encourages groups that are initially excluded to lobby for inclusion … [as] it’s always possible to make an argument by analogy.”
For example, there was a credit for volunteer firefighters introduced in 2011, which was followed by a new credit for search and rescue volunteers introduced in 2014. Brooks also maintains that “the legislative process for enactment of tax expenditures is much less rigorous than direct spending programs.”
Of course, the unanswered question is whether the potential elimination of boutique tax credits could lead to a lowering of the general income tax rate for all Canadians? Or, could the government simply pocket this “new” revenue?