Everyone was expecting the Prime Minister to announce a change to the tax system to allow income splitting for families with children up to the age of eighteen. But he went much farther than anyone expected. He delivered much of the 2015 budget.

According to the material provided with the announcement the total cost of the proposed tax changes amounts to $3.1 billion this year and $4.6 billion in 2015-16. In the February budget the government forecast a deficit of $2.9 billion this year and a surplus of $6.4 billion in 2015-16. Clearly the better than expected outcome for the last fiscal year has carried forward into this year and next year allowing the government to make yesterday’s announcements. We won’t know by how much until Joe Oliver delivers his long awaited fall Economic and Fiscal Update.

To no one’s surprise the Prime Minister announced a new family tax cut of up to $2000 for couples with children under the age of 18. The proposal will allow couples to transfer up to $50,000 of taxable income to a spouse in a lower tax bracket up to a maximum benefit of $2,000. This is a variant of the proposal made by the government in the 2011 election campaign, which has received so much criticism over recent months.

 Critics of the original proposal argued that income splitting would benefit only about 15 per cent of taxpayers. Those who would benefit most would be a single earner family with income exceeding $125,000. Single parent families would receive nothing, nor would two earner families earning within the same tax bracket.

The government has acted to restrict the benefit to high income Canadians by capping the tax benefit at $2000. This will reduce the total cost of the proposal but it does not in any way change the fact that eighty-five per cent of Canadian taxpayers will receive nothing from this tax proposal.

According to the government income splitting will cost the federal government $2.4 billion 2014-15 and $1.9 billion in 2015-16. This is a substantial amount of “general tax revenues” that will go to a small group of high-income taxpayers. Why does this group of taxpayers deserve a tax cut more than all other Canadian taxpayer? How can the government justify such a re-distribution of tax revenues to high-income earners?

Supporters of income splitting argue that this recognizes the contribution of a stay at home spouses who are caring for young children. Equally important they argue that income splitting would apply taxes more equitably or fairly.

According to Jack Mintz, one of Canada’s leading tax experts, income splitting would achieve “horizontal equity” meaning “the equal treatment of equals” where “families with similar economic circumstances should be taxed similarly”. This may sound like a simple principle to apply, but true to form, economist can’t agree on the meaning or measurement of  “equal” and “similar economic circumstances”.

One thing is certain, earned income is an inadequate measure of “similar economic circumstances”. Jonathan Kesselman, another leading Canadian tax expert, writes (www.irpp.org) “for individuals to be equal they must not only have the same realized incomes but also confront the same costs and opportunities and possess the same preferences”.

 In other words, one cannot simply look at tax rates and conclude that because a two-earner family pays less tax than a single earner family with the same income the tax system is treating people unfairly

 There is no justification for introducing income splitting on social or economic grounds, certainly not in the current economic environment.  The argument that the government did it for seniors and therefore it can be applied to other families makes no sense. The reality is that it was done for seniors in order to make amends for the introduction of a tax on income trusts.

Income splitting is being done to placate a small part of the Conservative base at the expense of all taxpayers. Indeed they will be able to collect their tax cut when they file their 2014 tax return

It will be interesting to see how this tax change plays out among Canadians as they come to understand what it means to them or better still what it does not mean to them.  The strong likelihood that it will not play out well has led the government to propose other changes to the income tax system to support families with children.

Mr. Harper announced enrichment to the Universal Child Care Benefit (UCCB), which would benefit almost 1.7 million families with children. First, the monthly benefit for a child under age 6 will be increased from $100 to $160.  Second, under the UCCB children aged between 6 and 17 will receive $720 per year.  Enhanced payments will take effect in January 2015 and will begin to be reflected in monthly payment in July, just before a fall election. The cost of the enhanced UCCB will be offset by the elimination of the existing child tax credit beginning in 2015.

According to the government the cost of the enhanced UCCB would be $700 million in 2014-15 and $2.6 billion in 2015-16.

Finally, the government is proposing to increase the dollar limits of the Child Care Expense Deduction (CCED) by $1,000. The cost of this change and the cost of doubling the child fitness tax credit and making it tax refundable would be less than $100 million a year.

Not surprisingly there was no mention by the government of what the “down-loaded” cost of these proposals will be to the provinces. In all likelihood the cost could come in around  $2.0 billion in 2014-15 and perhaps as high as $2.5 billion in 2015-16. The loss in revenues would be the largest in Ontario. The federal government may be able to afford a tax cut, but the provinces certainly cannot. Once again we see a complete lack of federal-provincial coordination in fiscal planning.

The changes were announced at this time in order to ensure that Canadians would see the full affect prior to the 2015 election. This will ensure that there will not be an early election.  To effect the changes for the 2014 taxation year, the Canada Revenue Agency needs at least one month to change the applicable tax forms. 

Mr. Harper has thrown the gauntlet. He plans to fight the election on putting “money in the pockets of Canadians”. Assuming a fall 2015 election all his tax proposals will be in place and Canadian families will be receiving larger monthly cheques.  He is daring the NDP and Liberals to reverse them.

Next step is Mr. Oliver’s fall Economic and Fiscal Update.

Stay tuned.