Tax relief is coming from the federal government, but don't get your hopes up for anything tremendous.
Lots of people have been salivating about the possibility that the Conservatives will allow income-splitting, which reduces the taxes paid by families where one spouse either stays home or makes a lower salary than his or her partner. But income-splitting was barely even alluded to in the economic update that Finance Minister Jim Flaherty delivered yesterday.
Instead, Canadians were handed a plan that offers bits of tax relief here and there, while putting much greater emphasis on paying down the federal debt.
The update reiterated the government's intention to make a second cut of one percentage point in the GST, which would bring the tax to 5 per cent. However, no specific date for the move was announced.
There was also a hazy reference to an election promise by the Conservatives to defer taxes on capital gains that are reinvested within six months. But it was contained in some motherhood stuff about how important it is to reduce taxes on savings to support investment and economic growth. Again, no details on when people can expect to see a new capital gains tax policy.
The most specific the update gets in talking about tax relief is a commitment to use the interest savings from paying down the federal debt on personal income tax reduction. The government expects to have room for tax cuts that will amount to $800-million in 2007-08, and then rise to $1.4-billion annually by 2011-12.
Doug Porter, deputy chief economist at BMO Nesbitt Burns, said $800-million in tax cuts amounts to about one-tenth of 1 per cent of the total amount of personal disposable income in this country. "Every little bit helps, but it's modest, at best," he said.
More tax cuts would theoretically come as the government moves further toward its best-case goal of eliminating its "net debt" by 2021. Note: This doesn't mean Ottawa could be truly debt-free by then, a development that could spell the end of Government of Canada bonds as an investment class. The reason, according to Mr. Porter, is that net debt allows the government to apply assets like the contents of the Canada Pension Plan against its debt, even though the CPP is a separate and sacrosanct entity.
The only specific group targeted for tax relief in the update was low-income Canadians. As first disclosed in the last federal budget, Ottawa is working with the provinces on a plan to help people on welfare keep more of their income when they enter the work force.
And what about those people whose hopes for income-splitting have been raised by a recent flurry of speculation? The best chance lies in the surplus of slightly more than $4-billion that is forecast for the current fiscal year. The cost to the government of allowing income-splitting has been estimated at about $5-billion, so it's in the ballpark.
Unfortunately, the update offered only the barest, most fleeting hint that the government is contemplating income-splitting, or any other bold tax-cutting measure for that matter.
The update does refer to the Oct. 31 announcement that senior couples will be able to even out the income they take in through pensions or registered retirement plans and thus reduce their overall income tax burden (you'll recall that pension-splitting for seniors was the add-on to the news of a crackdown on income trusts). The update then goes on to say that the government will "continue to reduce personal income taxes to help Canadian families to be better off and more secure."
Income-splitting is justifiably perceived as a families-first measure, because it would deliver major tax relief in cases where one parent works and one stays home.
Sandy Cardy, senior vice-president of tax and estate planning for Toroto-based mutual fund company Mackenzie Financial Corp., said she believes the government can afford income-splitting based on the numbers that were released yesterday. But she's resigned to not finding out what concrete form tax cuts will take until the next federal budget. "I just came from watching the update on television and I was scratching my head," she said. "There sure wasn't much there in terms of specifics."
