Everything you need to know about income-splitting

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An income-splitting tax cut was the biggest remaining promise from the Conservatives' 2011 campaign platform. The merits of the pledge have been hotly debated in policy circles. Prime Minister Stephen Harper's Oct. 30 announcement of the government's actual policy in this area will inform larger political debates over child care, fiscal management and the role of government during the next federal election campaign.

The promise

With his first announcement of the 2011 election campaign, Stephen Harper appeared with his wife Laureen and a smiling family on the front porch of a suburban Victoria home. With two-and-a-half-year-old Fiona swatting his legs, the Prime Minister unveiled his party's biggest promise: a "Family Tax Cut" that would start once the federal deficit is erased.

Parents with children under18 would be allowed to split up to $50,000 in income for tax purposes. The platform made no reference to a cap, but the Prime Minister announced that the actual policy will include a maximum benefit of $2,000. Previous estimates had said the maximum benefit could exceed $6,000.

The twist

They were not campaign promises, but Mr. Harper announced two other benefits for families on Oct. 30.

The Universal Child Care Benefit was a key pledge of the Conservatives' 2006 platform and currently delivers $100 cheques every month to families for each child under six. The government announced that this monthly amount will rise to $160. Also, parents with children aged 6 to 17 would begin receiving monthly cheques worth $60 for each child in that category.

This enhancement would be paid for in part by eliminating the Child Tax Credit, a non-refundable tax credit was introduced in the 2007 budget that provided $338 per child under the age of 18.

The government also announced an increase in the child care expense deduction limits.

The cost

The 2011 Conservative platform said implementing the promise would cost $2.5-billion a year in forgone tax revenue. However a recent report by TD Economics put the cost at $3-billion if fully implemented next year, rising to $3.5-billion annually by 2019-20.

By imposing the cap, the government now projects the income splitting tax cut will cost about $2-billion a year. The net impact of all of the measures announced on Oct. 30 is a $4.6-billion tax cut in 2015-16.

Provinces had expressed concern that income splitting would cost them billions in revenue because the federal and provincial tax systems are linked. However Ottawa says it has structured the tax cut so that provinces will not be affected.

In the Conservative caucus

Hints that the government was having second thoughts about the pledge spilled into the open in February when finance minister Jim Flaherty – who died two months later – shared his concerns the day after releasing the government's 2014 budget.

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

The Prime Minister did not immediately distance himself from the remarks, which suggested Mr. Flaherty was speaking with his blessing. But caucus members pushed back and a few weeks later Mr. Harper told the House that "income splitting has been a good policy for seniors in Canada, and it will also be a good policy for Canadian families."

The comment satisfied Conservative MPs who still point to it as evidence that the government would in fact deliver.

The policy

Tax expert Jack Mintz, with the University of Calgary's School of Public Policy, has been the most vocal academic champion of income splitting.

Dr. Mintz co-authored a 2013 paper with University of Calgary doctorate student Matt Krzepkowski that responded to criticism published by several groups – including the C.D. Howe Institute – that the program would disproportionately benefit high-income earners. The paper listed several technical changes that could be made to shift the benefits more toward middle-income earners.

In 2011, the C.D. Howe Institute published a research paper titled "Why income splitting for two-parent families does more harm than good." That report found 40 per cent of total benefits from the tax cut would go to families with incomes above $125,000 a year – with some high-income families receiving a tax cut of as much as $6,400. The report also found that 85 per cent of all households – including single parents – would gain nothing from the policy.

The Institute's Alexandre Laurin, who co-authored the paper, said the revised package responds to a lot of the policy criticisms.

"It's an attractive package because there's something for everyone in there," he said. Mr. Laurin said the revised package does "less harm" that the original proposal. However some of the criticisms remain, including the fact that it creates a disincentive for the lower-income spouse to return to the workforce.

One of the main reasons so few Canadians would benefit from income splitting is that the policy would make no difference to couples who are in the same tax bracket. Current tax rates progressively increase from 15 per cent on the first $43,953 of taxable income to 22 per cent on additional income up to $87,907. The tax rate rises to 26 per cent on income above that amount and then reaches a final rate of 29 per cent on income over $136,270. All single-parent families would also be shut out from the tax break.

The politics

On the same day Finance Minister Joe Oliver promised to release details in his coming fall update as to how the government will cut taxes for families, NDP Leader Thomas Mulcair had a major announcement of his own.

The NDP is proposing to spend billions on a national daycare plan that would aim to provide Canadian parents with daycare spaces that cost no more than $15 a day.

The contrast is clear. The Conservatives will campaign on a hands-off, low-tax plan focused on smaller government, individual choice and help for parents who stay home with their children. The NDP will argue there is a need for an expanded government role in child care – likely to be funded through higher corporate taxes. The Liberals have not outlined their policies, but have said income splitting would benefit the rich at the expense of the middle class.

Liberal Leader Justin Trudeau also suggested in a recent interview with Radio-Canada that if his party forms government, he would reverse new Conservative tax cuts to fund new spending in areas such as infrastructure and research.