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Minister of Finance Jim Flaherty speaks at a post-budget event in Ottawa on Wednesday, February 12, 2014. THE CANADIAN PRESS/Fred Chartrand (Fred Chartrand/THE CANADIAN PRESS)
Minister of Finance Jim Flaherty speaks at a post-budget event in Ottawa on Wednesday, February 12, 2014. THE CANADIAN PRESS/Fred Chartrand (Fred Chartrand/THE CANADIAN PRESS)

Tories having second thoughts on income-splitting pledge Add to ...

The Conservative government is having second thoughts about an expensive and carefully targeted campaign promise to allow income splitting for couples with children, a policy meant to be a key part of the party’s re-election effort.

Finance Minister Jim Flaherty made waves Wednesday when he expressed misgivings about the fairness of his party’s income-splitting pledge for Canadian families, saying the policy needs a “long, hard analytical look.”

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Sources within the government, and others familiar with the deliberations, indicate that Mr. Flaherty is not alone: The Prime Minister’s Office is also reexamining the 2011 commitment. “The government has been thinking for some considerable time how to implement the promise, including whether some modifications to it might be advisable,” one source said.

When asked directly on Thursday, Mr. Harper declined to say whether income splitting is still on the table. “Once we have a balanced budget and once we get a surplus we can have … the discussion about what we do next,” he told reporters at a Greater Toronto Area announcement. “But we’re very clear: That we’ve made some commitments and reducing taxes for Canadian families will be among our highest priorities as we move forward.”

Mr. Flaherty’s public questioning of the tax break is sparking a backlash within the Tory caucus, with government members worried that the Conservatives might renege on a policy that is overwhelmingly popular with the party base, particularly social conservatives, who see current tax policy as discriminatory toward families with a spouse who chooses to stay out of the workforce.

“This is a big-ticket tax concession that delivers targeted rather than widespread relief,” the source added, saying this makes it difficult for the Tories even though it’s very important to “significant portions of the social conservative base.”

During the 2011 election, the Conservatives tabled a very detailed proposal that would allow couples with kids under 18 to split up to $50,000 of their income each year for tax purposes – reducing what the household would pay the Canada Revenue Agency. It would cost $2.5-billion and, according to the Tories’ March 28, 2011, press release, would be implemented “as soon as the budget is balanced.”

The government seems to be reconsidering the size and scope of income splitting, at least. One person familiar with deliberations said there is a range of ways to implement a promise to cut taxes for families and the government hasn’t settled on one yet.

The challenge for Conservatives heading into a 2015 election is winning the public debate over how to spend a projected 2014-15 budget surplus – the first in eight years. They need their plan to withstand criticism from NDP Leader Tom Mulcair and Liberal Leader Justin Trudeau – both of whom will likely propose rival ideas for dividing the surplus.

Should the Tories proceed with the promised income splitting pledge as written, it would eat up 40 per cent of the forecast surplus. That’s prompted Mr. Flaherty and others to consider whether there are other ways to get more bang for their tax-cut buck.

Notable outside economists dislike the measure.

The C.D. Howe Institute has calculated 85 per cent of all Canadian households, including single parents, would gain nothing. The benefits, it forecast, would be “highly concentrated” among high-income, one-earner couples, with 40 per cent going to families with incomes above $125,000.

The problem for Mr. Harper, say MPs and Tory insiders, is the 2011 promise is “overwhelmingly popular” among both Conservative Members of Parliament and party rank and file who see it as correcting an “anti-family” bias in the tax system that penalizes single-income families.

At least three cabinet ministers, including Employment Minister Jason Kenney and Treasury Board President Tony Clement, have said they believe the government is obliged to deliver on its campaign promise as written.

Tory MPs opposed to abandoning the pledge say it would be a blow to rank-and-file supporters should the government shelve the idea. “Most MPs will tell you it’s one of the most popular things they’ve ever campaigned on,” one Conservative MP said. “Finance bureaucrats don’t like it? Too bad. We keep our platform commitments and this is both good policy and politics.”

Said a second Tory MP: “This is not dead. Far, far from it.”

It’s not the first time Mr. Flaherty has reversed himself on a Tory campaign pledge. In 2006, he shocked Canadian investors by announcing the Tories would slap a tax on income trusts – a 180-degree change of heart from an election promise to “preserve income trusts by not imposing any new taxes on them.”

Follow on Twitter: @stevenchase

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