Mr. Speaker, refundable tax credits are akin to expenditure programs delivered through the tax system and have long been used in very limited circumstances. In the majority of circumstances, expenditure programs are often a more appropriate way to direct funding to certain individuals and businesses, since programs can be designed and administered in a manner that facilitates targeting to achieve a specific goal. The government treats these measures as spending programs in the public accounts.
Preliminary estimates suggest the cost of converting existing non-refundable tax credits for individuals into refundable tax credits would be greater than $11.5 billion in 2013. Note that this represents a lower bound estimate, as it assumes that only the unused value of the non-refundable tax credits currently claimed would be refunded.
A number of other factors could contribute to substantially increasing the cost of converting existing non-refundable tax credits into refundable tax credits. These include the fact that the cost does not account for a potential increase in the take-up of existing non-refundable credits.The cost of refundability would also be greater in the early years of such a policy, since credits that are currently allowed to be carried forward to future years, such as amounts for education, textbooks, and tuition, as well as the charitable donations tax credit, would be claimed in the year the costs were incurred. Moreover, the cost could increase significantly depending on the parameters for refundability. As an example, there are 5.6 million children in Canada of ages up to 14 years old, who in the majority of cases will not have employment income. If a refundable basic personal amount could be claimed in respect of these children, providing a refundable amount of $1,623 per child, the cost of refundability could potentially be in the range of $9 billion higher.
In the corporate income tax system, tax credits are provided to encourage businesses to engage in certain types of activities or to invest in certain regions. Businesses, incorporated and unincorporated, are permitted to offset income tax otherwise payable with non-refundable investment tax credits. When a corporation has more non-refundable tax credits than tax owing in an individual year, the unused value of the tax credits can be carried back three years to refund tax paid in past years, or be carried forward 20 years to offset tax otherwise payable in future years. The principal objective of this carryover system is to improve fairness and smooth out the impact of business cycles. In addition, a component of the scientific research and experimental development, SR and ED, tax incentive program and the Atlantic investment tax credit is refundable for smaller businesses.
It is estimated that making non-refundable investment tax credits refundable for all businesses would cost at least $1.7 billion in 2013. Note that this represents a lower bound, as it assumes no behavioural response. In deriving this estimate, five non-refundable investment tax credits were examined, including the scientific research and experimental development tax incentive program, the Atlantic investment tax credit, the apprenticeship job creation tax credit, the child care spaces investment tax credit, and the corporate mineral exploration and development tax credit. Furthermore, if the value of the unused investment tax credits being carried forward was fully refunded in 2013, there would be an additional one-time cost to the federal government that is estimated to be $10.8 billion.
The annual cost of refundability would likely be greater than this $1.7 billion static estimate, as refundability may change how corporations respond to investment tax credits. For example, the non-refundable SR and ED tax credits encourage companies to locate other profitable activities and associated jobs in Canada, since any tax on these activities is reduced by the value of the SR and ED tax credits. Extending SR and ED refundability to large multinational corporations could result in fewer related activities and less taxable income in Canada. Moreover, new corporations with little or no expectation of earning future profits in Canada would also likely be formed to take advantage of refundability.