Introduction
It’s election time in Canada. Canadians go to the polls on October 21, 2019. All political parties and their leaders vying for power are offering their election manifestos, that is the menu of goodies along with their projected costs to be offered to families, things and tasks that they will do and/or accomplish, if elected to govern. Nothing unusual. Parties and leaders in all democratic countries, developed and undeveloped, follow the same procedure. Canada is no exception. For politicians, the election time is the time to show who can offer voters the best of goods and services with voters’ own money. That’s also considered bribing voters with their own money. 

And what’s the politicians’ source of providing financial help to voters? Money collected by government as direct income and sales taxes from taxpayers, their mandatory and voluntary contributions and deductions on several federal and provincial plans, excise, corporate taxes, and all other indirect taxes – the key sources of government revenue, besides borrowings.

In the upcoming October election, there are six parties vying to form a government: the incumbent Liberals, Conservatives, New Democrats, Green, Bloc Quebecois, and People’s. This blog is not intended to synthesize the manifesto of each of these parties. It’s simply focused on the two specific goodies being offered by the two main contenders, the Liberals and Conservatives: first, offering more income to low and middle income class voters by tweaking the rate of first income tax bracket, giving additional tax credits, or by raising limit of basic income exempted from tax as well as by raising benefits currently provided under Canada Child Benefit  program; and second, offering help to first time home buyers.

Do the stated ways and means of providing help to families in respect to these two commitments make sense and really help voters or are just  gimmicks to get votes? 

Let’s look closely at each. 

Raising incomes of low/middle income voters and their families

The conservatives’ slogan is to put more money in the pockets of low and middle class families and help them move forward. To do it, the Party is proposing to reduce the first income tax bracket from the current 15% (brought down from 17% by the Liberals after the 2015 election) to 13.5% along with tax credit of $1,000 annually for each child for fitness and sports-related activities, $500 for children’s arts and educational activities, another $500 for parents with children with disabilities. Besides these, the Party is offering a transit credit worth 15% that tax filers spend on buying monthly passes for using public transport including buses, streetcars, subways, or local ferries, designed to cut emissions causing air pollution. Most of these credits are being re-introduced from Mr. Stephen Harper’s era , as these were terminated by the incoming Liberals in 2015.

The Liberals, on the other hand, are proposing to increase the amount of basic income exempted from tax from $12,000 to $15,000 for all tax filers. In addition, the Party is proposing to increase Canada Child Benefits by another 15% for children under one year of age as well as benefits under Old Age Security (OAS) program by 10% for persons aged 75 and over.  The Party recognizes that families need more money at these stages of their life cycles.

Both parties seem to agree to help parents of the newborns while they are receiving Employment Insurance. The Liberals want to make such benefits tax free at the source whereas the Conservatives are offering 15% tax credit at the time of filing tax return.

With all these proposed changes in the first income tax bracket and different tax credits against the changed threshold of basic income exempted from tax, one may ask how much it’s going to cost the government, and how much additional income a low/mid income family is going to get at the end of a year? The best educational guess is that it’s going to cost around $7 billion and taxpayers and their families will gain anywhere between $500 to $1,000 (Mr. Scheer, the Conservatives leader, in a recent English language debate said that a couple would gain $750). Assuming that each eligible family will gain a net income of $1,000 at the year end, which in turn, can be translated to around $3 a day – not enough to buy even an average size bottle of cooking oil. How far families will get ahead with this petty amount? Politicians really need to think before making any meaningful offer to attract low/mid income voters’ favour.

Again, in respect to offering different tax credits to children and transit credit to those using pubic transport, this concept is really not that equitable. What about offering tax credits to single-person families, or those with two or more members without children. Even all those with children and eligible to get credits wouldn’t be tempted to send their kids to such activities simply because petty credits are available. Because it takes more than that for parents to decide whether to send their children to such activities as parents have to take into into account several other factors including costs of accessories, equipment and facilities associate to such activities , besides their own time and resource commitments. The reality is that that only those in the upper and higher income brackets, who could afford to send their kids to such activities, will benefit from these son called “Boutique” credits.

In the same manner, offering transit credit to users of public transport is inequitable too. What’s wrong with those who drive to work, or share carpools, etc.? These people also incur transportation costs and some may even need assistance.

Since a good majority of families are carrying a load of consumer and/or mortgage debt, and living in financially straitened circumstances, receiving, say $1,000 at the end of the year may make them momentarily happy. Nothing else is going to change. Leaders of both Parties maybe happy to keep their words too – “putting more money in the pocket of a low/mid income family” – costing billions of dollars a year to the federal treasury. But for an individual recipient, this negligible financial help is not going to make any dent in his/her pocket.  

So as I see it, it’s just a politicians’ token gesture to win votes.

However, if one looks from a politician’s perspective, his/her objective is to look good in the eyes of the electorate. He/she is doing something not only to re-distribute incomes, but also helping the economy grow by making families spend more. He/she knows that all of this additional money given to low/mid income families will be spent right away, boosting the nation’s economy. Keep in mind that consumer expenditure accounts for close to 60% of our gross domestic product (GDP) – an economic measure of the size of the economy that values all goods and services produced by the nation.

