Appearance Before the House of Commons Standing Committee on Finance

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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.

Thank you.

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Medical necessity, Infertility, and the Taxpayer

Since Ontario’s announcement to fund one round of IVF treatment costs, there have been a number of articles written how this procedure is not medically necessary and should not be covered by taxpayers. There are things, though, that you should know before jumping on this band wagon.

The Canada Health Act provides for the transfer of funds to the provinces for their health care insurance programs for services that “are medically necessary for the purpose of maintaining health, preventing disease or diagnosing or treating an injury, illness or disability.” The Act, however, does not define what it means by medically necessary services. Instead, what is deemed to be medically necessary is defined in each province.

The medical community, backed by the World Health Organization, recognizes and defines infertility as a disease. Because it is defined as a disease, diagnostic and management of the disease is medically necessary in their opinion. This means that the failure to cover IVF is not a medical decision but rather a policy decision.

As we all know, Quebec considers IVF to be medically necessary and covers 3 rounds of IVF.

Ontario already considers IVF to be medically necessary; it just limits the procedure to some forms of infertility. In fact, Ontario used to cover IVF treatments until 1994. What happened was in 1993, the Royal Commission on New Reproductive Technologies showed that IVF was a medically proven treatment for women with blocked fallopian tubes and urged provinces to cover IVF treatment costs for these couples. It also recommended the IVF be provided for other forms of infertility and to continue to assess the effectiveness of this treatment in these cases. Ontario, in the face of sharp fiscal constraints at the time, used this decision to limit its coverage of IVF to only these women.

Of course, since 1994, IVF has been proven to be an effective treatment in the face of many causes of infertility. So much so that the Expert Panel on Infertility and Adoption recommended in its 2009 report that IVF be covered by the province. This recommendation, however, was ignored. The result is that Canada is one of few developed countries that does not fund infertility treatments. Currently, 15 US states have mandated fertility coverage by private sector providers and even providers not in these states will cover many fertility treatments, including IVF. You will find in their policies some statement that says that ART procedures such as IVF are considered both medically necessary for women with infertility and have been proven effective. The UK, Sweden, Australia, France, New Zealand, and Israel, to name a few, all provide IVF treatments to its citizens under a certain age. In fact, Israel is the world leader in IVF, with the highest rate of IVF in the world.

It is interesting that despite most provinces not funding IVF, it does fund many of the supporting costs associated with IVF, including diagnostics (like HSG, semen analysis, endometrial biopsy, various blood work, monitoring, etc.). In addition, many infertility treatments are already covered, including attempting to unblock fallopian tubes and embolization of varicocele. The result is that the out of pocket expenses from IVF is nowhere near as high as it is in non-mandated US states. In addition, it means an interesting state where some couples infertility is treated and managed through the provincial medical plan, whereas others are not. This leads to some interesting questions like: Why is varicocele embolization, the sole purpose of which is for fertility, considered medically necessary as a treatment for infertility, despite the lack of medical evidence as to its efficacy, but IVF is not, despite the abundance of medical evidence in support of its efficacy? Better yet, why is a vasectomy considered medically necessary? And more ironically, why is a woman with two blocked fallopian tubes allowed IVF access in Ontario but a women with one 100% blocked tube and the other 95% blocked, not?

The advantage of provinces considering IVF to be medically necessary as it means the treatment can be covered through the provincial health care plan. Something that Ontario has not yet actually committed to. The other route is to skirt the medically necessary debate and instead over financial support through the tax system. This is exactly what the Government of Canada and the Government of Manitoba does.

The Government of Canada allows the expenses incurred for IVF (actually all ART procedures) to be claimed through the medical expense tax credit, including both the procedure and fertility medications. This is a nonrefundable tax credit (valued at 15%), the caveat being that only expenses above a threshold are covered. The threshold is the lessor of $2,152 or 3% of net income. That is, if you earn less than $71733.33, you can claim a larger portion of your medical expenses. Median income in Canada is about $32,000. All medical expenses within a household can be pooled and claimed by just one taxpayer, preferably the one with the lowest net income but not so low that they are unable to benefit from the nonrefundable nature of the tax credit. Assuming that a round of IVF costs $10,000, the minimum level of taxpayer support for these expenses is $1,177.2. Since most claimants earn less than $71,733.33 it actually means most couples obtain much greater taxpayer financed support. I have yet to see those arguing against IVF under a provincial medical plan arguing against this taxpayer financed support.

The province of Manitoba also offers a Fertility Treatment Tax Credit. Manitoba covers 40% of the cost of IVF and related ART procedures to a maximum of $8000. Again, assuming that a round of IVF costs $10,000, Manitoba couples see an additional $4000 in support for their expenses.

