FINA Committee Report

Although the Committee did not pose specific questions related to communities when its 2007 pre-budget consultations were launched, mention was made of public goods and services; many of these goods and services are related to communities and are funded by tax revenues. Within this context, it should be recognized that the design of a system of taxes, fees and other charges can have an important impact on the communities within which people live and businesses operate.

For example, the tax system may provide incentives for the preservation of our environment and heritage buildings or for other behaviours that are desirable from the perspective of the community. It may also be designed in a manner that promotes the development and maintenance of infrastructure in our communities, including in respect of housing and municipal services. Finally, the tax system can be used to encourage contributions to charitable and not-for-profit organisations by individuals and businesses.

WHAT WE HEARD

A. The Environment

The Committee was told that taxes, fees and charges can affect the environment by either encouraging or discouraging certain behaviours. For example, witnesses noted that taxes can promote the development, commercialization and use of goods and services that have desirable consequences for the environment, including through incentives to use public transit, purchase goods and services that are energy-efficient, and engage in responsible use of water. Alternatively, they can discourage the use of goods and services that are considered to be undesirable, perhaps because of their environmental footprint.

1.   Taxes to Support Environmental Objectives

A number of the Committee’s witnesses supported the idea that the nation’s tax system should promote and support environmental objectives. The Green Budget Coalition suggested that levies should be gradually increased on activities that damage society, such as those that create pollution and waste, and reduced or credited on activities that benefit society, such as non-polluting economic activities.

Another witness, Gordon MacKinnon, suggested that an ECO (Environmental Cost of Ownership) consumption tax should be created, with a rate that would vary according to the environmental footprint associated with the use of a particular good or service.

top

2.   Carbon Taxes

Some witnesses advocated the implementation of a carbon tax as an incentive to reduce the greenhouse gas emissions associated with global warming. The Green Budget Coalition and the Pembina Institute proposed that the federal government establish a price for greenhouse gas emissions of at least $30 per tonne carbon dioxide equivalent by 2009 and of at least $50 per tonne by 2020, through a carbon tax and/or a cap-and-trade system. The Canadian Union of Public Employees suggested that the federal government should set a price of $30 per tonne for carbon dioxide emissions, with a view to increasing this price in the future.

The British Columbia Sustainable Energy Association urged the federal government to create a carbon tax in the form of a variable-rate retail sales tax on all fuels with specific rates based on carbon content, while the British Columbia Environmental Network advocated incremental tax increases on all types of residential/consumer energy.

Another witness, Randall Garrison, shared his view that a carbon tax would be borne, to a great extent, by ordinary Canadians; he argued that such a tax is not the best way in which to help the environment. KAIROS: Canadian Ecumenical Justice Initiatives advocated a carbon tax on fossil fuels, with rebates for low-income Canadians and residents of remote communities where alternatives to fossil fuels are not available. The British Columbia Environmental Network suggested that, in the year prior to increases in energy taxes, there should be a substantial reduction in income taxation for individuals in the lower one-third of the income distribution.

Other witnesses, including Denise Holmen, Capital Unitarian Universalist Congregation, the Catholic Women's League of Canada and the Sierra Club of Canada - Atlantic Canada Chapter, agreed with the general objective of using the tax system to bring about behavioural changes that would result in lower greenhouse gas emissions.

3.   Public Transit

Some of the Committee’s witnesses supported tax measures to enhance the use of public transit. Accor Services advocated employer-provided transit media on a tax-free basis, based on the U.S. experience. Two options were suggested:

·        employees purchase transit media (i.e., monthly/annual passes, single tickets, smart cards or vouchers used for fare media) as a pre-tax payroll deduction; or

·        transit media is provided to employees by their employer as a company-paid tax-free employee benefit.

Other witnesses, including the Greater Vancouver Transportation Authority and the Canadian Urban Transit Association, made similar proposals to exempt employer-provided transit benefits from taxation. Moreover, the Royal Architectural Institute of Canada supported the creation of tax incentives to promote the development and use of public transit systems.

The Fédération des femmes du Québec, the Conseil d'intervention pour l'accès des femmes au travail and the Fédération des associations de familles monoparentales et recomposées du Québec asserted, however, that the federal government should invest directly in public transit rather than in transit-related tax incentives, since people who live in communities where public transit is inadequate cannot benefit from the current public transit pass tax credit. Figure 5.1 provides the estimated federal fiscal cost of the federal tax credit for public transit passes over the 2006 to 2008 period.

