02/12/2014 03:33 EST | Updated 02/12/2014 03:59 EST

Jim Flaherty's Income-Splitting Remarks Open Rift Among Tory Cabinet

OTTAWA - Finance Minister Jim Flaherty opened a rift within the Conservative cabinet on Wednesday by casting doubt on the wisdom of using next year's expected budget surplus to expand income-splitting ahead of the next election.

Income-splitting for families with dependents under the age of 18 was a key promise the governing Tories made in the last election, but with a catch: it was contingent on a balanced budget.

The federal budget Flaherty introduced Tuesday projects a $6.4-billion surplus in 2015, just in time for the coming election.

On Wednesday, however, Flaherty lobbed a grenade into the Conservative caucus room when he said he personally thinks blowing part of that money on a promise that's expected to cost upwards of $2.5 billion is not the way to go.

"I would pay down public debt and reduce taxes more, myself, but I am only one person," he said in a post-budget interview before the Ottawa Chamber of Commerce.

Prudent fiscal management has historically served Canada well, but federal governments lost their way over the last 50 years and became spendthrifts, Flaherty continued.

"We've created a large public debt and we should deal with it and we should knock it down," he said. "Not for my sake, it won't make any difference to me, but it will make a big difference to the next generations."

Opposition Leader Tom Mulcair pounced on Flaherty's comments, asking Prime Minister Stephen Harper if he agreed that income-splitting would provide no relief to the vast majority of Canadian families.

"This government said in the last election, made a commitment, that when we balance the budget ... one of the highest priorities of this government will be tax reduction for Canadian families," Harper said.

But cracks had already started to appear within Tory ranks about whether they should abandon the promise.

Treasury Board President Tony Clement and Employment Minister Jason Kenney said they back income-splitting, while Maxime Bernier, minister of state for small business, seemed to side with Flaherty.

"I know what our campaign commitments are and I stand by those commitments," Clement said.

Echoed Kenney: "We made a platform commitment to introduce income-splitting when we get to a balanced budget. We'll get to a balanced budget next year, that's very clear."

Industry Minister James Moore, however, dodged direct questions about where he stands on income-splitting.

"You're talking about 2015. We have to get through 2014 first," Moore said.

New Democrat MP Peter Julian could barely contain his glee as he described the "incoherence" within the federal cabinet and the Prime Minister's Office.

"We now have a finance minister backtracking from what was a key Conservative commitment," he said.

The C.D. Howe Institute has calculated it will cost federal coffers $2.7 billion a year — plus $1.7 billion from the provinces — to allow couples with young children to split up to $50,000 of their income for income-tax purposes.

And the Tories have yet to implement another costly campaign promise: doubling the original $5,000 annual limit on contributions to tax-free savings accounts.

Critics say both policies would favour only a small segment of the population. With record household debt, many families can't afford to sock away $10,000 a year, they note.

The institute has argued that 85 per cent of households, particularly single parents, would gain nothing from the income-splitting proposal. As well, it estimated 40 per cent of total benefits would go to families with income above $125,000, who could gain up to $6,400 from Ottawa, with more savings potentially coming from the provincial tax bill.

Rajotte acknowledged that the policy would likely benefit only a small percentage of the population.

"It's a simple fact that there's a certain percentage of the population — those families with two parents that have incomes that are very disparate — benefit from it," Rajotte said.

"Those situations where two people working outside the home, with incomes that are comparable, obviously they're not going to benefit not nearly as much from a measure like this."

University of Calgary economist Jack Mintz has argued those problems can be fixed if income-splitting is accompanied by other measures that would allow the benefits to be shared by other kinds of families.

— With files from Joan Bryden and Bruce Cheadle

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