How income splitting landed on the agenda

The popularity of pension splitting coupled with the looming election, among other factors, gave rise to income splitting

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As predicted in the morning papers, the Conservative government has formally announced its long-promised introduction of family income splitting. A $4.6 billion-a-year package of tax measures was unveiled Thursday afternoon in Toronto.

As expected, there was also an enhancement to the universal child-care benefit. The previous $100/per month for each child under six is being raised to $160/month. And parents with children between 6 and 17 will receive $60/month for each child of that age, effective January 1, 2015. However, the existing Child Tax Credit is being eliminated.

Couples with children under 18 will also be able to split income for tax purposes by transferring up to $50,000 of income from the higher-income earner to the lower-income partner, effective for the 2014 tax year now in progress. As speculated in the morning papers, the original proposal has been slightly watered down to impose a maximum (annual) benefit of $2,000: a sop to critics who carped that otherwise high-income earners would unduly benefit from family income splitting.

Pension splitting foreshadowed this

The precursor to family income splitting was pension income splitting, which provides a considerable tax break to retirees when one couple has a large employer pension and the other spouse does not. Introduced in the 2007 budget, pension income splitting already operates in a similar fashion to how family income splitting would work. Pension splitting is implemented when couples prepare their annual tax bill each spring.

During the 2011 election, the Conservatives floated a promise aimed at families with children up to 18 years of age; it would permit the higher-earning parent to transfer up to $50,000 a year of income to the lower-earning spouse. In effect, this would reduce tax levied at the highest marginal tax rate for the higher earner, while the lower-earning spouse would be taxed at their likely lower tax rate.  Seen as a family unit, the net tax paid by such couples would be potentially thousands of dollars less.

The classic example is to compare a one-income family where the sole breadwinner earns $100,000 a year and is taxed accordingly, versus a family where both spouses earn a more modest $50,000 a year and are taxed relatively less. A 2011 research paper from C.D. Howe Institute said the tax savings could run as high as $6,400 a year for some high-income families earning at least $125,000 a year. It said 40% of the benefits of family income splitting would go to those high-income families.

Many families — and singles — would gain nothing

While it’s nice that seniors and families with children can gain from income splitting, in between are many Canadians who would not benefit from the measure. CD Howe found 85% of households would gain nothing. That would include families where both spouses are in the same tax bracket and of course single parents who have no spouse with whom income could be split for tax purposes.

Looming election issue

I’m all for anything that boosts the financial independence of heavily taxed Canadians. Part of me thinks that all taxpayers should be treated equally, rather than singling out seniors and parents. On the other hand, there would be a high cost to the federal treasury if income splitting were applicable across the board. Because it potentially affects so many of us, family income splitting is bound to become a major political issue the next time we go to the polls.

The National Post suggests both income splitting and the child-care enhanced benefits will be introduced before the general election next fall. But Liberal leader Justin Trudeau has said he would repeal family income splitting if he were to be elected next year. The NDP is sitting on the fence on the issue, pending full details of the measure.

When I posted a link this morning on my Linked In account, Allen Scantland — an accountant in Metcalfe, Ont. who is running for city council  – said “the arguments against income splitting in my mind are baseless, derogatory and wrongly associated with old notions of who earns money in the family.” Scantland said relatively few families have a primary earner making more than $100,000. Most make less and have to make tough choices on childcare, homes and where to work. “Almost all families spend their money together and should be able to level their taxes by income splitting. It is a social good.”

Tickets still available for Saturday retirement event

On a related note, the MoneySense retirement event is on Saturday morning. Last I checked, tickets were still available. Details can be found here.

Also, if you listen to Motley Fool’s podcasts, I was a guest of Chris Hill on Thursday’s edition of MarketFoolery. The 14-min clip can be found at iTunes here. We talk about how Canada’s stock market resembles Australia’s, the fact Canada is concentrated in just three sectors, longevity, retirement versus Financial Independence, and even a prediction I made in 1983 about cell phones.

Jonathan Chevreau is editor-at-large at MoneySense. He blogs at findependenceday.com and here. 

2 comments on “How income splitting landed on the agenda

  1. Would income splitting be worth it if I earned 40,000 and my partner earned 75,000 a year?

    Reply

  2. Many years ago I filed a tax return with all calculations based upon income splitting, 50/50. Single income (modest), 4 kids. RevCan of course corrected my “mathematical errors” but we left Canada shortly afterwards, never to return.

    Reply

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