Figure 5.1 — Federal Fiscal Cost of the Tax Credit for Public Transit Passes,
2006 - 2008

Source: Department of Finance, Tax Expenditures and Evaluations 2006

top

4.   Energy-Efficient Buildings, Machinery and Equipment

In addition to the proposals for accelerated depreciation that were noted in Chapter 4, witnesses supported other tax measures that would support the environment through energy efficiency. For example, the Royal Architectural Institute of Canada suggested that corporate tax incentives should be created to support net zero energy housing and increased density housing projects, while the Canadian School Boards Association advocated the establishment of a green tax policy, based on the Leadership in Energy and Environmental Design (LEED) system, to support school board green capital and operational investments.

The Canadian Gas Association urged the federal government to create a temporary 10% tax credit for: qualifying high-energy efficiency equipment, such as Energy Star appliances; equipment that integrates renewable sources, such as ground-source heat pumps using natural gas or grid-electricity; and high-efficiency boilers, furnaces, domestic water heaters and air conditioning equipment. Enbridge advocated the creation of an investment tax credit, based on installed capacity, for clean energy projects, such as stationary fuel cells and energy recovery technologies, and proposed that investors in clean energy plants be permitted to claim accelerated depreciation for eligible assets.

The Canadian Trucking Alliance spoke to the Committee about the enviroTruck program, which would help to accelerate the penetration of new generation smog-free trucks into the marketplace and promote investment in fuel-efficiency devices. It urged the federal government to provide financial incentives, including tax credits or accelerated capital cost allowance rates, to purchase or lease new trucks, or to take other actions that would reduce smog and increase fuel efficiency.

5.   Water Use

Friends of the Earth Canada and The Canadian Water and Wastewater Association told the Committee that, on a per-capita basis, Canadians use almost twice the amount of water as the average European, and that one-quarter of Canadian municipalities have faced water shortages or water quality problems in recent years. Consequently, they proposed that the federal government adjust import duties and taxes with the objective of reducing the cost of technologies that support water soft path objectives, such as low-flow toilets, and imposing import duties and taxes on technologies that do not support water soft path objectives.

6.   Other Tax Measures related to the Environment

Other proposals related to the environment were also presented to the Committee. For example, the Green Budget Coalition urged the federal government to extend Ecogift tax incentives to lands acquired for resale by a corporation for business purposes. Moreover, the Insurance Bureau of Canada supported tax changes, such as the ability for earthquake premium reserves to grow on a tax-deferred basis, in order to promote the ability of Canadian communities to withstand natural disasters. The Canadian Real Estate Association advocated a change that would allow developers to treat costs related to the rehabilitation and redevelopment of environmentally impaired properties as a deductible expense for purposes of income taxation.

The Pembina Institute requested the elimination of the super flow-through share program and of the investment tax credit for exploration (ITCE). Both of these measures are available in respect of mining development and exploration.

B. Housing

The Committee heard a variety of concerns about affordable and rental housing, new housing and home purchases, and fire safety in buildings. Witnesses proposed tax-related measures that, if implemented, would address their concerns in each of these areas.

top

1.   Affordable and Rental Housing

Witnesses identified ways in which the tax system could be used to encourage the development of more affordable and rental housing, as well as to provide a better balance between the tax benefits received by homeowners and by rental property investors. The Poverty Reduction Coalition proposed that the federal government eliminate the federal Goods and Services Tax (GST) on construction materials associated with affordable housing and affordable rental housing developments. The Greater Victoria Chamber of Commerce supported measures aimed at encouraging the development of multi-unit rental housing, and advocated such initiatives as removal of the GST on the purchase of land to be used for the development of multi-unit rental housing and the ability for owners of rental properties to deduct capital cost allowance losses against other sources of income. Moreover, the St. Andrew’s-Wesley Homelessness and Mental Health Action Group and the Greater Victoria Chamber of Commerce requested that small businesses involved solely in rental properties be able to claim the small business deduction.

As well, the St. Andrew’s-Wesley Homelessness and Mental Health Action Group advocated the creation of a regulated investment vehicle for affordable housing. According to it, the measure could be modelled on labour-sponsored investment funds, but would be structured to support investments in affordable housing rather than venture capital needs.

In order to increase the supply of rental housing in Canada, such witnesses as the Association of Regina Realtors, the Canadian Federation of Apartment Associations, the Canadian Home Builders' Association and the Housing Affordability Partnership urged the federal government to allow the rollover of capital gains and capital cost allowance recapture from the sale of a rental property if the proceeds are reinvested in another rental property. The Association of Regina Realtors suggested that proceeds should be reinvested within a one-year period.

