Tax breaks


A big part of financial planning is maximizing government benefits and minimizing taxes. The MoneyReadyApp attempts to be complete and accurate. We attempt to cover all Canadians. This is a challenge, because the tax code of Canada is complicated. It is fairly straightforward for the able middle class, but it gets very complicated for the poor, the disabled and the very rich. It seems that the fewer people a tax measure applies to, the more complicated it is. At least that is my hypothesis, based on how difficult it was to implement some tax and benefit calculations in the MoneyReadyApp. There are a few still missing, in particular the calculation of the Lifetime Capital Gains Exemption (LCGE), which is the most convoluted and complicated piece of tax code I have encountered so far. Even if I assumed eligibility (a big if, as there are many rules), the calculation would essentially need the tax returns (T1, Schedule 3, form T657, form T2017, form T936) for the individual claiming it, back to 1985.

This goes against another aim of the MoneyReadyApp which is to make financial planning easy. That is to ask the fewest questions from the user yet still project their taxes and deductions accurately. It also aims to accommodate whatever degree of accuracy a user wants. Some users want to enter every one of their expenses and have every tax credit calculated. Most users just enter an approximate yearly living expense and that’s good enough.

Any tax benefit that you qualify for is of course very important to you. But it got me thinking about how many people does each tax measure affect, and by how much? What are the tax measures I should prioritize to benefit the most Canadians? Am I spending the most time on the measures that affect the least number of people or with small benefits?

I am a scientist by training, and if I have a hypothesis, then I feel obliged to test it. To test it I need data. So I went out looking for data on 3 things:

  1. The number of people affected by every tax measure
  2. The dollar benefit to those people
  3. The difficulty in making the tax claim.

I did find data on #1 and #2. The department of finance publishes a Report on Federal Tax Expenditures every year, with loads of data on federal taxes. I did not find data on #3. I thought it possible to get an approximate, yet objective measure by simply counting the number of words or pages in the tax code that covers the measure, and the number of forms, or lines on the forms; I might attempt to do that at some point.

From the Government’s point of view, a “Tax Expenditure” is any tax that they consider individuals or companies could have paid, but didn’t because of an exemption, tax credit, deduction, rebate, refund, or reduced tax rate. Your tax benefit is their revenue forgone. Even though they didn’t get the money, they consider it as a spent expense for them. I’ll just call them tax breaks.

The Report on Federal Tax Expenditures provides a list of all the tax breaks, and approximately how much they are worth per year. It also provides some comments on how many people, businesses or other entities were affected by the measure. Those data are also approximate and also out of date: they mostly reference numbers from 2016. Nevertheless, I summarized the data to only include totals, and removed entries for which no information was actually available. The result is a table with 99 tax breaks (77 of which apply to individuals). Because the numbers I used were the 2020 projected-dollar values (in order to consider measures that are still in place, although some have been changed) while the number of affected individuals given are mostly for 2016, any analysis and comparison will be wrong in absolute terms. Still, the analysis can help us to rank the measures in different ways.

Table 1 below shows most tax breaks for which data exist on the number of people or entities affected. I show it in full for completeness, since it can be an eye opener. An extended table with a description of each measure is available here

