Thursday, July 31, 2014

Income-splitting debate reignites

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 yesterday 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.
Yesterday, 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 noted.
“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 was having second thoughts about expanding income splitting, Mintz replied: “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 yesterday 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 percent of Canadian families gaining nothing from the proposal.
The C.D. Howe Institute essentially is in step with that percentage, also noting income splitting’s lack of benefit for single parents.
The institute estimates 40 percent of total benefits would go to families with incomes exceeding $125,000.

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