In addition, the Housing Affordability Partnership proposed that the amortization period for capital costs in respect of rental properties be shortened, and urged tax benefits for both corporations that provide land and funding in the development of housing that is considered to be affordable, and landlords wishing to sell their older rental properties to not-for-profit housing societies and municipalities for affordable housing purposes. As well, it advocated a reduced tax rate of 15% for revenues generated from secondary suites. The New Brunswick Non-profit Housing Association supported tax incentives for corporations or individuals to donate property for affordable housing developments.

The Committee was told that the GST input tax credit cannot be used by rental housing investors because no GST is charged on residential rents; however, the credit is available to investors in retail office complexes since the GST is collected on commercial rents. The Canadian Home Builders’ Association proposed that, since rental housing is a business and rental housing investors should not be treated differently, rental housing should be zero-rated under the GST, a change that would result in the refunding of the GST paid by rental housing investors.

top

2.   New Housing and Home Purchases

Witnesses informed the Committee that, although the price of new houses has increased by more than 40% since the GST was introduced in 1991, the price thresholds for the GST New Housing Rebate have remained unchanged. The Canadian Home Builders’ Association supported indexation of the price thresholds in order to make new homes more affordable, while the Housing Affordability Partnership urged the federal government to reduce or rebate the GST on the purchase of a primary dwelling. Figure 5.2 shows the federal fiscal cost of the GST New Housing Rebate over the 2001 to 2007 period.

Figure 5.2 — Federal Fiscal Cost of the Goods and Services Tax New Housing Rebate, 2001 - 2007

e: estimations

p: projections

Source: Department of Finance Canada, Tax Expenditures and Evaluations 2006

Inflation was also mentioned by witnesses in the context of the federal Home Buyers' Plan (HBP); the maximum withdrawal amount has never been adjusted to account for the increase in house prices. The Canadian Real Estate Association, the Association of Regina Realtors and the London and St. Thomas Association of Realtors proposed that the maximum withdrawal amount allowed under the HBP be raised to $25,000, and adjusted every five years to account for inflation.

The Committee also learned that although GST rebates are available in circumstances where a home is substantially renovated, the definition of substantial renovation is felt to be overly restrictive. The Canadian Home Builders’ Association suggested that the definition should be expanded in order to encourage renovation work.

Finally, the Canadian Home Builders’ Association indicated that, unlike other businesses that have interest expenses associated with inventory, home builders and developers are required to capitalize and depreciate over time the carrying costs of their land holdings; the result is that the cost of land development for home builders and developers is relatively higher, ultimately leading to higher house prices. It urged the federal government to make the carrying costs of land holdings fully deductible as a business expense, as was the case prior to changes to the tax system in the late 1980s.

top

3.   Housing and Fires

The Canadian Association of Fire Chiefs told the Committee that the presence of automatic sprinkler systems in buildings reduces the potential that lives will be lost in a fire incident, and supported the creation of tax incentives to encourage owners of existing non-residential and high-rise residential buildings to install automatic sprinkler systems. It also suggested that owners of low-rise residential structures should be entitled to a partial deduction, from taxes payable, of the cost of equipping their buildings with automatic sprinkler systems.

C. Infrastructure and Municipalities

Witnesses spoke to the Committee about various aspects of public infrastructure and about how the federal government can support municipalities as they provide residents with infrastructure and other services.

1.   The Federal Sharing of Gasoline Tax Revenues with Municipalities

Witnesses, such as the Association of Municipalities of Ontario, told the Committee that the federal sharing of gas tax revenues has benefited municipalities. Figure 5.3 shows federal gasoline tax revenues that have been allocated to the provinces/territories and First Nations for the 2005 to 2010 period.

Figure 5.3 — Federal Gasoline Tax Funds Allocated to the Provinces, Territories and First Nations, 2005 - 2010

Note: Figures may not add due to rounding.

