Budget 2017: What will the Liberals decide to cut?

Uncertainty amid secret tax system review

For weeks, speculation had been swirling that the Liberals wanted to get rid of the tax exemption for private health and dental plans, which the Finance Department has calculated costs the federal government about $2.9 billion in forgone revenue per year.

The controversy over the suggestion, first raised by the National Post in December, took on steam as the Conservatives pressed the Liberals to divulge their plans and the government refused to clear things up one way or the other — until they did.

“We are committed to protecting the middle class from increased taxes and that is why we will not be raising (those) taxes,” Prime Minister Justin Trudeau said Feb. 1.

The thing is, that while taxing health and dental benefits now appears to be definitively off the table, no one really knows for sure what else is on it as the Liberals work on fulfilling a campaign pledge to find $3 billion per year in new revenue by fiscal 2019-20 through “an overdue and wide-ranging review” of existing tax expenditures.

That is a form of government spending that is done through the tax code, such as deductions or credits, and it is costing the federal government more than $100 billion per year.

The campaign platform said the goal of the review would be to find ways to reduce tax benefits for the rich — defined as individuals who earn more than $200,000 in annual income.

Their first budget announced the elimination of tax credits for education, textbooks, arts and fitness — and made it clear that was just the beginning.

Last June, Finance Minister Bill Morneau launched a comprehensive review of the tax system and convened seven experts to give him advice on where things should go.

“This review is part of a broader government commitment to eliminate poorly targeted and inefficient programs, wasteful spending, and ineffective and obsolete government initiatives,” said the news release.

The secret nature of that review has fuelled the political fires on the opposition benches, especially since its results — and how the government responds to them — could end up being a major component to the upcoming budget.

The Liberals had promised to fully tax annual stock option gains over $100,000, but then backed down on the pledge in last year’s budget under pressure from startups who feared for their ability to grow.

That kind of pressure could play into this budget, too.

Gabe Hayos, vice-president of taxation at Chartered Professional Accountants Canada, said the fact that President Donald Trump is promising a lower-tax environment in the U.S. means the Liberal government would want to think carefully about what they do with tax expenditures that could have an impact on competitiveness.

“Canada is going to need to be very flexible about what it does,” Hayos said.

Annie Donolo, a spokeswoman for Morneau, said she could not provide any details of the review but noted the government is “not looking at any measures in isolation and no final decisions have been made.”

There are nonetheless some tea leaves available to read.

The Liberal platform mentions a 2014 analysis of tax expenditures from the parliamentary budget officer, which suggests that pension income splitting and the dividend tax credit in particular provide much greater benefits to those with larger incomes.

Kevin Milligan, an economist from the University of British Columbia who was named to the review panel at Finance Canada, wrote a paper for the C.D. Howe Institute in 2014 that makes the case for eliminating boutique tax credits like those for public transit and volunteer firefighters, while acknowledging the political cost of doing so.

Milligan also argued that since the age amount and the pension income amount are non-refundable, they cut out many seniors who could use the additional financial support. He suggested it would be better to move their value into the Guaranteed Income Supplement and Old Age Security.