Flaherty challenges Tories’ income-splitting plan, Employment Minister disagrees

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Finance Minister Jim Flaherty is directly challenging a centrepiece of the Conservative Party's platform with comments that quickly exposed divisions among members of caucus and cabinet.

At a post-budget event Wednesday, Mr. Flaherty delivered his strongest criticism yet of income splitting for families, a policy that would allow a higher-earning spouse to transfer income to the lower-earning spouse as a tax-saving move.

"I'm not sure that overall it benefits our society," he said. "I think income splitting needs a long, hard analytical look."

Shortly after on Parliament Hill, federal Employment Minister Jason Kenney shot back with a defence of the policy.

"All I know is we keep our platform commitments. There's always different ways you can design a program around the details," he said. "The bottom line is we're committed to tax relief for Canadian families."

The 2011 Conservative Party platform promised families with dependent children under the age of 18 would be allowed to split their income for tax purposes. The Institute of Marriage and Family Canada has been urging MPs on Parliament Hill to support the pledge, arguing it will make it more affordable for one parent to stay home.

However, other research papers have said the policy has several flaws, including the fact that would primarily benefit high-income Canadians.

Researchers with the C.D. Howe Institute have warned income splitting "does more harm than good" and would discourage mothers in particular from returning to the work force.

A research report by the left-leaning Centre for Policy Alternatives came to a similar conclusion last month.

"The evidence in this study of income splitting reveals that it creates a tax loophole big enough to drive a Rolls Royce through. In essence, it's a tax gift to Canada's rich," the report stated.

Income splitting was by far the most expensive tax cut promise in the 2011 Conservative election platform. That document promised to implement the tax cut once the deficit is erased. The platform estimated it would cost $2.5-billion in 2015-16 in forgone revenue.

Many Conservative MPs strongly support the pledge and it was widely expected that launching the income splitting tax cut would be a major good news announcement for the party to make once the deficit is erased and the party heads into the next election.

Mr. Flaherty has hinted at concern regarding the policy in recent days, but Wednesday's comments are his most definitive on the topic.

Speaking with reporters following the Wednesday morning event in Ottawa, Mr. Flaherty was asked about his comments.

"You know, it's an interesting idea. I'm just one voice. It benefits some parts of the Canadian population a lot and other parts of the Canadian population virtually not at all. And I'd like to think I'm analytical as finance minister, so when we discuss it eventually in cabinet and caucus I will present my analysis to my colleagues."

As they emerged from a Wednesday morning caucus meeting, several Conservative MPs stated their continuing support for the move.

"We brought in income splitting for seniors and we're going to continue down that road," said MP Paul Calandra, who added he was "certainly not" backing off from the income-splitting pledge.

"What was said in the last election is the plan as I understand it to be," said Conservative MP Steven Fletcher. "However, the world is a complicated place... All things being equal, I'm hopeful on income splitting that it will be in the near future."

Conservative MP James Rajotte, who chairs the House of Commons Finance committee, added some nuance to the finance minister's comments.

"I think what he's saying is he wants to get all the facts and figures – because even in terms of income splitting, you have to determine how you exactly want to do that. Are you going to income-test it at all? Are you going to split everything?" he said. "It's a simple fact that there's a certain per cent of the population, those families with two parents who have incomes that are very disparate, benefit from those situations… [Mr. Flaherty] wants us to fully flesh out the concept prior to doing anything because it is such a large fiscal outlay. That's my sense of what he's saying."

Liberal Leader Justin Trudeau praised Mr. Flaherty for expressing doubts about the policy, pointing to recent reports from think-tanks that raised questions about the breadth of its impact.

"The Finance Minister has made some good points indeed," Mr. Trudeau said. "The various reports out about income splitting suggest that it is more beneficial in general to richer families rather than middle-class families. As I've long said, our focus is on serving the middle-class."

In his morning comments to reporters, Mr. Flaherty also answered reporters' questions about the budget's measures for Ontario's auto sector and responded to provincial concerns that the budget expands Ottawa's powers over job training.

"The money that's set aside in the auto innovation fund is not just for Chrysler," he said, of the $500-million over two years announced in the budget toward the Automotive Innovation Fund. "It's for some of the other automotive companies in Canada. The demands by Chrysler are substantial and you can ask Chrysler about that."

Mr. Flaherty said it is important to consider the many spin-off jobs associated with auto manufacturing, including parts suppliers, restaurants and truck drivers.

"I'm not saying that there should be some automatic subsidy of automobile plants," he said. "I am saying that we need to give a long, hard look and make sure that we are careful in what we do before we let one of the large auto manufacturers leave Ontario."

As for the strong negative reaction from several provinces over the budget's pledge to go it alone with a Canada Job Grant training subsidy as of April 1 in provinces where no deal is reached, Mr. Flaherty held firm.

"It's not an ultimatum. If it's federal money, then the federal government can spend it the way the federal government and its elected people chose to spend it," he said. "The provincial governments have taxation powers. They can raise their own taxes. This is not a confrontation. This is a choice."

With files from Daniel Leblanc