Source: Infrastructure Canada, available at www.infrastructure.gc.ca, January 2008

In order to ensure the repair and replacement of its aging infrastructure, the City of Toronto proposed that the federal sharing of gas tax revenues be made permanent. Moreover, because of relatively higher inflation in Canada’s North, the Association of Yukon Communities advocated annual increases in the amount of federal gas tax revenues that are shared. Finally, the Canadian Medical Association urged the federal government to increase the federal gas tax transfers, with the amount of the increase dedicated to municipal transit infrastructure projects in order to improve air quality.

top

2.   Other Tax-Related Measures to Support Municipalities

Witnesses also provided the Committee with other tax-related suggestions regarding federal support for municipalities. For example, the Halifax Regional Municipality, the Association of Yukon Communities and the Registered Nurses' Association of Ontario urged the federal government to share, on a permanent basis, the equivalent of one cent of the federal Goods and Services Tax annually with cities.

The City of Courtenay told the Committee that municipal expenses are growing relatively more quickly than municipal revenues, and advocated a federal transfer of 1% of personal and corporate income tax revenues to municipal governments as a sustained source of funding. In its view, income taxes are a relatively more equitable source of revenue than are property taxes.

3.   Tax-Related Support for Specific Infrastructure

Federal tax-related support for specific types of infrastructure — roads, museums, science centres and heritage buildings — was also proposed by witnesses. The Canadian Automobile Association maintained that, in 2006, the federal government collected gasoline excise tax revenues that far exceeded federal investments in road infrastructure, and suggested that the federal excise tax on transportation fuels should be allocated solely to investments in federal highway and road infrastructure. Figure 5.4 shows federal gasoline and motive fuel excise tax revenues over the 1996-1997 to 2006-2007 period.

Figure 5.4 — Federal Gasoline and Motive Fuel Excise Tax Revenues, 1996 - 1997 to 2006 - 2007

Source: Statistics Canada, Cansim Table 385-0002

Moreover, the Canadian Museums Association urged the federal government to develop tax incentives that would assist the museum sector in establishing endowments, foundations and other financing vehicles in order to create long-term sustainable sources of private financing.

The Discovery Centre proposed the creation of tax incentives that would facilitate partnerships between science centres and the private sector on science projects that result in innovative behaviour and skills as well as science literacy.

The Committee was told that while many provincial and municipal governments have implemented tax incentives to support the restoration of heritage buildings, until recently the federal government was almost entirely uninvolved with the conservation of privately owned heritage buildings. Such witnesses as the Heritage Trust of Nova Scotia, the Heritage Property Corporation, the Royal Architectural Institute of Canada, Heritage BC and the Heritage Canada Foundation asked the federal government to institute a tax incentive for the rehabilitation of privately owned heritage buildings. Urbanspace Property Group urged the creation of a 20% tax credit available to developers that rehabilitate a heritage building.

In particular, the Heritage Trust of Nova Scotia indicated that the proposed tax incentive could be limited to buildings listed on the National Register of Historic Places and could be limited to restoration work that meets required conservation standards. Moreover, it suggested that the tax incentive could apply to work that directly benefits the public, such as exterior and structural repairs.

The Heritage Canada Foundation informed the Committee that the costs of rehabilitating or restoring a historic building are not eligible for the GST New Housing Rebate, even if the project introduces new housing units, because program rules require the owner to remove 90% of the non-structural fabric of the existing property. The Heritage Canada Foundation and the Heritage Trust of Nova Scotia proposed that a GST rebate, similar to the GST New Housing Rebate, be created in respect of the rehabilitation of historic buildings.

The Committee was also told that when a heritage building is demolished, the owner is allowed to deduct the building’s value as a loss to offset profits associated with other properties. The Heritage Trust of Nova Scotia argued against this type of deduction.

D. Charities and Volunteers

Charities play an important role in Canadian society, contributing to our sense of community and providing goods and services that Canadians may otherwise expect from their governments. Witnesses provided the Committee with suggestions about how charitable giving by individuals and corporations could be enhanced, and the activities of volunteers recognized.

top

1.   The Donations and Gifts Tax Credit

A number of the Committee’s witnesses supported changes that would make the federal donations and gifts tax credit more generous. Figure 5.5 shows the estimated federal fiscal cost of the donations and gifts fax credit over the 2006 to 2008 period.

Figure 5.5 — Federal Fiscal Cost of the Donations and Gifts Tax Credit,
2006 - 2008

Source: Department of Finance Canada, Tax Expenditures and Evaluations 2006

While Oxfam Canada advocated a larger and more flexible credit in order to encourage Canadians to give more generously, other witnesses were relatively more specific in their proposals. For example, such witnesses as the Calgary Chamber of Voluntary Organizations, Imagine Canada and Orchestras Canada proposed an increase, to 29%, in the rate for eligible donations less than $201, a change which would result in a single credit rate of 29% for all eligible donations up to the maximum allowable level.

