With a federal election looming, a promise made by the Conservative government could prove costly for the provinces. During the 2011 election campaign, the Conservatives promised to allow income splitting in 2015 if the federal budget was balanced. With a balanced budget expected shortly, the Tories are mulling over following through with their election promise as a way to entice voters.
Also read: What is Income Splitting?>
How Income Splitting Would Work
Income splitting isn’t something new to Canada; it already exists, but its use is limited. The Pension Income Tax Credit and Spousal RRSPs are a couple of examples of how retirees use it.
The Conservatives are looking to introduce income splitting on a larger scale,with the intention of benefiting families with children under the age of 18. In their 2011 election platform, the Conservatives said income splitting would allow them to divvy up their incomes to a maximum of $50,000. This would reduce their marginal tax rate and result in a lower bill to the taxman.
The Tories appear to be borrowing the idea of income splitting from our neighbours to the south; Income splitting has been around for years in the U.S.
Income Splitting Costly to Provinces
While the Conservatives claim income splitting will reduce the taxes for 1.8 million Canadian families, saving an average of $1,300 a year in taxes, not everyone is keen on it. The late former Federal Finance Minister Jim Flaherty had his doubts about how effective income splitting would be – and he’s not alone.According to a new study from the Mowat Centre, the measure will be the latest example of the federal government raiding provincial coffers.
Under the current tax collection agreement, the provinces would have no choice, but to follow suit – even if it’s to their detriment. At a time where the provinces are struggling to balance their books, income splitting would cost the provinces $1.7 billion a year. This will likely push back any hopes of a balanced budget for most provinces.
The Benefits of Income Splitting are Questionable
While income splitting sounds good on paper, its benefit remains to be seen. Various studies have concluded that in some provinces, there may not be any benefit from income splitting at all. In fact, in most cases only high-income Canadians would benefit, although their tax savings would be minimal at best.
While the tax measure has its naysayers, the Tories seemed determined to go ahead with it, come heck or high water. Similar to the Canada Job Grant program, the provinces – with the exception of Quebec – would be stuck footing the bill. This could lead to a standoff between the federal government and the provinces. The relationship is already strained due to the federal government’s refusal to enhance CPP. The Tories may have no choice but to sweeten the pot for provinces, who could threaten to walk away from the bargaining table.
If the Conservatives are still gung-ho on income splitting come election time, they’re going to have to tread softly, or their brewing feud with the provinces could come to a head at the worst possible time – the 2015 election.
Sean Cooper is a personal finance freelance writer and blogger 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 services on his personal website: http://www.seancooperwriter.com/