Speaking Notes for Lindsay Tedds
Associate Professor of Economics
School of Public Administration, University of Victoria
Appearance Before the House of Commons Standing Committee on Finance
In Relation to its Study of Parts 1 to 4 of Bill C-31
May 8, 2014, 5:00PM-6:30PM EDT
Good afternoon, my name is Dr. Lindsay Tedds and 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, particularly the design and implementation of tax policy. I have written a number of peer reviewed journals articles, book chapters, and technical reports, as well as two books in this field.
I would like to thank the Committee for providing me with the opportunity to share my views on two tax policy measures included in Bill C-31, namely:
- The elimination of the need for individuals to apply for the GST/HST tax credit and allowing the Minister of National Revenue to automatically determine if an individual is eligible to receive the credit; and
- Yet another one-year extension of the mineral exploration tax credit for flow-through share investors.
Change in application for GST/HST Credit
One of the biggest challenges levied against the GST/HST is that it is regressive. However, there are features of the GST/HST implementation that offset its regressivity, including the GST/HST tax credit. The purpose of the GST/HST tax credit is to help offset the amount of GST/HST taxes paid by low and middle income households.
Without the passage of Bill C-31, the status quo for applying for this important tax credit would remain, which would be very unfortunate. The current administration of the GST/HST tax credit requires individuals to apply every year by “checking the GST/HST Credit application box on their annual income tax return.” (Budget 2014, p. 327). By using this opt-in method low income individuals who overlook the box or do not understand what is meant by the question and do not check the box miss out on this very important tax credit.
Through Bill C-31, the federal government is making a very significant and important reform to the administration of the GST/HST tax credit. Bill C-31 eliminates the need for an individual to apply for the GST/HST Credit and to allow the Canada Revenue Agency to automatically determine if an individual is eligible to receive the GST/HST Credit.
I applaud this move: away from the opt-in method and towards this assessed method. This credit is an important way to get money into the hands of low and middle income Canadians and this simple change will likely make a big difference to some very deserving households.
Extension of the Mineral Exploration Tax Credit
The Mineral Exploration Tax Credit (METC), in form and function, dates back to 2000, when it was called the Investment Tax Credit for Exploration (ITCE). The impetus for this 15% non-refundable investment tax credit for investors in flow-through shares of mineral exploration companies was the low price of metals that occurred throughout the 1990s and which caused a significant contraction in mineral exploration. Despite metal prices rebounding by the mid-2000s, the tax credit, originally set to expire in 2003, has been continuously renewed for between one- to three-year periods. The METC was last set to expire in March 31, 2014, but Bill C-31 extends this tax credit for yet another year, despite metal prices currently being at historically high levels.
Not only have the conditions that prompted the creation of the tax credit disappeared, that of low mining prices, there is no evidence of the effectiveness of the tax credit. There is no evidence that the METC induces increased exploration activityover that stimulated by commodity prices. On the investor side, the METC subsidizes high risk investments and appears to be predominately used for tax planning purposes by high income taxpayers rather than for calculated investment purposes. The consequence 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 the METC have been very poor, suggesting that the tax regime is the sole impetus for the investment. On the administration 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 poor performing investments. Doing so will help restore fairness to our tax system and close a loophole with little discernable benefit to the tax payers that fund it.
In closing, I want to thank you for providing me with this opportunity to provide you with my views on these two measures contained in Bill C-31. I look forward to your questions.