Thank you.
My name is Dr. Lindsay Tedds. I am an associate professor of economics in the school of public administration at the University of Victoria. My primary area of expertise is Canadian tax policy, with a particular focus on design and implementation.
With that, I would like to thank the committee for allowing me the opportunity to share my views on two tax-policy measures that are contained within Bill C-31. This is mainly the elimination of the need for individuals to apply for the GST/HST tax credit, allowing the Minister of National Revenue to automatically determine if an individual is eligible. I'd also like to talk about yet another one-year extension of the mineral exploration tax credit for investors in flow-through shares.
With respect to the GST/HST credit, one of the biggest challenges levied against the tax itself is that it is regressive. However, there are features of the implementation of this tax that offset its regressivity, and a very important part of that is the GST tax credit. This tax credit puts money in the hands of low- and middle-income households to offset the tax that they are paying on their consumption.
Without the passage of Bill C-31, the status quo for applying for this important tax credit will remain and that is very unfortunate. The current administration of this tax credit requires individuals to apply for it every single year by checking a box on their tax application. By using this opt-in method, low-income individuals who overlook the box, or more importantly, do not understand the box and do not check it, miss out on this very important tax credit. Through Bill C-31, the federal government is making a very significant and very important reform to the administration of the GST/HST tax credit by eliminating the need for individuals to apply for the credit and allowing CRA to automatically determine if an individual is eligible for the credit, as we do with most credits in the tax system.
I applaud this move away from an opt-in method towards an assessed method because the credit is an important way to get money into the hands of low- and middle-income Canadians and this simple change will actually increase the money going to these households.
With respect to the mineral exploration tax credit, in form and function this tax credit dates back to 2000 when it was called the investment tax credit for exploration. The impetus for this 15% non-refundable investment tax credit for investors in flow-through shares in mineral exploration companies was the low prices of metals that occurred in the 1990s, and those low prices caused a significant contraction in mineral exploration. Now, metal prices have rebound significantly since 2000 and that tax credit, which originally was set to expire in 2003, has unfortunately been continually renewed since that time. The METC was last set to expire on March 31, 2014, but Bill C-31 extends it for yet another year. This is despite the fact that mineral taxes are at historically high levels and in fact have increased threefold since the tax credit was implemented.
Not only have the conditions that prompted the creation of the tax credit disappeared, there is actually no evidence to support the existence of the tax credit. There is no evidence that the credit induces increased exploration activity over that stimulated by commodity prices. On the investor side, the credit subsidizes high-risk investments that are used predominantly for tax planning purposes by high-income taxpayers rather than for calculated investment purposes.
The dire consequence of it is that the tax credit channels investment money away from other more lucrative but unsubsidized investments. In fact, the rate of return of investments that qualify for this tax credit is very poor, suggesting that the tax regime is the sole purpose for these investments. On the administrative side, the METC regime is associated with high administrative and compliance costs benefiting only tax lawyers and accountants.
It is time to end this tax credit that benefits wealthy investors and subsidizes poorly performing investments. Doing so will help restore fairness to our tax system and close a loophole with little discernable benefits for the taxpayers who fund it.
In closing, I'd like to thank you for providing me with an opportunity to provide you with my views on these two measures, and I look forward to your questions.
Thank you.