Last week the Conservative Government of Stephen Harper announced that it would finally allow income splitting within a family unit. The move is an attempt to make the tax system fairer for families who are in similar situations from an income perspective.
The plan allows one spouse to transfer up to $50,000 in income per year to the lower income-earning spouse, thereby reducing the family’s tax burden. The maximum benefit from this transfer is capped at $2,000. The following example will illustrate the inequity that this policy is seeking to correct:
One spouse works and one spouse is at home
Family income $100,000
2 kids under the age of 18
Both spouses work; both earn $50,000 each
Family income $100,000
2 kids under the age of 18
Family A would pay a total of $18,923 in taxes in 2014 (ignoring basic personal and spousal exemptions)
Family B would pay a total of $15,847 in taxes in 2014 (excluding basic personal exemption)
Family A would be paying taxes on the $100,000 income and Family B would be paying taxes on each of their $50,000 income. The way that the tax brackets in Canada are set up, Family A would be paying more taxes as a family than Family B. This is because of the progressive tax system we have in Canada; the more you earn, the higher proportion of taxes you pay. But when you look at this from the family unit perspective, the inequity is evident. Harper’s plan would allow Family A to transfer up to $50,000 to the non-working spouse. The end result is that both families now are in the same tax situation as all of the income was earned in the family unit.
Note: In Family A’s situation currently, the soul income earner is also using the spousal deduction. In this analysis, when the income is split, that spouse will lose this deduction and the lower income spouse will use their basic personal exemption, so it is a wash.
I have read many opinions on this proposal. The theme that I keep seeing over and over again is that people are worried about other segments of society that would not see any relief from this proposal. Examples of these other segments are seniors, couples with kids older than 18 years of age, and single people.
Though I would agree with the sentiment, you also need to realize that this policy’s aim is not not benefit every segment of the society. No tax policy change can benefit every person. The income splitting plan is simply aimed at treating families equally and nothing else. It has nothing to do with equalizing tax burdens of single individuals, seniors etc. There are tax policies that seek to provide credits for seniors but not for anyone else. Child tax credits are provided to people who are supporting kids. If you are a single parent , you have the ability to claim the equivalent to spouse credit. All of these are examples of policies that seek to give a benefit to a particular segment of society. There are policies that seek encourage businesses to invest in certain type of technologies and get tax benefits. Again, the aim of these policies are to affect a certain behaviour. If accelerated depreciation was offered for businesses investing in certain type of assets, the response shouldn’t be “Well that is great for them, what about businesses like mine that can’t afford to invest?” This is the type of sentiments I am seeing and reading about.
My only point is that we cannot simply dismiss this income splitting proposal on the basis of whether it provides a benefit to us individually. Rather, we should look to see what the aim of the proposal is. In this case it is trying to make the tax system more fair by looking at a family as a unit and treating each unit fairly and equally, regardless of who is earning the income and at what proportion within that family; $100,000 should be taxed the same whether it is earned by one spouse or both spouses – this is the what this proposal seeks to address.
There also people who believe that this proposal is costing the taxpayer’s money. While in theory it is true, that fewer taxes will be collected, it is also true that that these families who will benefit have been paying more than their fair share in taxes for years. You cannot overcharge someone and then set up your social programs based on this overcharge and then complain that less revenues are coming in and that programs will suffer. Had the inequity been addressed earlier then there would have been less money anyways and those social programs may not have been established in the first place. You cannot blame the people who will be the beneficiaries of this proposal, nor can you blame government.
It is my personal opinion that the government is doing what no other government has wanted to do for fear of the critisism it would face. I believe this is a good move and one that will help many Canadian families.
This proposal is still subject to parliamentary approval.