The Multiple Sclerosis Society of Canada urged the federal government to eliminate the requirement to mail tax receipts by first-class mail, which would result in reduced mailing costs, and to allow donors to claim donations for income tax purposes without providing receipts issued by a registered charity when donations are less than $250. The Mood Disorders Society of Canada suggested that individual taxpayers should be able, for taxation purposes, to carry forward and to carry backward their charitable donations for up to three years.

Witnesses also commented on donations to non-governmental organizations (NGOs). The City of Charlottetown suggested that tax measures related to donations to NGOs should be enhanced, while the Mood Disorders Society of Canada advocated an increase in the value of modest donations made to NGOs by a factor of 1.5 for purposes of the donations and gifts tax credit.

Another witness, Derwyn Davies, suggested that corporate donations to “think tank” institutions, such as the Fraser Institute, should not be allowed to be deducted from income for tax purposes since, according to him, such institutions have unfair access to deliberations by the federal government and have influence over its decisions.

top

2.   Donations and the Capital Gains Exemption

A number of witnesses, including the Association of Fundraising Professionals, suggested to the Committee that capital gains resulting from the donation of appreciated land and real estate to charities should not be taxed. The Canadian Association of Gift Planners made a similar proposal, and noted that real estate is one of the most widely held asset classes in Canada but is rarely donated to charities. Moreover, the New Brunswick Non-profit Housing Association and the Poverty Reduction Coalition urged the elimination of capital gains taxation on real estate donations for affordable housing developments. Orchestras Canada supported the elimination of, or a reduction in, capital gains taxation applied to donations of stock in privately held companies to charities.

3.   Charitable Remainder Trusts

The Committee was told that, although discussions with the Department of Finance are continuing, Canadian law continues to be unclear with respect to the use of charitable remainder trusts. According to the Canadian Association of Gift Planners, the federal government should be urged to implement quickly any Income Tax Act changes that are needed to clarify the tax treatment of donations to such trusts.

4.   Other Support for the Charitable Sector

Witnesses, including Imagine Canada and Philanthropic Foundations Canada, advocated targeted tax measures to improve access by the charitable and not-for-profit sectors to debt financing from private sources, an option that is currently available in the United Kingdom. Moreover, the Sport Matters Group and the Canadian Sport Centre Calgary urged the federal government to institute tax incentives for private debt financing for not-for-profit sport associations seeking to secure capital for infrastructure projects.

World Vision Canada suggested that, in order to increase the financial resources available to charities and not-for-profit organizations, the federal government should increase the Goods and Services Tax rebate for charitable organizations and qualifying not-for-profit organizations.

top

5.   Volunteers

Witnesses also urged the federal government to implement tax measures related to volunteer activity. While the Independent Media Arts Alliance supported the creation of a tax credit to recognize and reward volunteer activity generally, the Canadian Association of Fire Chiefs commented specifically on volunteer firefighting activity. It suggested the creation of a volunteer firefighter tax credit equal to $1,000 for 50 to 99 hours of volunteer firefighting activity, to $2,000 for 100 to 199 hours, and to $3,000 for 200 hours or more. Furthermore, in order to encourage employers to permit their employees to become volunteer firefighters, it advocated a $500 federal tax credit for employers for each employee actively serving as a volunteer firefighter or fire officer.

Moreover, the Heritage Trust of Nova Scotia spoke to the Committee about the expenses incurred by volunteers while performing non-paid activities, and suggested that since these expenses are similar to charitable donations, they should be recognized as such for purposes of taxation. Similarly, the Canadian Sport Centre Calgary and the Sport Matters Group advocated tax measures to support the training and development of community volunteers who coach, lead, officiate and govern sport in Canada.

WHAT WE RECOMMEND

The Committee recommends that:

16.    the federal government make permanent the existing program for the sharing of a portion of the federal gasoline excise tax revenues with municipalities. Moreover, in the next budget, the portion to be shared should be 5 cents per litre.

17.    the federal government, in respect of the Home Buyers’ Plan, amend the Income Tax Act in order to increase the amount that can be withdrawn from a registered retirement savings plan to purchase or build a qualifying home for the holder of the plan or for a related person with a disability.

18.    the federal government develop and implement tax incentives to encourage truck owners and operators to reduce greenhouse gas emissions. In particular, incentives should be developed to encourage the purchase of vehicles that are less harmful to the environment.

19.    the federal government amend the Income Tax Act in order to enhance incentives for charitable giving.

top