Despite plunging oil prices, the federal government is plowing ahead with a controversial plan to offer income splitting to Canada’s wealthiest. With a federal election in the cards sometime in 2015, The Conservatives are determined to come through on one of their former key promises. In the 2011 election, the Tories promised to offer income splitting to families with children under 18 years of age contingent on the federal deficit being eliminated. The problem is the federal government made the promise in November, before oil prices fell to below $50 a barrel.
With the Tories taking in less tax revenues from oil, a balanced budget is no longer a certainty. But, come heck or high water, they desperately want to balance the budget before this year’s election. They’ve even suggested using some of the nation’s $3-billion contingency reserve, which is set aside for unexpected circumstances, to balance the federal books.
Also read: Income Splitting – What You Need to Know>
Income Splitting to Benefit the Wealthiest Families
The Family Tax Cut (FTC) has been criticized by the opposition for providing tax relief to Canada’s wealthiest families. We finally have some numbers that back up those claims. Almost a third – 32 per cent – of families earning over $120,000 per year will benefit from income splitting, according to internal government documents obtained by the CBC.
Federal finance minister Joe Oliver has insisted income splitting will help low- and middle-income families, yet over two-thirds – 68 per cent – will go to families making up to $120,000 per year. Income-splitting is costly to the federal government; it’s expected to cost the federal government $2 billion a year and a whopping $26.7 billion by 2020.
To help pay for income splitting, the Tories have cut government spending in a number of areas that will affect millions of Canadians. Besides eliminating door-to-door mail delivery and pushing up the age of eligibility for old age security from 65 to 67, the Tories recently saved $3.4 billion from tax changes and the elimination of old tax credits like new user fees for passports and eliminating the safety deposit box tax deduction.
Should Income Splitting be Scrapped?
The Tories are caught in a bind. The FTC is supposed to be the centrepiece of their 2015 re-election campaign, but it has drawn a lot of criticism. Even the late federal finance minister Jim Flaherty expressed his concern that income splitting wouldn’t be a good use of the federal surplus. Some have suggested the Tories roll back the FTC, but so far they won’t budge. The Tories were caught in a similar position in a few years ago when they reduced the GST and then the financial crisis happened, creating a huge federal deficit.
The Liberals and NDP have made their stand on income splitting clear. NDP leader Thomas Mulcair said he would scrap income splitting in favour of a $15 a day national daycare, similar to Quebec. Liberal leader Justin Trudeau is also not a fan of income splitting, stating he would reverse it if in office. Trudeau once famously said, “Middle class families should not have to pay more to give families like Mr. Harper’s and mine a $2,000 tax break.”
What About Plans to Double the TFSA?
The Conservatives have yet to announce another key election promise that looks to benefit more Canadians. While income splitting benefits only 15 per cent of the population, leaving 85 per cent with nothing, the majority of Canadians would benefit from an increase in the contribution limit of the TFSA. In the 2011 election, the Tories promises to double the contribution limit for the TFSA to $10,000 per year. This was also contingent on eliminating the federal deficit. With the government delaying the budget until April, it remains to be seen if it’s still in the cards.
Sean Cooper is a Financial Journalist and Personal Finance Expert, living in Toronto, Ontario. He is a first-time homebuyer and landlord who aspires to be mortgage-free by age 31. Follow him on Twitter @SeanCooperWrite and read his blogs and request his writing services on his personal website: http://www.seancooperwriter.com/