Tax Credits Should Be Refundable

By Andrew Rickard | August 26 2015 08:51AM

A report from the The School of Public Policy at the University of Calgary suggests that all tax credits should be made refundable.

photo_web_2044In paper published earlier this week, authors Wayne Simpson and Harvey Stevens considered the effect of converting non-refundable tax credits (NRTCs) to refundable tax credits. Their conclusion is that NRTCs are of no value to people who have low incomes and who do not pay taxes. If the government wants to address the issue of income inequality, they believe that making all credits refundable would go a long way to helping poor Canadians.

"Making all tax credits refundable wouldn't require Ottawa to introduce new tax measures; the Canadian tax system already contains a mix of refundable and non-refundable tax credits, so the government could simply continue its practice of designing tax credit programs to be refundable," say the authors, who argue that doing so "would turn the tax system into a proper negative income tax system – where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government."

How much would this cost? If credits were refundable without an income exemption, Simpson and Steven put the price tag of switching NRTCs to RTCs at $6.6 billion; they say this would provide extra benefits for 6.4 million families, which is about 37% of Canadian households.

"To help finance the conversion of NRTCs to RTCs, a fifth tax bracket with a marginal tax rate of 34% could be created for the top one percent of taxable incomes," explain the authors. "As well, the marginal tax rate for the fourth tax bracket could be raised to 30%. We estimate that these two measures would increase federal income tax revenues by $3.72 billion."