Help to first time home buyers

Again, let’s start with the Conservatives. The Party has proposed two key measures: first, to extend the mortgage amortization period from the current 25 years to 30 years; and second, to drop the current eligibility criteria that a potential first time buyer would be able to retain property if the current mortgage rate increased by another 2% (currently known as 2% test). The former is aimed to facilitate the issue of affordability. 

The Liberals, on the other hand, are going to increase the thresholds of both the family income (to $150,000) and purchase price of home (to $800,000); the latter indeed varies not only by province , but also within urban and rural cores of cities of each province. This increase in the  thresholds is in addition to the already available 10% of home equity to the first time home buyers to give them a head start. This equity is held by the crown corporation Central Mortgage & Housing Corporation (CMHC). Put another way, CMHC will contribute 10% of the purchase price to start with (besides the down payment made by the potential owner). Keep in mind that this chipping in of 10% of loan by CMHC has to be paid back over the years by the owner, or at the time the house is sold. The Liberals are not talking about either the the current 2% test, or the change in amortization period, or the issue of affordability of home. This changing of the threshold of purchase price may result in an increase in the price of home, forcing a buyer to take more mortgage debt. 

Now let’s look at the implication of the Conservatives’ proposal to increase the mortgage amortization period from 25 to 30 years. No doubt any increase in amortization period will bring down the monthly mortgage payment, and that means more cash available for other needs for a financially hard pressed new home owner. The Party thinks it is helping the first time buyer when in fact, it’s making the owner to keep paying debt for another five years, dishing out more interest payments. Any extension of amortization period will indeed financially benefit the lender at the borrower’s expense. That’s not helping the buyer, but putting him/her in a longer financial distress. 

To illustrate this point, let’s consider a buyer with a mortgage of $400,000 at 4% interest. The monthly payment is $2,104 with 25 year amortization and $1,902 with 30 year – a difference of $202 a month. The home owner is happy that he/she has additional $202 in cash available for other needs. Assuming all else constant, and interest rate remains unchanged, that owner would pay (according to the Bank of Nova Scotia’s Mortgage Calculator available on Google) total interest amounting to $284,748.48 over 30 years on $400,000 mortgage loan compared with $231,224.30 over 25 years. In other words, an increase in amortization period from 25 to 30 years will cost the owner $53,524.18 extra in interest alone. Indeed he/she would be able to have extra cash $72,720 (= $202 x 12 x 30) for other needs, but with extra interest of $53,524. That means, for each dollar of extra cash, he/she paid 74 cents in interest. Is that a good deal to offer? Not at all. In my professional opinion, any lengthening of amortization period is the worst disservice one can offer to the first time home buyers.

It’s rather unfortunate that the Conservatives have failed to recall that when their peers were in power with Mr. Stephen Harper at the helm with Mr. Jim Flaherty as Finance Minister, they tried to introduce measures like no down payment and 40 year amortization in order to boost the housing industry and in turn, the economy. There was a huge public outcry that we were putting home owners in a rather miserable situation. Not only that, the longer amortization period would deny them the opportunity to save for their children’s higher education, retirement, etc. as they would be spending their work life paying off the mortgage. Mr. Flaherty listened and he brought back the provisions including 5% down payment with 30 year amortization, and with continuing public dissatisfaction, brought back amortization period to conventional 25 years. 

I don’t know why the current Conservative leader has not paid attention to what happened in his backyard years ago. Extending amortization period is not a good proposal by any sense.

The Conservatives’ second proposal about getting rid of 2% test makes sense as the measure is meaningless to begin with. Since a family income can change due to several factors including the loss of job of the primary or secondary earner in a volatile labour market and shifting economy, their sickness or disability, or family’s dissolution over time, what good is the criteria that qualifies a family on the day it is assessed, but what happens to it or its ability to afford a home after that day is anybody’s guess. Moreover, this test is based on a specific criteria: monthly payment of mortgage plus property taxes plus utilities as a proportion family’s monthly income should be under one-third of income (at current interest rate and at +2% rate). A family may qualify this criteria, but in reality it can be in a real financial hardship as there are umpteen other expenses associated with maintenance and furnishings of a new home, besides other expenses on food, clothing, persona care, and children’s education – to name a few.

In my professional opinion, this criteria of qualifying a family that it can afford a home is totally meaningless. It may cause more pain and financial stress to a potential home owner than helping it to own it.

The Conservatives are rightly proposing to get rid of this 2% test used as a qualifier to own a home.

Conclusion

I would say that the proposed plan as put forth by the leading two contenders about putting more income in pockets of  low/middle class families is just an election plank and would hardly make a dent to their overall well-being. And, the proposal to increase amortization period from 25 to 30 years is a big disservice to the first time home buyers.

Key words: Family income, Middle class, Income tax, Tax rate, Tax credit, Child benefit, Home ownership, Mortgage debt, Amortization, Interest payment.