Tax change will cost $1.2 billion, Ottawa says

Canadians are facing the threat of deeper deficits following revelations the Liberal government’s promise to cut taxes for middleincome earners and hike them for the rich will cost $1.2 billion more than anticipated.

Finance Minister Bill Morneau revealed the shortfall Monday as he announced the tax-rate changes will take effect on Jan. 1. The government will also be rolling back contribution limits for the Tax-Free Savings Account (TFSA), which had been raised under the Conservatives.

“This is going to cost a bit more for the government, and we want to explain to Canadians exactly what the shortfall is,” Morneau said. “But we are going to continue to uphold our commitment because we know with a lower growth rate than planned for in the budget, it’s necessary to make investments.”

Under the plan, which was at the core of the Liberals’ election platform, Canadians earning between $45,282 and $90,563 will see their tax rate fall to 20.5 per cent from 22 per cent. At the same time, those earning more than $200,000 will see their tax rate increase to 33 per cent from 29 per cent.

Finance Canada officials estimated that about nine million of the 16 million Canadians who pay income tax each year will benefit from the middle-income cut, and about 60,000 of the country’s richest citizens will end up paying more.

“The change is about giving the middle class a fairer deal,” Morneau said. “To that end, we’re also asking that Canadians who have the most contribute a little more.”

But the Liberals also promised during the election campaign that the changes would be revenue-neutral, meaning the tax hike on the rich would pay for the middle-income tax break. But they underestimated how much the tax break would actually cost, and how much the tax hike would bring in.

Finance Canada documents show the combined difference amounted to a shortfall of about $1.2 billion each year, or more than $5 billion over the life of the Liberal government. Morneau did not say how the Liberals got their numbers wrong during the election, or how the government plans to cover the shortfall.

The likeliest option, however, is to go further into deficit. The Liberals had said during the election that they would run “modest” deficits of less than $10 billion per year.

Morneau dodged repeated questions Monday on whether the Liberals, whose forecasts for economic growth have also fallen short and put additional pressure on their bottom line, were still planning deficits of less than $10 billion.

“We campaigned specifically on making investments in order to try to improve Canada’s growth rate,” he said. “We did campaign and believe it’s very important that we lower our net debt-to-GDP ration. And we do believe that it’s important to aim to get to a balanced budget in the course of our mandate.”

The Liberals will officially introduce the tax changes, as well as roll back the TFSA contribution limit from $10,000 to $5,500 per year, with a motion on Wednesday. Morneau said TFSAs will be indexed to inflation, and that the changes won’t affect unused contribution space.

During the first question period of the new parliamentary session, Conservative finance critic Lisa Raitt pounced on the shortfall and the threat of bigger deficits as proof the Liberal government can’t be trusted to manage the economy, balance the books or play straight with Canadians.

“The prime minister made two fundamental commitments to Canadians,” she said. “One, that the deficit would not go above $10 billion per year; and, two, that any tax increases would be revenue neutral. Unfortunately, neither of those are true and it appears that we are leaving those commitments in the dust.”

NDP finance critic Guy Caron said that not only does the Liberal tax plan not add up, it won’t do anything to help the poorest Canadians while those earning upwards of $200,000 will benefit the most.

Asked what the government is doing for those earning less than $45,282, Morneau referred to the Liberals’ revamped child benefit, which will be introduced in the spring budget and come into effect on July 1.

“When taken together, Canadians will see that helping nine out of 10 Canadians families is the right thing to do,” he said. “Raising 315,000 children out of poverty is the right thing to do. And helping middle-class Canadians to have more income is the right thing to do.”

Morneau also said the government plans to eliminate incomesplitting for families with children in the budget, which the Conservatives had introduced last year. He said the Liberal government would not touch income-splitting for seniors.