Skip to bottom of Table 1

Table 1. Federal Tax break measures and their approximate cost to the government of Canada.
TAX BREAK MEASURE Considered in the MoneyReadyApp Projected 2020 (Millions) Dollars/claim (Individual) Dollars/claim (Business or Entity) Individuals Businesses or entities
Credit for the Basic Personal Amount ✔︎ 38,410 $1,402 27,400,000
Registered Pension Plans ✔︎ 30,440 $3,853 7,900,000
Canada Child Benefit ✔︎ 24,700 $7,265 3,400,000
Registered Retirement Savings Plans ✔︎ 17,515 $1,968 8,900,000
Partial inclusion of capital gains ✔︎ 17,215 $3,056 $43,101 2,700,000 208,000
Refundable taxes on investment income of private corporations 12,155 $48,043 253,000
Tax treatment of Canada Pension Plan and Quebec Pension Plan contributions and benefits ✔︎ 11,050 $624 17,700,000
Non-taxation of capital gains on principal residences ✔︎ 5,915
Dividend gross-up and tax credit ✔︎ 5,650 $1,487 3,800,000
Preferential tax rate for small businesses ✔︎ 5,575 $7,316 762,000
Goods and Services Tax/Harmonized Sales Tax Credit 4,930 $470 10,500,000
Tax treatment of Employment Insurance and Quebec Parental Insurance Plan premiums and benefits ✔︎ 4,150 $208 20,000,000
Age Credit ✔︎ 4,025 $706 5,700,000
Charitable Donation Tax Credit ✔︎ (1) 3,190 $580 5,500,000
Non-taxation of benefits from private health and dental plans ✔︎ (2) 3,030 $235 12,900,000
Accelerated Investment Incentive 3,005 $147 631,500
Scientific Research and Experimental Development Investment Tax Credit 2,835 $250 $136,957 4,000 20,700
Rebate for municipalities 2,725 $286,842 9,500
Canada Employment Credit 2,505 $141 17,800,000
Canada Workers Benefit ✔︎ 2,100 $1,400 1,500,000
Deduction of interest and carrying charges incurred to earn investment income ✔︎ 1,925 $963 2,000,000
Spouse or Common-Law Partner Credit ✔︎ 1,895 $902 2,100,000
Medical Expense Tax Credit ✔︎ (1) 1,865 $373 5,000,000
Lifetime Capital Gains Exemption 1,810 $30,116 60,100
Tuition Tax Credit ✔︎ (1) 1,810 $754 2,400,000
Foreign tax credit for individuals ✔︎ 1,660 $1,186 1,400,000
Pension income splitting ✔︎ 1,455 $1,119 1,300,000
Child care expense deduction ✔︎ 1,445 $1,032 1,400,000
Pension Income Credit ✔︎ 1,340 $263 5,100,000
Tax-Free Savings Account ✔︎ 1,315 $97 13,500,000
Disability Tax Credit ✔︎ 1,190 $992 1,200,000
Deduction of union and professional dues 1,100 $193 5,700,000
Deduction of other employment expenses 1,075 $1,402 767,000
Refundable capital gains tax for investment and mutual fund corporations 1,040 $16,000,000 65
Eligible Dependant Credit ✔︎ 1,025 $1,058 969,000
Rebate for schools, colleges and universities 930 $206,667 4,500
Rebate for hospitals, facility operators and external suppliers 745 $1,064,286 700
Partial deduction of and partial input tax credits for meals and entertainment ✔︎ (1) 740 $277 $376 811,000 838,000
Deductibility of charitable donations 715 $7,582 94,300
Employee stock option deduction ✔︎ 710 $20,882 34,000
Non-taxation of workers’ compensation benefits ✔︎ (2) 675 $1,174 575,000
Exemption of scholarship, fellowship and bursary income ✔︎ (2) 425 $368 1,155,000
Rebate for registered charities 335 $6,700 50,000
Non-taxation of social assistance benefits ✔︎ (2) 315 $197 1,600,000
Film or Video Production Services Tax Credit 305 $762,500 400
Tax treatment of investment income from life insurance policies ✔︎ 260 $12 22,000,000
Canada Caregiver Credit ✔︎ 245 $544 450,000
