Who will benefit the most from income splitting?

Families with large income disparities making $60,000 or more will come out on top

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(MARCO DE SWART/AFP/Getty Images)

(MARCO DE SWART/AFP/Getty Images)

The federal Conservatives moved on a four-year-old election promise Thursday by introducing income splitting for families, dubbing it “The Family Tax Cut.” The government also rolled out a surprise enhancement of the Universal Child Care Benefit and a $1,000 increase in the maximum amount that can be claimed under the Child Care Expense Deduction.

As expected, the plan unveiled by Prime Minister Stephen Harper and Finance Minister Joe Oliver in Vaughan, Ont., allows families with children under the age of 18 to transfer as much as $50,000 worth of income from the higher-earning spouse to the lower-earning spouse for tax purposes starting in this year.

The wrinkle is that the resulting non-refundable tax credit has been capped at $2,000 per couple.

This means income splitting will provide a meaningful saving opportunity for Canadian families, but not as much as previously thought.

The maximum credit of $2,000 per couple was added after fierce criticism from pundits that income splitting would benefit higher-income families more so than lower-income families.

“The $2,000 cap limits the value of income splitting for higher income families,” says Knowledge Bureau president and MoneySense tax expert Evelyn Jacks. “The couples that will benefit most are those where there’s a large income disparity and they’re making roughly $60,000 to $70,000 in combined income, by our calculations.” At that point couples will hit the $2,000 cap, so those with higher incomes will not get a larger benefit. “It’s not as good as a provision that would allow up to $50,000 of income to be split all across the various income streams, particularly because we are losing the non-refundable Child Tax Credit in the process,” Jacks adds. The average market income for families with children under the age of 18 in Canada is $106,000.

 READ: How income splitting landed on the agenda »

Still, Jacks thinks income splitting will be beneficial for eligible families regardless of their income level, especially when combined with the Tax-Free Savings Account. That’s because couples with young children will be able to keep more of their pay including if one parent stays home to look after a baby. The savings can then be invested for the future, earning tax-free interest for life. (There are rumours brewing that the Harper government also plans to increase TFSA contribution limits, which would further sweeten the deal for Canadians.)

Canada’s current tax rate structure means that a couple with two children in which spouses report a taxable income of $60,000 and $20,000, respectively, would pay about $1,210 more in federal income taxes in 2014 than a couple with two children in which both spouses report a taxable income of $40,000, even though their combined household income is the same at $80,000.

Thursday’s announcement changes that by offering the first couple in the scenario above the chance to save up to $2,000 per year. It’s estimated that 1.7 million couples could benefit from income splitting. (Seniors who are pension splitting are not eligible.)

“It begins to address the real economic cost of raising families in Canada, in earning income and building up pension resources for the future. That’s a positive thing,” Jacks says.

Income splitting could also simplify the tax filing process. By allowing couples to pool their income, the government could be paving the way for a single filing between couples, though no one has indicated that’s the ultimate goal. Right now, in order to be eligible for income splitting, both partners need to file a tax return.

“But it begs the question, does it make sense to introduce joint filing like in the U.S.?” Jacks says.

For the time being, H&R Block senior tax analyst Caroline Battista advises taxpayers “not to rush to do anything until we know all the implications.”

She says only time will tell whether transferring the maximum amount allowable ($50,000) from one spouse to another will always be worth it or if there are advantages to only transferring the exact amount necessary to collect the maximum $2,000 benefit. When pension splitting was first introduced, some seniors found transferring more didn’t always pay off.

Changes to the Child Tax Credit and Universal Child Care Benefit

Harper also announced Thursday that the Child Tax Credit would be replaced in 2015 by increases to the existing Universal Child Care Benefit (UCCB). Starting Jan. 1, the Universal Child Care Benefit for parents of children under age 6 will rise from $100 per month to $160 per month. A new benefit for children aged 6 through 17 of $60 will also be introduced.

