Last Thursday the federal government announced the “Family Tax Cut” which is essentially a watered down version of Harper’s 2011 election promise to introduce income splitting for Canadian taxpayers. Although I have some reservations, this is actually one of the few pieces of the current government’s economic agenda that I actually support.

Under the proposal, families with children under 18 would be able to transfer up to $50,000 of income from the higher income spouse to the lower income spouse. Unlike true income splitting which would reduce the higher income earner’s taxable income, this income transfer will take the form of a non-refundable federal tax credit which will be capped at $2,000 per family. It will not affect the calculation of provincial taxes.

Who does it benefit?

There has been a lot of criticism aimed at income splitting measures, making the argument that they will primarily benefit high income and wealthy Canadians who do not need the tax break. Often this position will be supported by a calculation that shows the highest tax savings will be achieved by a couple where one spouse earns significant amounts of money, and the other earns nothing.  I have been preparing taxes professionally for over 25 years, and I have never run across any Canadians who fall into this theoretical scenario.  From my experience, wealthy Canadian couples generally fall into one of two categories:

  1. Both spouses are already high income earners, or
  2. They have already taken advantage of existing income splitting opportunities through investments and corporate structures not readily available to lower income Canadians.

While there will be some wealthy Canadians who have done little tax planning in the past who will benefit, what the proposals accomplish is to make some of the advantages of income splitting available to a much larger group of ordinary Canadians with children under 18.

Another criticism has been that it does nothing for single parents who need it the most. This may be the case, but since three quarters of single parent families already do not pay any income tax, there is not much to be done for this group through income tax reform.  Instead, improvements to programs such as the universal child care benefit will be far more beneficial than any income tax break aimed at this sector.

Where should we be headed?

Ideally, I would like to see Canadians be able to file spousal returns, similar to what is currently allowed in the US. What this would mean is that families with the same income would be taxed at the same level, unlike the current system in which there can be a large disparity between the taxation of families with identical incomes.

What it does not mean is that we should give up Canada’s progressive tax system that places a heavier tax burden on those that can afford it. Ultimately the fairest way to level income taxes is to base tax on the economic unit, which in the case of most families is the joint income of the couple. This would allow Canadian families to plan their lives and budgets more effectively, without having to worry about who makes how much of their combined income.

While the government’s proposal is a long way from achieving that objective, it is a step in the right direction.