Northern Residents Deductions 240 $938 256,000
Non-taxation of Guaranteed Income Supplement and Allowance benefits ✔︎ 235 $370 635,000
Registered Education Savings Plans ✔︎ 220 $39 5,700,000
Non-taxation of capital gains on donations of publicly listed securities 195 $17,500 $107,955 6,000 880
Patronage dividend deduction 190 $250,000 760
Education Tax Credit. Eliminated 190 $83 2,300,000
Non-taxation of certain veterans’ benefits ✔︎ (2) 180 $1,636 110,000
Refundable Medical Expense Supplement 175 $311 562,000
Non-taxation of non-profit organizations 170 $6,464 26,300
Non-taxation of payments to Canadian Armed Forces members and veterans in respect of pain and suffering ✔︎ (2) 170 $2,429 70,000
Labour-Sponsored Venture Capital Corporations Credit 170 $535 318,000
Atlantic Investment Tax Credit 160 $2,128 $24,786 4,700 5,850
Flow-through share deductions 150 $2,558 $114,286 43,000 350
Moving expense deduction 125 $1,330 94,000
First-Time Home Buyers’ Tax Credit 110 $558 197,000
Deduction for clergy residence ✔︎ (1) 100 $3,774 26,500
Apprenticeship Job Creation Tax Credit 100 $1,000 $8,000 1,000 12,500
Tax treatment of alimony and maintenance payments ✔︎(1)(2) 95 $1,532 62,000
Registered Disability Savings Plans ✔︎ 85 $472 180,000
Rebate for qualifying non-profit organizations 75 $9,375 8,000
Mineral Exploration Tax Credit for flow-through share investors 65 $6,500 10,000
Deductibility of contributions to a qualifying environmental trust 60 $1,200,000 50
Student Loan Interest Credit ✔︎ 45 $84 537,000
Non-taxation of RCMP pensions and other compensation in respect of injury, disability or death ✔︎ (2) 40 $2,857 14,000
Deferral through 10-year capital gain reserve 35 $3,804 9,200
Deduction of allowable business investment losses 35 $2,469 $8,242 8,100 1,820
Holdback on progress payments to contractors 30 $4,762 6,300
Textbook Tax Credit. Eliminated 30 $13 2,300,000
Corporate Mineral Exploration and Development Tax Credit 25 $1,000,000 25
Home Accessibility Tax Credit 25 $893 28,000
Political Contribution Tax Credit 25 $170 147,000
Exemption from branch tax for transportation, communications, and iron ore mining corporations 20 $1,000,000 20
Volunteer Firefighters Tax Credit 20 $465 43,000
Rebate for book purchases made by certain organizations 15 $7,500 2,000
Deferral through five-year capital gain reserve 10 $1,235 8,100
Refunds for Indigenous self-governments 5 $166,667 30
Patronage dividends paid as shares by agricultural cooperatives 5 $125,000 40
Non-taxation of capital gains on donations of cultural property 5 $12,500 400
Rollovers of investments in small businesses 5 $4,545 1,100
Non-taxation of up to $10,000 of death benefits 5 $714 7,000
Teacher and Early Childhood Educator School Supply Tax Credit 5 $106 47,000
Disability supports deduction ✔︎ 3 $1,154 2,600
Apprentice vehicle mechanics’ tools deduction 3 $441 6,800
Tax-free amount for emergency services volunteers 3 $150 20,000
Adoption Expense Tax Credit 2 $1,053 1,900
Search and Rescue Volunteers Tax Credit 2 $417 4,800
Deduction for tuition assistance for adult basic education 2 $333 6,000
Deduction for tradespeople’s tool expenses 2 $100 20,000
Deductibility of earthquake reserves 1 $50,000 20
Special tax computation for certain retroactive lump-sum payments 1 $2,000 500
Logging Tax Credit 1 $2,000 $72,289 500 830
Deductibility of certain costs incurred by musicians 1 $313 3,200

