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The Conservative government is looking at a radical restructuring of the tax system that would allow couples to reduce what they pay by averaging out their income, says a government source.
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Critics say income splitting &emdash; transferring income to the lower-earning partner for tax purposes &emdash; would alter the fundamental nature of the tax system, making the family a basic unit and the system less progressive.
Income splitting was praised by Prime Minister Stephen Harper during the last election. And Flaherty, who brought in income splitting for pensioners on Oct. 31, has not ruled out extending it to all Canadians.
Doing so would be expensive &emdash; economists estimate it would cost Ottawa about $5 billion a year &emdash; but it would fit with Flaherty's personal ambition to establish a reputation as Canada's tax-fighting finance minister. Ottawa had a $13 billion surplus last year.
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The 2007 federal budget, expected in February or March, is likely to include hefty tax breaks and income splitting would dovetail with the Tories' preference for policies that strike a chord with middle-class families.
The opposition parties are threatening to defeat the Conservative minority government over the budget. The income-splitting system would likely be a huge hit with taxpayers going into an election campaign and would help the Tories deal with criticism that the one percentage point cut in the GST earlier this year really didn't have much of an impact on ordinary Canadians.
Income splitting is common in other developed countries, including the United States, where couples have the option of filing joint or separate tax statements. Germany, Switzerland, France and Portugal also allow joint statements. It's not clear how the system would work in Canada.
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Income splitting would be a tax break for many couples, with the lion's share of benefits going to those in which one spouse is a high-income earner and the other does not work outside the home.
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But it would attract fierce criticism from singles who would feel disadvantaged by income splitting and by women's advocates who argue, by easing the tax burden for families with a stay-at-home spouse, it would tend to discourage women from joining the workforce.
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- reprinted from the Toronto Star