Income splitting proposal would pinch provincial pockets too: report

OTTAWA—A Conservative plan to allow Canadians to use income splitting as a tax-saving measure will be just one more example of the federal government financing its policies partly through provincial coffers, a new study says.

The Mowat Centre report says if the federal government goes ahead with its plan to introduce income splitting, the provinces would have no choice but to follow suit thanks to existing tax agreements.

And that would cost provincial coffers around $1.7 billion a year at a time when everyone is strapped for cash.

“The federal government has walked out of the bar and the bill is sitting on the table and the provinces are going to have to pick it up,” report author Sunil Johal said in an interview.

It’s far from the first time the provinces have been impacted financially by new federal measures.

Earlier this year, the provinces won a hard-fought battle over the controversial Canada Job Grant program, fearing Ottawa would claw back federal job-training dollars even as it forced provincial governments to foot their share of the bill.

They’ve also been vocal of late in expressing frustration at the billions of dollars they expected to have to pay as a result of Conservative criminal justice reforms.

The Tories promised to allow income splitting during the 2011 campaign, saying it would take effect in 2015 as long as there was a balanced budget, which is now expected.

The plan would allow spouses with children under 18 to divvy up their incomes to a maximum of $50,000 in order to reduce their overall tax bill.

The government estimates 1.8 million families could save an average of $1,300 a year.

But critics, including the late former finance minister Jim Flaherty, have suggested the policy is a flawed one.

The Mowat Centre, based at the University of Toronto, bills itself as a non-partisan think-tank. But multiple studies from across the political spectrum have found that in some provinces, existing tax structures mean no families will benefit. In others, some in high-income brackets would see only minimal financial savings.

Despite the criticism, however, the federal government has insisted it will press ahead with the measure.

The provinces would likely be on the hook because of the tax collection agreements all of them save Quebec have signed with the federal government over the last 50 years, the report said.

The deals mean there is only one tax collector for the various federal and provincial levies, which saves everyone money. But as a result, the affected provinces all use the same definition of taxable income.

That means if the federal government changes the definition, the provinces will have to go along.

The tax agreements are a key part of the economic union in Canada, Johal said.

“But at a certain point, if things like this keep happening and the cumulative impact of these decisions reaches a certain dollar value, the provinces are going to have to make an assessment: ‘Is it really worth it to us to stay in these agreements if the federal government is going to continually make unilateral decisions?”‘

But amendments to the agreements or an offer by the federal government to compensate the provinces for lost tax revenues are options that could be explored before the provinces just walk away, he added.

For example, Ontario’s agreement with Ottawa on the collection of the harmonized sales tax protects the province from any decision that would result in a one per cent revenue decrease. If the province doesn’t agree with the decision in writing, the federal government has to pay up.