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It’s Time For Income Splitting
By Dave Hodson | September 27, 2007
Canadians are an overtaxed people and are in need of some relief on that front. I’ve also long been in favour of allowing Canadian couples to split their incomes for income tax purposes. Unfortunately, reports earlier this year indicated there was not enough room in the federal budget to comfortably allow it. However, given today’s announcement of an expected federal surplus of $14 Billion, the time has come to finally allow income splitting.
Our personal spending power is largely driven by our family income, not our individual income. So why do we pay tax based largely on our individual income? Why should a family where each spouse earns $60K per year, pay less income tax than a family where one spouse earns $100K and the other earns $20K?
With a surplus (also known as over-taxation) of this magnitude, Canadians must receive a tax cut. Therefore, why not make income splitting a large part of that cut? The recent plan to allow seniors to split pension income was a good start, but it’s time to extend that benefit to all Canadians.
Allowing income splitting would be the best way for Stephen Harper to show that he supports families and to show that he supports returning hard-earned tax dollars to the working people that provided them in the first place.
The introduction of income splitting for Canadians should be a centerpiece of the Conservative’s upcoming throne speech.
Cross-posted at Western Standard.
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Topics: Family, Politics, Taxation |
September 27th, 2007 at 6:57 pm
If polygamy becomes legal will that mean 3 or more way splits are OK as well?
September 27th, 2007 at 7:33 pm
If polygamy was legal Kevin with that attitute you wouldn’t be able to get one spouse let alone 3 or 4 nanan..
Thank you for this Dave, we’re advocating hard for Income Splitting.
http://www.careofthechild.com
September 27th, 2007 at 8:45 pm
Just asking a question. Since when is examining something from all angles a bad thing?
September 27th, 2007 at 8:48 pm
Ok, polygamy is illegal, taxing single income families more than double income families would be discrimination.
Actually in France a single parent is allowed to income split with their children. That may be closer to your argument.
September 27th, 2007 at 8:55 pm
By that logic then would it not also be discriminatory to tax people in a higher income tax bracket more percentage wise than those in a lower income tax bracket?
September 27th, 2007 at 9:26 pm
Kevin,
I don’t know if it’s what you’re advocating from your last comment, but a flat tax system where there is one percentage tax rate, regardless of income level, would be my preferred tax system. In such a system, income splitting would be moot.
I believe that our progressive tax system is far too progressive.
September 27th, 2007 at 10:12 pm
I like Kevin’s comment. Right now taxes are against individual income, which is a nice simple rule. Why do you believe changing it to apply to whatever the fashionable definition of “family” is will make it more fair?
September 28th, 2007 at 7:16 am
Ray, it’s not about the fashionable definition of “family”. Currently, taxes are based on individual income, but the basic premise of our progressive tax system (which we currently have, although I’m not in favour of–I’d simply prefer a flat tax, but that’s a different discussion), is that you pay more as you earn more, to reflect one’s increasing ability to pay.
However, one’s ability to pay is more a function of family income than it is individual income. When you’re married, you share with your spouse equally–that’s the law. So if the higher income spouse “subsidizes” the lower income spouse to some degree through a type of “family equalization”, the higher income spouse’s ability to pay is diminished while the other’s is increased. Family income is pooled as a matter of law, and the tax rates should be pooled accordingly.
All else being equal, 2 families earning $100K per year have the same ability to pay income tax. However, if one family is comprised of each spouce earning $50K, and the other family is $90K and $10K respectively, the latter family will pay substantially more income tax. That is not in keeping with the basic “income-determined ability to pay” premise of the tax system.
September 28th, 2007 at 7:46 am
We don’t have a fashion in what we call family. Family is family whether you are married, gay or common law.
Flat tax would solve our problem as well, but there is no way they would pull that off.
A drop in the GST is fine but it would still leave the discrimination of single incomes and double income families.
I’m asking them to fix the discrimination.
