Finance Minister says Liberal tax plan will cause $1.2B revenue shortfall

OTTAWA—The Liberal government is making good on its election vow to cut federal income taxes for middle earners by raising the rate on the richest Canadians.

However, it now acknowledges the tax tweaks, introduced Dec. 7 in a motion in Parliament, won’t be revenue-neutral.

Finance Minister Bill Morneau conceded Monday that an array of new tax adjustments will have an annual net drain on the federal treasury of about $1.2 billion in each of the next five years, starting in 2016-17.

The headliner of the new measures is the one to lower the income-tax rate to 20.5 per cent, from 22 per cent, on Canadians earning between $45,282 and $90,563 per year.

To help offset that change, the Liberals have added a 33 per cent tax rate on income earned by Canadians in the top one per cent _ those who make more than $200,000 per year.

Previously, the 29 per cent tax bracket, which applies to incomes between $140,388 and $200,000, was the highest tax rate in the country.

In their election platform, the Liberals estimated the tax increase on the top earners would only fall short of covering the full cost of the tax cut by less than $100 million per year.

But the numbers were adjusted after an evaluation by the Finance Department found the projected revenues of the Liberal promise were off the mark. The net cost of the changes is $1.4 billion in 2016-17, a shortfall that’s projected to rise each year until it hits $1.7 billion in 2020-21.

“It will cost a little more for the government,” Morneau said of a plan that will take effect Jan. 1 and is aimed at injecting some life into the ailing economy.

The tax-bracket changes were a central pledge in the election platform that helped propel the Liberals to victory in October.

Those campaign vows also included another tax modification: cancelling the Conservative move to increase limits on tax-free savings accounts to $10,000 from $5,500. However, the ceilings on the popular accounts will be indexed to inflation.

Morneau said more of the promised Liberal changes will be introduced in the new year, including its child-benefit plan and a move to repeal the Tories’ income-splitting plan for families with kids.

“It’s important to look at our entire plan,” Morneau said. “We have taken this very first step.”

Some experts had warned the Liberal tax-bracket changes were likely to cost public coffers more than the government had expected.

A recent study by the C.D. Howe Institute think tank predicted the changes would encourage big earners to make more of an effort to avoid taxes, while the rate reduction itself would cost government finances more than expected.

Others argue the measures provide more benefit to richer Canadians.

Those making more than $90,563 are taxed at three different rates: one rate on the first segment of income up to $45,282, the second, newly reduced rate on the next segment of income, up to $90,563; and a third rate beyond that, up to $200,000.

Therefore, people earning $90,563 and higher will receive the largest possible benefit of $679. But once they hit the $217,000 mark, the squeeze of the new, highest tax rate erases the benefit entirely.

About 319,000 Canadians will reach the upper tax echelon.

New Democrat MP Guy Caron criticized the plan for doing nothing for people earning less than $45,000. He also said he wasn’t surprised when the calculations in the Liberal platform failed to add up.

“This is the problem when you are overpromising during the campaign,” said Caron, the NDP’s finance critic.

“There’s a real risk that reality will catch up to you.”

Last week, Morneau backed away from another Liberal campaign vow: keeping Ottawa’s annual budgetary shortfalls under $10 billion in 2016-17 and 2017-18.

Combined with the sting of the struggling economy, the new Liberal government is facing increasing pressure to meet its election vows to cap annual deficits at $10 billion over the next two years and to balance the federal books in the fourth year of its mandate.

Morneau has said the Liberals are facing a slower economy and a worse-than-expected fiscal environment handed over from the former Conservative government.

Last month, Morneau announced a $3-billion deficit forecast for the current fiscal year. In April, the Tories projected a $2.4-billion surplus for 2015-16 _ including the $1 billion set aside for contingencies.

The proposed changes to the tax brackets will help boost the economy, the Liberals say.

He said the government would focus on its pledges to invest in infrastructure, lower the federal debt-to-GDP ratio and balance the books before the next election, but dodged when asked directly about the party’s promise to keep annual shortfalls under the $10-billion ceiling.