A Conservative-dominated Senate committee has moved to rewrite the tax code with a surprise amendment to a government bill.
Conservative Senator Larry Smith, who chairs the Senate finance committee, proposed an amendment to Bill C-2 that would make major changes to federal tax brackets. After heated debate, the motion passed 9-3. The amended bill will ultimately be voted on by the full Senate, which could potentially reverse the change.
The changes would deliver a larger tax break to Canadians earning between $45,282 and $52,999, but would have the effect of raising taxes overall by $1.7-billion in an effort to eliminate a funding shortfall that has been identified in the original Liberal plan.
It is rare for the Senate to amend a government bill, especially a money bill. The Senate is not allowed to initiate legislation that imposes new taxes or commits the government to new spending – a fact that prompted debate in committee over the appropriateness of the amendment.
If the full Senate approves the amendments, the bill will go back to the House of Commons for a vote by MPs.
Bill C-2 is a government bill that implements the Liberal government's tax changes that took effect Jan. 1. The bill, as originally written, reduces the second marginal tax rate from 22 per cent to 20.5 per cent on income between $45,282 and $90,563 and introduces a new tax bracket imposing a rate of 33 per cent on income above $200,000.
These changes are already in place for the 2016 tax year. The government is able to implement tax changes once they have been voted on in principle by the House of Commons, even though legislation has not yet been approved.
Mr. Smith argued the government's changes are not revenue neutral and the benefits are weighted in favour of higher-income Canadians. Mr. Smith said that his changes would do a better job of targeting the tax cuts to middle-income Canadians and would be revenue neutral.
"We're increasing the debt and we're not giving the benefit to the people who are supposed to get it," he said, explaining his concern with the original bill. He said his changes will address these issues.
The push from the Conservatives comes as the party is on the verge of losing its control over Senate committees. Prime Minister Justin Trudeau recently appointed a wave of independent senators who will ultimately outnumber the Conservatives in the 105-seat Senate 44 to 40.
However, the Senate has not yet rebalanced committee memberships to reflect the new standings in the chamber. As a result, Conservatives continue to hold a majority on committees.
Most of the independent senators on the national finance committee, who are in the minority, expressed their strong disapproval of the amendment.
"Sober second thought is not doing calculations on a napkin," independent Senator André Pratte said.
"I think this is not a serious exercise and I refuse to be part of it," he said.
The Conservative amendment would create a new, lower tax rate of 16.5 per cent on income greater than $45,282 but less than $52,999. It would then maintain the 20.5-per-cent rate on income greater than $53,000 but less than $90,563. A handout from Mr. Smith's office said there would be "a transition as an individual moves to the third bracket for income above $90,563" that would make the entire package revenue neutral.
Mr. Smith argued that the bill as written would create an annual shortfall of $1.7-billion, contrary to what the Liberals promised during the election campaign.
The transition measure marks a significant departure for current tax practice. It essentially means that Canadians earning about $95,000 or more would have to pay 22 per cent on income between $45,282 and $90,563, while Canadians who earn a smaller total would pay less tax on income earned in that same range.
Independent Senator Diane Bellemare warned this will create a disincentive in the tax code that would discourage Canadians from earning more and triggering the transition clause.
Finance Minister Bill Morneau called the Senate's move "surprising" given that the tax changes in the bill were part of the Liberal party's election campaign, but he had little more to say about how the government would respond.
Conservative interim leader Rona Ambrose appeared to distance herself from her Senate colleagues when asked for her opinion on the amendments.
"I haven't seen it. Look, I have no power over the Senate," she said Tuesday afternoon.