Thank you very much, Madam Chair, and to all members of the committee, good morning.
We would like to take this opportunity to explain the lens through which my colleagues and I in the tax policy branch examine and evaluate tax credits such as this one.
As a starting point, it's important to consider whether the goal of any tax measure is consistent with the functions of the tax system. The primary function of the Canadian tax system is to raise revenues needed to finance programs and initiatives that benefit Canadians.
However, the tax system has other secondary functions. One of these involves incentives within the tax system to support economic and social objectives, such as increasing saving and investment and charitable giving. The member also mentioned the research and development program, which is a very good example. Disincentives, such as excise taxes on tobacco, can also be used to discourage activities with negative externalities.
A tax measure of the variety proposed in this bill seeks to further a social objective, in this case, encouraging the rehabilitation of historic properties, its stated goal. The preservation of Canada's built heritage could be considered a socially beneficial behaviour. You talked a lot about that. But it endeavours to achieve this at the expense of another desirable goal, raising revenue. We have to strike a balance between the two. In making such an assessment, we strive to determine if the tax expenditure in question can effectively and efficiently fulfill its stated purpose.
Is offering a tax incentive, like this one, the most cost-effective or efficient means for providing these benefits? The tax expenditure associated with the measure represents amounts or dollars that could otherwise be used towards supporting a similar objective through spending. The colleagues from Parks Canada can talk about what happens on the spending side. There are advantages and disadvantages. You touched on this a bit in the previous round of discussion for tax incentives versus spending. With tax incentives, it is a bit more bottom-up, so there's more flexibility. However, in terms of spending, it's easier to control program costs and to ensure other types of equity, like regional and sectoral equity, so there are trade-offs.
A key consideration when considering any tax measure of this type is the extent to which it's effective in changing behaviours, as opposed to simply subsidizing activity that would have taken place anyway in the absence of the measure. On the one hand, this credit could have some effectiveness in encouraging owners to rehabilitate rather than demolish heritage properties. You touched on the U.S. experience. Things here are a bit mixed. There are studies that suggest the federal rehabilitation tax credit, in particular, has been effective. An important point we want to make is that the estimates of economic effects in these studies assume that none of the rehabilitation work would have happened in the absence of the credit, so zero. Is that a fair assumption?
On the other hand, the credit could represent a windfall gain for existing owners of historic properties. Those required to maintain their properties, in accordance with provincial, territorial, or municipal legislation, or to those who would have undertaken it anyway.
You also talked about equity, another criterion integral to policy analysis. A specialized credit offers tax incentives to a limited group of taxpayers. In terms of the bill at hand, the benefits of the tax incentive would primarily accrue to corporations and a limited number of, likely higher-income, individuals who own heritage homes. While heritage properties undoubtedly involve extra expenses, it is not clear that it is appropriate for these expenses of one home owner or property owner to be subsidized through the tax system.
Providing tax recognition for rehabilitation expenses for heritage buildings that are used as personal residences, which is part of the bill, could be inconsistent with the treatment of non-taxable assets such as a principal residence. Currently, neither the expenses related to owner-occupied housing nor the benefits, such as capital gains on a principal residence, are recognized for tax purposes. This approach ensures symmetry in the tax treatment of principal residences. To the extent that tax assistance is provided for renovations to personal residences, this would in many cases result in an increase in the value of these residences, providing a tax-free gain on disposition of the property.
To a certain extent, the tax system already provides measures to support the preservation of Canadian heritage. The Income Tax Act provides incentives for individuals and corporations to make donations to registered charities that support heritage properties. These tax incentives for donations to registered charities in Canada are among the most generous in the world. Generally, the tax policy in these instances has been to encourage donors to make contributions to registered charities, that is, organizations that have the mandate and the capacity to preserve and maintain important properties for the benefit of the public.
Tax measures also impose compliance costs for taxpayers and administrative costs for the government. In this case, you're probably talking about both the Canada Revenue Agency and Parks Canada, and it's important to take these into account in analyzing the overall efficiency of the measure. You want to see how these would compare if you tried to achieve the measure in an alternative way, say, through a spending program.
You had the discussion comparing it to the U.S. At the federal level, it's a 20% tax credit for designated properties. One important difference between the two appears to be the amount of rigour around ensuring compliance. In the U.S., the National Park Service is involved in certifying rehabilitation projects to ensure the work meets standards for rehabilitation both before and after the completion of the work, and they can also complete on-site inspections. We don't necessarily see the same types of authorities or protections in this bill, and if they were added, that would have an effect on the administrative and compliance costs.
Finally, the department recognizes that developing an equitable and efficient tax system requires that tax legislation be drafted in a manner that protects individual tax measures from being accessed in ways counter to the original policy intent sought by legislators. In our tax policy development process, which includes legislative review and drafting, we do our best to provide comprehensive legislation that will be free from technical flaws that can undermine or run counter to the desired effects of the measure as voted by Parliament.
In this respect, we do have concerns about a few areas of the bill. By way of example, the bill's use of the phrase property “used in the course of rehabilitating a historic property” could be treated as quite broad in terms of what's eligible for accelerated depreciation, going beyond the building itself.
I'll wrap up there.
Thanks, Madam Chair and members of the committee. We'd be very happy to answer questions.