The province of Quebec also have a medical expense tax credit but it is refundable. This means that those that obtain IVF treatments through the provinces medical plan get an added bonus of claiming the costs of the fertility medications through this tax credit.

The result is a rather curious, nonsensical, contradictory, and confusing landscape related to taxpayer support for IVF and related fertility treatments. Perhaps rather than another haphazard leap into the environment, Ontario and the other provinces should think clearly about the medical coverage and taxpayer support for infertility as a whole and bring a more cohesive response to this issue.

BC Budget 2014

BC’s latest budget was tabled in the legislature this afternoon. Much like the federal budget, there is not a lot of new stuff announced in the budget but a few interesting pieces caught my eye. I, of course, focus on the tax measures.

The budget introduces the BC Early Childhood Tax Benefit. This benefit will pay $55 a month to eligible families. This actually looks like really smart public policy. The benefit will be a refundable tax credit. This simple act, making the credit refundable, means that low income families who are already in a tax neutral position will benefit from the credit. If you are a low income family and not currently filing your taxes, this should really make you want to rethink that decision.

The maximum benefit of $55 a month is payable to all families with net incomes up to $100k and then is partially clawed back such that it is fully phased out by $150k in net income. Given that BC has the highest rate of child poverty in Canada it is too bad that the payment is not higher for lower income families which could be offset by an earlier clawback threshold. But overall, putting more money into the hands of families gets a thumbs up from me.

Much like the federal budget extended the Mineral Exploration Tax Credit, the BC government extended their provincial version of this credit. I have written before why mining flow through shares is stupid tax policy and you can read all about it here.

I also see that the BC government fiddled a bit with the B.C.’s Property Tax Deferment Program. I have also written about this policy before, which also ranks in my stupid tax policy list. My problem with BC’s program is that it is not means tested meaning that wealthy households that qualify derive a substantial benefit from a program meant to keep low income seniors in their homes.

The fiddling also extended to the Distant Location Tax Credit. The Greater Victoria area now qualifies as a ‘distant location’. I have to wonder if the filming of Gracepoint influenced this decision in any way. By the way, Victoria is not, in my books, distant. Also these film tax credits are just races to the bottom, which makes for bad tax policy.

So I give the government a thumbs up for the child benefit, but I don’t see many other positive tax measures (though increasing tobacco taxes is a positive IMO). What I dislike is that the special tax credits like the flow through shares piece and the property tax deferment benefit high income Canadians and need to be scrapped. Had the flow through shares credit been axed, the child benefit could have been enriched for low income households. That, my friends, is a lost opportunity.

The 2014 Federal Budget Overlooked Measure to Help Low Income Canadians

The 2014 Federal Budget has now been tabled, and the newspapers and twitter are filled with analysis of this budget.  While many are slamming the budget for being ‘all talk and no action’ there is a very important measure announced in it that is getting almost no coverage in the media. This measure helps address many of the regressive features of the GST/HST and gets more money into the hands of low income Canadians.

One of the biggest challenges levied against the GST is that it is regressive. As I have said before all taxes can in fact be regressive. Whether or not any particular tax is truly regressive depends specifically on how the tax is implemented. For example, income tax can easily be regressive but we in Canada have decided to design our income tax system as progressive. So questions about regressivity can only be answered by looking at the implementation of the tax.

With respect to the GST there were features of the GST implementation that offset its regressivity.

  1. the zero rating and exemption of some goods. 0 rated goods include basic groceries while exempted goods include things like health and financial services.
  1. general tax reform. This last one is important and gets and making sure you understand the history of policies before making statements. Our tax system underwent significant reform just before the GST (it should have been in tandem but politics got in the way). These tax reforms benefited low income Canadians and were meant to also overcome the regressivity of the GST.
  1. the GST tax credit. The tax credit is meant to offset the tax paid not to bring a household above the poverty line. It is a very specific credit with a very specific purpose.

The current administration of the GST 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) Once checked, the CRA then considers whether this individual is eligible for the credit. CRA does not review returns for qualification for this credit when this box is unchecked. This is a curious method for administering this tax credit. CRA knows who is eligible, so why not use CRA to determine eligibility. This is a system that is used for many of our other credits. While it is not a huge burden to check the box, it begs the question of why we have it. By using this opt-in method low income individuals who overlook the box miss out on this very important tax credit.

In Budget 2014, the federal government is proposing a very significant and important reform to the administration of the GST/HST Tax credit:

Budget 2014 proposes to eliminate 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. A notice of determination will be sent to each individual who is eligible for the GST/HST Credit. In the case of eligible couples, the GST/HST Credit will be paid to the spouse or common-law partner whose tax return is assessed first. (p. 328)

I applaud the government’s proposal to move the GST/HST credit away from the opt-in method and towards this assessed method. This credit is important money to get into the hand of low income Canadians and this simple change will likely make a big difference to some very needy households.