Federal Finance Minister Jim Flaherty raised doubts about income-splitting for tax purposes, leading to a debate within the Conservative ranks about whether to abandon key 2011 election platform.

Federal Finance Minister Jim Flaherty raised doubts about income-splitting for tax purposes, leading to a debate within the Conservative ranks about whether to abandon key 2011 election platform.

During the 2011 federal election, Stephen Harper said that a Conservative government would allow income-splitting so families could save on income taxes once the government’s finances were back in the black. In the weeks leading up to the 2014 federal budget, left-wing groups such as the Broadbent Institute and the Canadian Center for Policy Alternatives began criticizing income-splitting as a tax scheme that disproportionately helped the wealthy. Then on budget day, Feb. 11, Finance Minister Jim Flaherty threw cold water on the tax reform idea which would allow a married partner to shift income to the partner in a lower tax bracket, reducing the total amount the family will pay in income tax.

The next day Prime Minister Stephen Harper refused to commit to income-splitting in next year’s budget, saying Canadians should wait-and-see. The Toronto Sun reported he said “once we get a surplus we can obviously have the discussion” about income-splitting. While he said “reducing taxes for Canadians families will be among the highest priorities,” he did not commit to income-splitting.

While Flaherty and Harper seem ready to renege on the party’s 2011 election promise, Employment Minister Jason Kenney and Treasury Board President Tony Clement maintain their support for the policy. Clement said he stands “by those commitments” he made to income-splitting in 2011 while Kenney said he still supports the 2011 platform. MPs also voiced their support for income-splitting. Maurice Vellacott (Saskatoon-Wanuskewin) said “we should keep this pledge” while Brad Trost (Saskatoon-Humboldt) said, “I can’t see anyone who campaigned on this platform last time being opposed to it” next year.

Gwen Landolt of REAL Women said income-splitting is a matter of fairness, saying that families with equal incomes are taxed differently if one parent earns significantly more than the other. “The inequality caused to the single income family under the present tax structure must be rectified so that people in similar circumstances are taxed at equitable rates.”

University of Calgary economist Jack Mintz has argued that the current tax system is unjust because it penalizes single-earner families. For example, a family with parents earning $60,000 and $20,000 could pay almost $1,300 more in tax than where each spouse earns $40,000. Income-splitting can allow have earner in the higher bracket to drop to a lower bracket.

Aside from fairness or tax relief, Andrea Mrozek, executive director of the Institute of Marriage and Family Canada, argues that income-splitting simply makes sense because it recognizes the realities of family life. Writing in the Ottawa Citizen, she said “families do not live, work, or budget as individuals,” and “therefore, they should not pay taxes as individuals.”

Conservative MP Vellacott agrees. “Families are doing their part when they pool income to cover their needs in the family budget. The government needs to do their part, where they recognize this and tax families accordingly, instead of taxing families as individuals,” he said.

Mrozek told LifeSiteNews.com she is “very concerned when I hear them going back on their promise.”

Vicki Gunn, executive director of the Christian Heritage Party, criticized the government for “making election promises without the intent or commitment to keep the promise.” She questioned whether the government did its homework “before the promise was offered to Canadians.” The CHP favours income-splitting. “Families are penalized for devoting the time of one parent to the care of their children,” Gunn explained.

The Broadbent Institute called income-splitting “a tax gift for the affluent.” That parrots the criticism of the Canadian Center for Policy Alternatives, which released a report on income-splitting in January. The CCPA claimed that the bottom 60 per cent of Canadian families by earnings would save an average of $50 on their income taxes with most people receiving no benefit whatsoever. The wealthiest five per cent, on the other hand, would “see an average benefit of $1,100.” What the report does not acknowledge, however, is that those in the bottom 760 per cent in earnings, pay proportionately less tax and therefore have proportionately smaller potential savings because they are already in the lower tax brackets.

Mrozek said there are ways to spread the benefits of income splitting. She noted that in France single parents can split their income with a child to decrease their tax burden.

Economists at the Fraser Institute oppose income-splitting as a tax-reduction measure, preferring broad-based rate cuts instead. Jason Clemens, Niels Vedhuis, and Milagros Palacios argued in the Financial Post that eliminating the middle two tax brackets would place all but the top two per cent of earners into the bottom 15 per cent bracket. “This would eliminate the distortion causing the need for income splitting for almost all households,” they explain.

Landolt applauds efforts to reduce the tax burden of Canadian families, but also wants to see the current discriminatory tax system rectified to treat all families similarly regardless of the parenting and employment decisions mothers and fathers make.