Skip to top of Table 1

A ✔︎ indicates the MoneyReadyApp considers the measure automatically without additional input from the user. A ✔︎(1) means the MoneyReadyApp will automatically consider the measure if you enter the appropriate expense (optional). For expenses with no ✔︎(1), you can still enter them if you want to keep an extensive budget in the app, but you will need to reduce them by the tax credit yourself. A ✔︎(2) means you can enter the income (or appropriate portion) as Non-taxable.

Plotting the data, we see that every million dollars in tax breaks affects about 1000 individuals. Businesses are more expensive, but the measures presumably affect the individuals tied to the business (as owners, shareholders and/or employees). Also note for businesses that the number of businesses counted are only those that are incorporated. There is a lot of scatter in these plots. Some points are way below the fitted line, indicating measures that are expensive to the government, given how few people they benefit, and some are way above the fitted line, which indicate measures that are relatively cheap to the government in terms of the number of people helped. Not to be overly political, but substitute the word “people” with the word “voter”, and reinterpret the graph accordingly.

Figure 1

Figure 1

Because the MoneyReadyApp deals with individuals, we will analyse these measures some more. In our list, there are tax breaks that impact over a million Canadians per year. These are shown in Table 2.

Skip to bottom of Table 2.

Table 2. Tax breaks that impacted over a million Canadians (2016)
TAX BREAK MEASURE Considered in the MoneyReadyApp Projected 2020 (Millions) Dollars/claim (Individual) Individuals
Credit for the Basic Personal Amount ✔︎ 38,410 $1,402 27,400,000
Tax treatment of investment income from life insurance policies ✔︎ 260 $12 22,000,000
Tax treatment of Employment Insurance and Quebec Parental Insurance Plan premiums and benefits ✔︎ 4,150 $208 20,000,000
Canada Employment Credit 2,505 $141 17,800,000
Tax treatment of Canada Pension Plan and Quebec Pension Plan contributions and benefits ✔︎ 11,050 $624 17,700,000
Tax-Free Savings Account ✔︎ 1,315 $97 13,500,000
Non-taxation of benefits from private health and dental plans ✔︎ (2) 3,030 $235 12,900,000
Goods and Services Tax/Harmonized Sales Tax Credit 4,930 $470 10,500,000
Registered Retirement Savings Plans ✔︎ 17,515 $1,968 8,900,000
Registered Pension Plans ✔︎ 30,440 $3,853 7,900,000
Age Credit ✔︎ 4,025 $706 5,700,000
Deduction of union and professional dues 1,100 $193 5,700,000
Registered Education Savings Plans ✔︎ 220 $39 5,700,000
Charitable Donation Tax Credit ✔︎ (1) 3,190 $580 5,500,000
Pension Income Credit ✔︎ 1,340 $263 5,100,000
Medical Expense Tax Credit ✔︎ (1) 1,865 $373 5,000,000
Dividend gross-up and tax credit ✔︎ 5,650 $1,487 3,800,000
Canada Child Benefit ✔︎ 24,700 $7,265 3,400,000
Partial inclusion of capital gains ✔︎ 17,215 $3,056 2,700,000
Tuition Tax Credit ✔︎ (1) 1,810 $754 2,400,000
Education Tax Credit. Eliminated 190 $83 2,300,000
Textbook Tax Credit. Eliminated 30 $13 2,300,000
Spouse or Common-Law Partner Credit ✔︎ 1,895 $902 2,100,000
Deduction of interest and carrying charges incurred to earn investment income ✔︎ 1,925 $963 2,000,000
Non-taxation of social assistance benefits ✔︎ (2) 315 $197 1,600,000
