Finance Minister Bill Morneau says he expects to find $3-billion a year in new revenue for the federal government by cancelling a broad range of boutique tax credits.
After delivering a federal budget this week that promises billions of dollars for infrastructure and social programs, the government's focus now shifts to what projects to fund and how to find extra money to help pay for them.
In an interview with The Globe and Mail on Thursday, Mr. Morneau said a review of so-called tax expenditures will begin this year and he's optimistic that it will produce billions in new revenue. The minister also said he expects new budget funding for enforcement at the Canada Revenue Agency will raise billions.
The minister's comments came on the same day that he faced the House of Commons for the first time since releasing Tuesday's budget, which forecasts a $29.4-billion deficit in the 2016-17 fiscal year. Interim Conservative leader Rona Ambrose said the budget was a "betrayal of the middle class," and specifically accused the government of cutting tax credits for families in order to cover the cost of a Liberal spending spree.
About 200 tax expenditures or credits have been added to the federal tax system over the years and they are worth more than $100-billion a year. The Auditor-General has expressed concern that they receive virtually no scrutiny, as they are rarely reviewed by government or Parliament to determine their effectiveness.
The former Conservative government brought in a wide-range of targeted tax credits aimed at specific segments of the population, including tradespeople and public transit riders. Mr. Morneau added a new one Tuesday, with a school-supply tax credit for teachers and early childhood educators.
The budget also moved to eliminate tax credits for children's fitness and art programs this year, as well as the education and textbook tax credits next year. There's more to come: The budget promised a "review of the tax system" this year, but did not say how much revenue this might raise.
"The goal is to make sure that the [tax] expenditures that we have in place are having the intended impact. So, we'll get going on that. It's something that we'll be looking at in the coming months," Mr. Morneau said.
The federal government calls these credits "tax expenditures" because they are classified as government programs that have an "expense" in terms of lost federal revenue. However, fiscal conservatives argue the term is misleading because eliminating a tax expenditure is essentially a tax hike.
The Liberal platform promised to find $3-billion a year in savings through a review of tax expenditures, but little has been said on that since the party formed the government last fall.
The Globe asked Mr. Morneau whether the $3-billion figure remains a realistic target.
"It still seems realistic to me," he said. "This was budget 2016. Year one of a four-year mandate. We want to make sure that we continue to look at tax fairness. Clearly, I don't have an exact number for you at this stage, but we'll remain focused on how we can ensure that the tax system works as best as it can. You've also seen that we've charged the [Canada Revenue Agency] with the responsibility for ensuring that people pay the taxes that they owe. And that's an important part of our plan."
The budget gave the CRA $444-million over five years to fight tax evasion and avoidance, and booked $2.6-billion in expected new revenue from this added enforcement activity.
Mr. Morneau's comments suggest the review will be focused on tax expenditures and will fall short of the broader review of Canada's tax system that many economists and business groups have recommended. The Finance Minister said the exact form of the tax review has not yet been decided. In addition to that review, Mr. Morneau said his priorities for the year are to reach an agreement with the provinces on expanding the Canada Pension Plan, to work with Infrastructure Minister Amarjeet Sohi on the shape of the government's second phase of infrastructure spending and to prepare an innovation agenda with Innovation Minister Navdeep Bains.
The political appeal of tax credits is that they can be relatively inexpensive compared with a broad-based tax cut, and they allow a governing party to tell specific groups that it is delivering something just for them. Advocates of tax credits also argue they are more efficient because they can deliver help to individuals without the need for a bureaucratic program.
Mr. Morneau acknowledged that reversing some of these credits will inevitably mean some people will be upset. "With every tax expenditure, there's going to be a constituent that feels it's appropriate, and we'll listen to voices that tell us why each part of the tax code makes sense the way it is. But our objective is to make the tax code simpler and our objective is to ensure that there's tax fairness."