The tax measure in question is pension income splitting, which allows for a higher-earning spouse to shift up to half of their pension income to their spouse. Although the lower-earning person will pay taxes on the transferred funds, the maneuver helps decrease a family’s overall tax burden.
“That’s real money,” said the Canadian Centre for Policy Alternatives’ David Macdonald, the report’s author. “You could make a serious investment in reducing senior poverty.”
But the Justin Trudeau government isn’t going to touch the tax break, despite its recent, fierce opposition to a similar tax measure — the income splitting introduced by the previous Conservative government.
“As a party and a government, we’ve been very clear that income splitting for seniors is not something we’re re-opening,” Daniel Lauzon, communications director for the finance minister, wrote in an email.
Following the 2016 budget, Finance Canada began reviewing the federal tax system as a whole, and specifically tax expenditures. The department is taking advice from a number of academics in an effort to ensure the tax system if fair and efficient, according to the department.
The Liberals were staunchly opposed to the previous government’s income splitting policy, which Trudeau campaigned on cancelling; the 2015 budget eliminated that tax credit. The Liberal platform, however, defended pension splitting for seniors.
The Conservatives, meanwhile, also support pension income splitting.
“Pension income splitting helps thousands of seniors manage their retirement, Canadians should be concerned about this,” said Conservative employment, workforce and labour critic Gérard Deltell.
Estimates from the Parliamentary Budget Officer pegged the Conservative tax break at $2.2 billion per year with a potential benefit to about 15 per cent of – or roughly two million – Canadian homes, virtually none of which were low income. The costs of the “tax break for the wealthy” weren’t worth the payoffs, Trudeau said.
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Across the country, approximately 600,000 seniors live in poverty, according to a December 2014 release from Statistics Canada
“The cancellation of family income splitting … was driven by specific studies,” Macdonald said. “Had this data been available at the time pension income splitting was introduced, it would have been interesting to see if it changed the narrative.”
According to the left-leaning Canadian Centre for Policy Alternatives, pension income splitting is the most regressive federal tax expenditure – or, as they call it, tax loophole – on the books. It costs $975 million annually and the benefits are concentrated among the very top earners.
“Benefits from pension income splitting are concentrated at the very top, with 83 per cent of the value of the expenditure going to the richest,” reads the report, released Monday.
The report described a “progressive” tax loophole as progressive if most of the benefits go to the lower half of Canadian income earners.
A regressive tax break, on the other hand, is one whose benefits overwhelmingly benefit the top half of income earners.
In its study of 64 personal tax expenditures, the Canadian Centre for Policy Alternatives found only five qualified as “relatively progressive,” with a maximum benefit of $1,100 or less.
The remaining 59, on the other hand, are described as regressive, and cost Ottawa $100.5 billion in 2011.
“The study … shines a light on an otherwise institutionalized inequality that’s built into our personal income tax system,” said David Macdonald, a senior economist with the Canadian Centre for Policy Alternatives.
“In the case of the Conservative’s family income splitting plan, for instance, the fact that almost all of the benefit went to the richest households was an important consideration in the cancellation of income splitting … What about the other 64 tax expenditures the federal government spends money on every year?”
Overall, the study found Ottawa spends $103 billion every year paying out the 64 so-called tax loopholes. Putting that figure into perspective, Macdonald said it’s almost equivalent to what the federal government spends on all the Canadian Pension Plan, Old Age Security, Guaranteed Income Supplement, Employment Insurance, the GST credit and all three child benefits combined – mostly going to the richest households.
“The richest 10 per cent of Canadians pocket on average $15,000 per person, per year from tax expenditures,” Macdonald said. “At the same time, tax expenditures result in about $130 per person for the poorest 10 per cent of Canadians who also receive on average about $1,100 in federal transfers.”