Canada Workers Benefit ✔︎ 2,100 $1,400 1,500,000
Foreign tax credit for individuals ✔︎ 1,660 $1,186 1,400,000
Child care expense deduction ✔︎ 1,445 $1,032 1,400,000
Pension income splitting ✔︎ 1,455 $1,119 1,300,000
Disability Tax Credit ✔︎ 1,190 $992 1,200,000
Exemption of scholarship, fellowship and bursary income ✔︎ (2) 425 $368 1,155,000
Eligible Dependant Credit ✔︎ 1,025 $1,058 969,000
Partial deduction of and partial input tax credits for meals and entertainment ✔︎ (1) 740 $277 811,000
Deduction of other employment expenses 1,075 $1,402 767,000
Non-taxation of Guaranteed Income Supplement and Allowance benefits ✔︎ 235 $370 635,000
Non-taxation of workers’ compensation benefits ✔︎ (2) 675 $1,174 575,000
Refundable Medical Expense Supplement 175 $311 562,000
Student Loan Interest Credit ✔︎ 45 $84 537,000
Canada Caregiver Credit ✔︎ 245 $544 450,000
Labour-Sponsored Venture Capital Corporations Credit 170 $535 318,000
Northern Residents Deductions 240 $938 256,000
First-Time Home Buyers’ Tax Credit 110 $558 197,000
Registered Disability Savings Plans ✔︎ 85 $472 180,000
Political Contribution Tax Credit 25 $170 147,000
Non-taxation of certain veterans’ benefits ✔︎ (2) 180 $1,636 110,000
Moving expense deduction 125 $1,330 94,000
Non-taxation of payments to Canadian Armed Forces members and veterans in respect of pain and suffering ✔︎ (2) 170 $2,429 70,000
Tax treatment of alimony and maintenance payments ✔︎(1)(2) 95 $1,532 62,000
Lifetime Capital Gains Exemption 1,810 $30,116 60,100
Teacher and Early Childhood Educator School Supply Tax Credit 5 $106 47,000
Flow-through share deductions 150 $2,558 43,000
Volunteer Firefighters Tax Credit 20 $465 43,000
Employee stock option deduction ✔︎ 710 $20,882 34,000
Home Accessibility Tax Credit 25 $893 28,000
Deduction for clergy residence ✔︎ (1) 100 $3,774 26,500
Tax-free amount for emergency services volunteers 3 $150 20,000
Deduction for tradespeople’s tool expenses 2 $100 20,000
Non-taxation of RCMP pensions and other compensation in respect of injury, disability or death ✔︎ (2) 40 $2,857 14,000
Mineral Exploration Tax Credit for flow-through share investors 65 $6,500 10,000
Deferral through 10-year capital gain reserve 35 $3,804 9,200
Deduction of allowable business investment losses 35 $2,469 8,100
Deferral through five-year capital gain reserve 10 $1,235 8,100
Non-taxation of up to $10,000 of death benefits 5 $714 7,000
Apprentice vehicle mechanics’ tools deduction 3 $441 6,800
Non-taxation of capital gains on donations of publicly listed securities 195 $17,500 6,000
Deduction for tuition assistance for adult basic education 2 $333 6,000
Search and Rescue Volunteers Tax Credit 2 $417 4,800
Atlantic Investment Tax Credit 160 $2,128 4,700
Scientific Research and Experimental Development Investment Tax Credit 2,835 $250 4,000
Deductibility of certain costs incurred by musicians 1 $313 3,200
Disability supports deduction ✔︎ 3 $1,154 2,600
Adoption Expense Tax Credit 2 $1,053 1,900
Rollovers of investments in small businesses 5 $4,545 1,100
Apprenticeship Job Creation Tax Credit 100 $1,000 1,000
Special tax computation for certain retroactive lump-sum payments 1 $2,000 500
Logging Tax Credit 1 $2,000 500
Non-taxation of capital gains on donations of cultural property 5 $12,500 400

