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Only 15 percent of Canadian households will qualify for the Conservative government’s income-splitting tax cut, according to new analysis from the Parliamentary Budget Officer.
A report released Tuesday takes a closer look at the “Family Tax Cut” announced in the fall by Prime Minister Stephen Harper that would allow couples to transfer income for tax purposes up to a maximum savings of $2,000.
The PBO analysis adds to the view of previous research that finds the benefits will primarily go to “medium– through high-income households.”
In fact, the PBO says families in the bottom 20 percent of income would receive “near zero” benefit from the tax cut.
The main reason why only 15 percent of families would benefit is because it only applies to families in which one spouse is in a higher income bracket than the other.
While income splitting reduces taxes for the higher-earning spouse, it effectively raises taxes for the lower-earning spouse. The PBO report says this will encourage higher earners to work more and lower earners to work less. It estimates a net loss in employment of about 7,000 full-time equivalent positions as the negative labour effects among lower-earners is expected to be greater than the gains among primary earners.
The PBO describes this as “a small negative impact” on total labour supply.
From a fiscal point of view, the PBO says the tax cut will reduce federal revenues by about $2.2-billion in 2015.
Federal Employment Minister Pierre Poilevre responded to the PBO with a statement that said 100 percent of families will benefit from the combined tax measures aimed at families.
“Under our Conservative Government, the tax burden on Canadians is at the lowest level in more than 50 years and Canadian families are paying $3,400 less in taxes each year than they were under the Liberals,” he said. “Our government thinks the best way to help families is to leave more money in the hands of the real experts on families. Their names are mom and dad.”
The opposition NDP and Liberals said the PBO report confirms their criticism that income splitting is poor public policy.
The Family Tax Cut was a central pledge of the 2011 Conservative election platform. The final policy as introduced last fall included several adjustments meant to respond to previous criticisms of the policy. For instance, the tax break will be delivered as a non-refundable credit. That avoids a significant negative impact on provincial revenues related to the calculation of the tax base.
The government also capped the maximum benefit at $2,000 to avoid much larger tax breaks for Canadians with very high incomes.
Also, in response to criticism that the benefits would go the relatively few Canadian households, the government coupled its announcement with other tax breaks that have a broader reach.
Starting this year, the government is increasing the Universal Child Care Benefit monthly payment to parents. For each child under six, parents will now receive $160 per month instead of $100. Also, a new benefit of $60 per month will be paid to parents for each child over six up until they reach the age of 18.
The increased payments are expected to be delivered starting in July 2015 and will include a cumulative payment for benefits incurred as of Jan. 1, 2015.