The myriad tax credits introduced by Jim Flaherty before the recession are now placing an added strain on Ottawa's bottom line as the Finance Minister prepares to wrestle a $31-billion deficit.
In his first few federal budgets, Mr. Flaherty created a wide range of tax breaks aimed at specific elements of the population. Groups on the receiving end of new deductions included construction workers, public transit riders, seniors and parents of sporty kids.
The credits featured prominently in government advertising, allowing the Conservatives to target their message toward various segments of the population.
A Finance Canada report released Monday provides an update as to how much these and other credits – which the government officially calls "tax expenditures" – now cost the federal government in terms of lost revenue.
Some of the changes that received little attention at the time are having a growing impact on federal revenues, the report shows.
For instance, two Conservative top-ups to the Age Credit have increased the annual cost of the deduction by 25 per cent, from $1.8-billion in 2006 to $2.26-billion in 2011. The tax credit for seniors used to apply to incomes of $57,377 or less. Now it can be claimed by seniors with incomes of up to $76,541.
Meanwhile the annual cost of the Tax Free Savings Account – announced in the 2008 budget – has grown from $65-million in lost revenue in 2009 to $220-million in 2011. The tax expenditure cost will continue to grow as Canadians save more in these accounts.
The cost of two other Conservative credits, the Children's Fitness Credit and the Public Transit Tax Credit, appears to have stabilized at $115-million and $150-million respectively.
But in an attached report specifically focused on the Public Transit Tax Credit, Finance Canada officials concluded that nearly six years after it was launched, Ottawa cannot say definitively whether the credit has had any impact on ridership.
Derek Fildebrandt, national research director for the Canadian Taxpayers' Federation, said the vast majority of these items are a form of spending, not tax cuts.
He notes that closing tax loopholes is a big part of the political debate in Washington as Democrats and Republicans argue over how best to tackle the U.S. deficit, yet Canada's many tax deductions get little scrutiny here.
Mr. Fildebrandt argues it would be better for taxpayers and the economy if most of these credits were replaced with across-the-board tax cuts.
"Is it the role of the federal government to be bribing us with our own income tax dollars to ride the bus?" he asked. "They call these things tax cuts, but in fact they're expenditures and they've only gone to make the tax code look like a piece of Swiss cheese."
Some of the credits – like the $725-million a year in lost revenue for an employee stock deduction – are often criticized as perks for the rich. Yet other deductions, such as the Child Tax Credit, are geared toward lower-income families.
Toby Sanger, senior economist with the Canadian Union of Public Employees, said in an era of restraint, he believes all sides of the political spectrum should be able to agree that these credits need a review.
"It makes the tax system more complicated and people end up getting accountants," he said. "Frankly, the spending would be a lot more effective if they just spent it directly."
Finance Canada released a related analysis Monday that concludes these tax credits, including raising the basic personal amount individuals can earn without paying taxes, help make the tax code more progressive. The review of tax records found that nearly 42 per cent of Canada's 24.9 million tax filers paid no tax at all once credits were claimed. As a result, Canada's personal tax base in 2008 came from 14.3 million Canadians who sent a combined $107.8-billion to Ottawa.