Debate over wisdom of income splitting extends beyond Tory caucus

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OTTAWA – The governing Conservatives aren’t the only ones divided over whether expanding income splitting to families with young children is a wise way to provide tax relief.

Think-tank experts have long duelled over the proposal; some say it will benefit the wealthy and provide little relief to low-income families, while others insist it can be tweaked to make it more equitable.

The simmering debate boiled over again Wednesday after Flaherty, in his first post-budget appearance, mused about whether it’s a good idea after all.

“I think income-splitting needs a long, hard analytical look … to see who it affects and to what degree, because I’m not sure that overall, it benefits our society,” he said in a post-budget interview before the Ottawa Chamber of Commerce.

That flies in the face of the Conservative campaign promise in 2011 to allow individuals to transfer up to $50,000 to a spouse for tax purposes, as long as they have at least one dependent child under 18.

The promise was contingent on the budget being balanced, which is why it came up after Flaherty tabled his latest fiscal blueprint: Tuesday’s budget projects a $6.4-billion surplus ahead of the 2015 election.

On Wednesday, though, Flaherty said he’d rather spend the extra cash on reducing the $619-billion debt and lowering taxes.

There is evidence in Tuesday’s budget that the Department of Finance has been taking a close look at how the tax system treats family income. But instead of moving in the direction of income splitting, the budget tightens a loophole that currently allows a limited form of the measure.

The long-standing loophole essentially allows wealthier Canadians to shift some of their income to their children through partnerships and trusts in order to get better tax treatment.

University of Calgary economist Jack Mintz said he found Flaherty’s comments interesting in light of that proposed change.

“It’s tightening income splitting with minor children,” he said. “This kind of predicts where the government might go on the issue next year.”

Asked if he thought the proposed tax amendments were a sign the government were having second thoughts about expanding income splitting, Mintz said: “If the finance minister says that he has other priorities, I think that sounds like it’s backing off.”

Both Employment Minister Jason Kenney and Treasury Board President Tony Clement suggested that while the Tories were sticking by their campaign promise, it’s still a work in progress.

“We made a commitment and of course there’s always going to be issues around how exactly you deliver it, because there are a lot of different ways of doing that,” Kenney said.

“But the bottom line is we’re committed to tax relief for Canadian families.”

Prime Minister Stephen Harper didn’t even utter the words “income splitting” in the House of Commons when asked about Flaherty’s comments, talking instead about “tax reduction” for families being a priority.

Income splitting would be a costly move. The C.D. Howe Institute estimates it will cost the federal government $2.7 billion a year, plus $1.7 billion from the provinces. That would consume a large chunk of the surplus Flaherty is projecting for 2015.

The Canadian Centre for Policy Alternatives projects it would amount to $3 billion in lost federal revenue and another $1.9 billion provincially, with some 86 per cent of Canadian families gaining nothing from the proposal.

The C.D. Howe Institute is essentially in step with that percentage, also noting income splitting’s lack of benefit for single parents.

The institute estimates 40 per cent of total benefits would go to families with incomes exceeding $125,000, collecting up to $6,400 from Ottawa, with more savings potentially coming from the provincial tax bill.

CCPA looked at the potential impact of income splitting in three scenarios: on pensions, for those families with children under 18 and for all families across the board.

In a Jan. 27 report, it said the impact in all three cases would be very unequal, while the cost to Canadian governments would be substantial.

The upper third of Canada’s richest families would receive $3 of every $4 spent on income splitting, the report said. Seven of 10 senior families get no benefit at all from pension income splitting, while the richest 10 per cent of senior families receive more than the bottom 70 per cent combined, it noted.

The Conservative proposal could, however, provide more equal treatment of families if it’s accompanied by other measures, Mintz suggested.

The government should consider getting rid of boutique tax credits altogether, instead offering comprehensive tax reform that lowers rates and treats everyone equally, said Gregory Thomas, federal director of the Canadian Taxpayers Federation.

“Everybody, every federal minister and MP and everyone in the country with an interest in getting some tax relief to Canadians has an opinion on this,” Thomas said.

“The good news is, there’s time for a debate.”

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