Skip to top of Table 2.

We can calculate the ratio of dollars per individual to see which are the most valuable tax breaks to individuals. The tax breaks that affected a minimum of 10,000 Canadians in 2016 are given sorted in descending order of the claim value (Table 3)

Skip to bottom of Table 3.

Table 3. Most valuable individual tax breaks that impacted over 10,000 Canadians.
TAX BREAK MEASURE Considered in the MoneyReadyApp Projected 2020 (Millions) Dollars/claim (Individual) Individuals
Lifetime Capital Gains Exemption 1,810 $30,116 60,100
Employee stock option deduction ✔︎ 710 $20,882 34,000
Canada Child Benefit ✔︎ 24,700 $7,265 3,400,000
Mineral Exploration Tax Credit for flow-through share investors 65 $6,500 10,000
Registered Pension Plans ✔︎ 30,440 $3,853 7,900,000
Deduction for clergy residence ✔︎ (1) 100 $3,774 26,500
Partial inclusion of capital gains ✔︎ 17,215 $3,056 2,700,000
Non-taxation of RCMP pensions and other compensation in respect of injury, disability or death ✔︎ (2) 40 $2,857 14,000
Flow-through share deductions 150 $2,558 43,000
Non-taxation of payments to Canadian Armed Forces members and veterans in respect of pain and suffering ✔︎ (2) 170 $2,429 70,000
Registered Retirement Savings Plans ✔︎ 17,515 $1,968 8,900,000
Non-taxation of certain veterans’ benefits ✔︎ (2) 180 $1,636 110,000
Tax treatment of alimony and maintenance payments ✔︎(1)(2) 95 $1,532 62,000
Dividend gross-up and tax credit ✔︎ 5,650 $1,487 3,800,000
Credit for the Basic Personal Amount ✔︎ 38,410 $1,402 27,400,000
Deduction of other employment expenses 1,075 $1,402 767,000
Canada Workers Benefit ✔︎ 2,100 $1,400 1,500,000
Moving expense deduction 125 $1,330 94,000
Foreign tax credit for individuals ✔︎ 1,660 $1,186 1,400,000
Non-taxation of workers’ compensation benefits ✔︎ (2) 675 $1,174 575,000
Pension income splitting ✔︎ 1,455 $1,119 1,300,000
Eligible Dependant Credit ✔︎ 1,025 $1,058 969,000
Child care expense deduction ✔︎ 1,445 $1,032 1,400,000
Disability Tax Credit ✔︎ 1,190 $992 1,200,000
Deduction of interest and carrying charges incurred to earn investment income ✔︎ 1,925 $963 2,000,000
Northern Residents Deductions 240 $938 256,000
Spouse or Common-Law Partner Credit ✔︎ 1,895 $902 2,100,000
Home Accessibility Tax Credit 25 $893 28,000
Tuition Tax Credit ✔︎ (1) 1,810 $754 2,400,000
Age Credit ✔︎ 4,025 $706 5,700,000
Tax treatment of Canada Pension Plan and Quebec Pension Plan contributions and benefits ✔︎ 11,050 $624 17,700,000
Charitable Donation Tax Credit ✔︎ (1) 3,190 $580 5,500,000
First-Time Home Buyers’ Tax Credit 110 $558 197,000
Canada Caregiver Credit ✔︎ 245 $544 450,000
Labour-Sponsored Venture Capital Corporations Credit 170 $535 318,000
Registered Disability Savings Plans ✔︎ 85 $472 180,000
Goods and Services Tax/Harmonized Sales Tax Credit 4,930 $470 10,500,000
Volunteer Firefighters Tax Credit 20 $465 43,000
Medical Expense Tax Credit ✔︎ (1) 1,865 $373 5,000,000
Non-taxation of Guaranteed Income Supplement and Allowance benefits ✔︎ 235 $370 635,000
Exemption of scholarship, fellowship and bursary income ✔︎ (2) 425 $368 1,155,000
Refundable Medical Expense Supplement 175 $311 562,000
Partial deduction of and partial input tax credits for meals and entertainment ✔︎ (1) 740 $277 811,000
Pension Income Credit ✔︎ 1,340 $263 5,100,000
Non-taxation of benefits from private health and dental plans ✔︎ (2) 3,030 $235 12,900,000
Tax treatment of Employment Insurance and Quebec Parental Insurance Plan premiums and benefits ✔︎ 4,150 $208 20,000,000
Non-taxation of social assistance benefits ✔︎ (2) 315 $197 1,600,000
Deduction of union and professional dues 1,100 $193 5,700,000
Political Contribution Tax Credit 25 $170 147,000
Tax-free amount for emergency services volunteers 3 $150 20,000
Canada Employment Credit 2,505 $141 17,800,000
Teacher and Early Childhood Educator School Supply Tax Credit 5 $106 47,000
Deduction for tradespeople’s tool expenses 2 $100 20,000
Tax-Free Savings Account ✔︎ 1,315 $97 13,500,000
Student Loan Interest Credit ✔︎ 45 $84 537,000
Education Tax Credit. Eliminated 190 $83 2,300,000
Registered Education Savings Plans ✔︎ 220 $39 5,700,000
Textbook Tax Credit. Eliminated 30 $13 2,300,000
Tax treatment of investment income from life insurance policies ✔︎ 260 $12 22,000,000

Skip to top of Table 3

And there it is, right at the top, the LCGE. Claimed by 60,100 individuals in 2016, each claiming around $25,000 on average that year.

One thing I noted previously is how costly RRSPs are to the government. I’m often asked if RRSPs are worth it, because you get a tax break when you contribute and enjoy tax free growth, but you are taxed on the withdrawals. The amount shown in the table for RRSPs already accounts for the taxes recuperated upon withdrawal. The positive number indicates that the government has a net expense. Thus, on average, Canadians are benefiting. But because only averages are shown, you should not use this fact for your own personal financial planning, since everyone’s situation is unique to them.

I did this analysis to determine what deductions I should focus on implementing next in the MoneyReadyApp. As you see, the app already deals with most of them, but there are some missing. As I mentioned earlier, the LCGE is hard, but the Northern resident deduction shouldn’t be so bad. I’m thinking that I might need to do this analysis for all of the provincial tax breaks also, to find any more low-hanging fruit not already covered by the MoneyReadyApp (it does cover many provincial tax breaks already).

If a tax break isn’t implemented in the MoneyReadyApp, then the results that you get from a TIME MACHINE run will make you look a little poorer. Tax breaks come and go with different governments, and you want to create a financial plan that is not too dependent on them anyway.

I thought I’d share this analysis on my blog because I think the data are interesting and you might too. You can also see a glimpse of the MoneyReadyApp’s inner workings and how I am striving to bring Canadians the most accurate, complete, easy, and affordable financial planning tool.