The new UBCC allows families with income too low to be taxable to benefit, which wasn’t the case with the Child Tax Credit. Under the new program, all families with children under 18 will benefit, Jacks says.

Child Care Expense Deduction increased

Finally, the Child Care Expense Deduction was increased from $7,000 to $8,000 per child under the age of 7 and from $5,000 to $4,000 for each child aged 7 through 16.

The net effect of all these changes? “For higher earners it means lower taxes,” says Jacks. “For lower earners, it could mean higher refundable tax credits.”

 

9 comments on “Who will benefit the most from income splitting?

  1. Additional tax break is really good. Take this money and invest in child RESP for even greater benefit.

    Reply

  2. Question. Does splitting income to a non-working spouse mean losing the spousal tax credit of $11,000? If so, wouldn’t a person earning $80,000 be worse off by splitting?

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    • No. Due to the progressive income tax brackets, when one person earns all or majority of the family income, (s)he has to pay more taxes through a higher income tax bracket. But when the same amount of family income is earned spread over between 2 earners, the high earner’s income drops down to a lower tax bracket, the lower (or nil) earner’s tax bracket may rise but is not higher than what the higher spouse was already paying in the higher tax bracket. Hence, there will be a lower total family tax expense for the family as a whole.
      Also, note that unlike the pension income splitting, there is no actual transfer of income here. It is a notional transfer to simply allocate the funds from the higher earner to the lower (or nil). Thus, it will not affect any other tax or financial means tests to negatively affect the receiver of the notional income.

      Reply

  3. It’s UCCB, not UBCC.

    I took last year’s tax return and recalculated as if income splitting were in effect and we had received the increased UCCB and did not get the Child non-refundable tax credit. The result: my middle class (less than $70,000/year) family will pay $500 more in federal tax (due to loss of spouse and child non-refundable tax credits), but we will receive $2800 more in UCCB. So overall, it’s a benefit of $2300 for this middle class family. That’s $2300 more that we can spend on things to benefit our family, which in turn will strengthen the economy.

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  4. I am a big fan of income splitting across the board. TO have it introduced here for families with kids under 18 is a great start. Pensioners already have it. The rich already have it via family trusts. Parents with handicapped kids already had it. So now we just have to add single parents who like in France can attribute some income to the oldest child and save money and then to all households that in fact share income. In an era where we get men to change the diapers and cook sometimes, they are ‘sharing’ the household obligations so to admit we also share the household income is only logical. An idea whose time has come.

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  5. While I generally, like the idea of income splitting (it certainly is more fair than the current system), I don’t think it’s the best way. I think the fairest of all systems is a joint or family tax return. We earn money as a family and pay our bills as a family, why don’t we pay tax as a family?

    Under the current system, a one income family earning $70,000 pays more tax than a family of two people earning $35,000 each. That’s not fair and income splitting will fix that. However, what if that single income earner doesn’t have a spouse? Why should that single earner pay more tax than a one income family or a two income family? If we paid tax as a family, the single person will pay the same tax on the same amount of income as the single earner couple and the two earner family.

    I would also suggest that we get rid of all these non-refundable tax credits and just lower the tax rates.

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    • That income splitting didn’t turn out to be that great, with a $50 000 income earner and spouse who is not working that only gave us an additional $400. Better then nothing I guess but when I first heard about this program it looked way better. I agree with previous poster, we should be taxed as a familly, it would make more sense.

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      • It worked for us, to the tune of $2000 I am NOT going to like that being taken away by Trudeau.

        Reply

  6. Am I reading this right?

    Finally, the Child Care Expense Deduction was increased from $7,000 to $8,000 per child under the age of 7 and from “$5,000 to $4,000” for each child aged 7 through 16.

    Age 7 to 16 is from 5,000 to 4,000? So it’s not an increase but a decrease?

    If it’s a typo, can you please make necessary changes?

    Thanks!

    AJ

    Reply

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