Setup Menus in Admin Panel

Income splitting: It’s a good thing!

split rockThere was a pledge before the last election to allow income splitting for families with children under the age of 18 – once the Federal Budget is balanced.  A few months ago, a reader asked me where this proposal stood and what I thought.  I sent a letter to my local MP asking for an approximate timeline of when income splitting might be implemented.  The response that I got didn’t really provide any new information – only that the plan was still in the works.

What exactly is income splitting?

Under the current Canadian tax system, taxpayers file individually (as opposed to the US system where it is possible for couples to file one return together).  Because of the different tax brackets, a household that has 2 adults earning $30,000 each is going to pay less tax than a household with a single earner bringing in $60,000.  With the income splitting proposal, that single earner would be able to allocate $30,000 to his/her spouse, taking advantage of the lower tax bracket.  Here’s how this might look:

Household with one person earning $60,000 and 2 children under 18

Current system With income splitting
Income-earning spouse Reports all income Reports ½ the income
Other spouse Reports no income Reports ½ the income
Total taxes paid for the household (in Ontario, for illustrative purposes)* $8,918 $6,201

* From Taxtips.ca

With income splitting, this hypothetical family would save $2,717 in tax per year.

Benefits would extend to dual-income families as well.  If one earner has a higher income than the other, the couple could allocate the income between them in whatever way that reduces their overall tax bill (the income doesn’t have to be split 50/50).  The only rumoured restriction at this point is that the maximum amount of income that can be split is $50,000.  Pension-income splitting has been available for seniors in Canada since 2007.

Equality at the household level

One of the principles of the Canadian tax system is that taxpayers in similar financial circumstances should pay similar amounts of tax.  From the table above, we can see that this is not the case with the current system.  A two-earner family is going to pay significantly lower taxes than a single-earning family with the same income.  This does not make sense.

Each member of a couple is required to include the other’s income when calculating benefits and certain tax credits thereby reducing the amount they receive.  However, when they file their tax return and being treated as a single economic unit could work in their favour, a family is then split up and treated as individuals.  This does not make sense either.

But two-income houses have to work more…

So shouldn’t they pay less tax?  I don’t think so.  While I agree that the total number of hours spent on the job is going to be higher when there are two people earning the income, it may not be as straight forward as all that.  In many single earner families, the income-earning spouse would not be able to hold the job they have if the other spouse were not looking after things on the home front.  I’m not just talking about 1950’s “support your man” mentality.  I’m talking about getting the kids on the bus for school in the morning and doing double-duty while the higher-income spouse is travelling.

More choice

Easing the tax burden gives individual families the ability to choose what is right for them.  If that’s two parents working outside the home, so be it.  If it’s one, that’s great too.  The situations that don’t make sense to me are the ones where both parents are out earning an income when one wishes they could be at home with the children or those where the parent who is at home wishes they were out earning an income.

Keeping control

Opponents to income splitting are concerned that lower-income spouses could be held responsible for taxes on income that they haven’t actually been given access to.  If the application of the legislation is the same as the way it works for pension splitting, the issue of control should not pose a problem.  With pension splitting, both spouses are required to sign an election on how much of the income they want to split.   It is not an automatic provision.  If family income splitting were to proceed in the same way, couples who hold their finances separately could continue to file the way they always have if they so choose.

Better than enhanced child benefits?

Enhancing the child benefit system could be a viable option instead of income splitting, assuming that the money was put in the hands of parents directly, although I still prefer the income splitting option.  I’ll have to ponder exactly why and address that in a future post.

What do you think?  Is income splitting a good idea?  Or would you rather see an enhanced child benefit system?  Or no changes at all?

August 11, 2013

1 responses on "Income splitting: It’s a good thing! "

  1. Well I find income splitting really effective. It works for us at least.
    Andy Bland recently posted..Auto ResponderMy Profile

Leave a Reply to Andy Bland Cancel reply