Tax-Based Expenditures

Opening Statement to the Standing Committee on Public Accounts

Tax-Based Expenditures

(Report 3—2015 Spring Reports of the Auditor General of Canada)

25 May 2015

Michael Ferguson, CPA, CA
FCA (New Brunswick)
Auditor General of Canada

Mr. Chair, thank you for this opportunity to discuss our 2015 Spring Report on tax-based expenditures. Joining me at the table is Richard Domingue, Principal, who was responsible for the audit.

The federal government can attain its policy objectives either through direct program spending or through tax expenditures. In this audit, we refer to the tax expenditures that could be replaced by direct spending as “tax-based expenditures.” In support of this point, the International Monetary Fund’s Fiscal Transparency Code states that “because the government policy objectives could be achieved alternatively through a subsidy or other direct outlays, [tax expenditures] are regarded as equivalent to budget expenditure.”

Tax-based expenditures account for billions of dollars annually. We looked at how the Department of Finance Canada and the Canada Revenue Agency managed these expenditures. More specifically, we examined whether clear and useful information is reported, whether analyses are performed before the implementation of these expenditures, and whether existing tax measures are monitored and evaluated. We selected nine tax-based expenditures.

We found that the information provided by the Department of Finance Canada on tax-based expenditures does not adequately support parliamentary oversight. Although these expenditures are similar to direct program spending, less information is provided to Parliament about these expenditures than about direct program spending. For example, the Tax Expenditures and Evaluations report does not include future cost projections.

Reporting practices in some international jurisdictions provide examples where additional details related to tax expenditures are disclosed. The number of beneficiaries, the administrative costs, and links between direct spending programs and these expenditures are sometimes reported in other jurisdictions. We believe that Parliament needs comprehensive and consolidated information about tax-based expenditures to better understand total government spending.

We found that the Department of Finance Canada did a good job of analyzing new tax measures before they were implemented. For the measures we selected, the Department considered most key elements of its analytical framework, such as the need for government intervention, and efficiency, effectiveness, and equity. Analyses on potential tax measures are prepared to support decision making.

We found that although the Department of Finance Canada monitored existing tax-based expenditures, it did not systematically evaluate these expenditures to determine whether they achieved the expected results and whether they were performing as intended. The policy requirement to evaluate direct program spending does not apply to tax-based expenditures. Also, tax expenditures are not included in comprehensive spending reviews such as “strategic” reviews.

We found examples where the Department of Finance Canada identified issues in relation to certain tax measures before implementing them. Despite those issues, the Department had yet to evaluate these tax measures after they were implemented. When the Department evaluated tax measures, it did not publish the evaluations. For example, although the Department evaluated the Children’s Fitness Tax Credit, it did not make the information public. We believe that information needs to be disclosed for parliamentarians to understand what the money spent through the tax system is accomplishing.

We also examined the monitoring of costs and the sharing of information. We found that the Canada Revenue Agency monitored costs to implement new measures and compliance issues. It also shared relevant information with the Department of Finance Canada on an ongoing basis.

The Department of Finance Canada has prepared a detailed action plan to address each of our recommendations.

This concludes my opening remarks. We would be pleased to answer any questions the Committee may have. Thank you.