September 28th, 2007 at 7:26 pm
Dave and Sara, are either of you asserting that the definition of family is not fluid? Sara lists three different definitions which have evolved over time. Or are we now at the final form? Do you think pressure to change it will be more or less when there is money involved? I understand the benefits but it is still a tax shelter that you can qualify for based on who shares your home address.
September 28th, 2007 at 7:50 pm
Ray,
How would you define how Income Splitting is handled then?
I truly believe the flat tax is the only way to stop the unfairness across Canada but that won’t happen for a long time. We already have pension splitting so next logical step if for the kids.
September 28th, 2007 at 8:08 pm
Ray,
I’m not proposing anything about the definition of family. My proposal is simple…
Whatever already constitues married or common law for purposes of the Income Tax Act, which may change over time, I would propose that income splitting be allowed. Nothing new would need to be added to any definition, since there are already various rules that apply for married and common law couples, and this would just be another that falls under the same existing definition.
You say it’s a tax shelter based on who shares your home address. I should also clarify that the word “family” is not appropriate in this case, as that term often implies children or something beyond 2 people. My proposed income splitting would only be between the married (or common law or same sex) couple, not their children and additional members of their “family”. I’m not suggesting that parents be able to income split with their 6 kids who don’t have any income!
It’s also not just for 2 roommates who happen to share an address. It would not be so simple to conveniently call yourself “married” and claim the income splitting advantage. To do so, I would propose that you would need to be legally recognized as married or common law as set out in the Family Law Act. Therefore, people will be reluctant to fraudently dive in, since there are other legal ramifications of doing so, not the least of which is you may be subjecting 50% of your assets and debts to a future claim by your “partner”. A very big risk to take just for some current tax savings!
I should also add that this change could also serve to simplify the tax return. Currently, there are various credits and deductions that can be transferred between couples, and all sorts of rules about which spouse is allowed to claim which deduction/credit. With income splitting, this confusing mess could be eliminated.
September 28th, 2007 at 9:07 pm
Sara,
I won’t define how to handle income splitting because I don’t think it should be handled. I agree a flat tax would be ideal and income splitting, as a tax shelter, is a step further away from a flat tax (if it is assumed that most tax shelters should be eliminated in a flat tax system).
Dave,
I would not be sad to see the end of those various credits and deductions. I see income splitting as a can of worms, where we are only a desperate government seeking re-election away from parents being able to income split with their kids.
October 12th, 2007 at 2:10 pm
parents already split with their kids, if you are a single parent you can claim your child as equivalent to a spouse.
October 19th, 2007 at 8:40 pm
To whom it may concern
I have a friend who needs to know what her limit is for income tax before they start taxing her and deducting her child tax she is a single parent of 2 kids she already made over $5000.00 since March 2007.
Thank you
Christina Clarke
October 19th, 2007 at 9:06 pm
Christina, the amount is about $8,000 so she is ok. No worries.
October 19th, 2007 at 11:04 pm
Christina,
It has been a while since I did public accounting for a living, but below is what I can recall. She should consult CRA for “official” advice.
By “child tax”, I assume you’re talking about the CCTB or Canada Child Tax Benefit program?
If so, CCTB payments will not start being reduced until family income begins to exceed about $20,435. And even then, the benefits don’t suddenly drop to zero. The program was designed so that individuals should always be better off by working. Meaning, if you work and earn $1 more, any benefit reduction will be by less than additional $1 that you earned.
CRA has an online benefits calculator on their website. You can visit http://www.nationalchildbenefit.ca and follow the links for the calculator or more information.
Your friend should not worry about the limits. Any opportunity your friend has to earn more money will be a net benefit to her, and it should be pursued.
The $8,000 amount that Sara referred to is, I believe, the basic personal amount that one can earn before paying income tax. For this year, I believe that amount is $8,929. In your friend’s case, she could actually earn more than that, because she can also claim an equivalent-to-spouse credit for one of her children as well.
Income Tax and the CCTB are 2 seperate programs, and I don’t believe payments received under the CCTB are taxable.