The Harper government has finally delivered on their 2011 promise to bring spousal income splitting to Canadians. The Prime Minister said he would wait until the Tories had eliminated the budget deficit. Now that they have, this proposal comes just in time for the 2015 Federal election.
Under the “Family Tax Cut” proposal, a taxpayer will be able to transfer up to $50,000 of income for tax purposes to their spouse which, in addition to lower tax rates, will permit access to a $2,000 maximum non-refundable tax credit. The proposal works because we have progressive graduated tax rates in Canada – the more you make, the higher the tax rate: however, only families with children under 18 will qualify to take advantage of this new measure.
Other proposals contained in the same announcement are: an increase in the Universal Child Care Benefit from $100 per month to $160 and doubling the Children’s Fitness Credit from $500 to $1,000.
It all sounds really good! More money in the pockets of “average” Canadians. So let’s look at the cloud rather than the silver lining…
The C.D. Howe Institute, a well-respected “think tank” has commented that 85% of Canadian households would get NO benefit, while 40% of the tax cuts would go to families with one breadwinner earning at least $125,000 per year. These proposals will reduce Federal AND Provincial tax revenues. Although the Feds have balanced their budget, some of the Provinces have not been as successful, notably Ontario where we live. Under existing legislation, the provinces are required to adopt Federal proposals such as these, and as a result early estimates are that the Ontario treasury will lose as much as $1 billion per year.
So it would appear that the income splitting scheme might be more political rhetoric than a genuine desire to help Canadians keep more of their hard-earned dollars. David McDonald, writing for the Canadian Centre for Policy Alternatives in January of this year, commented that the restriction of the proposal to families with children under 18 is “odd”. He went on to say that if income splitting is a compelling redistributive tool, then it should be available to all families.
Sloan Partners LLP believes that the income-splitting proposal is flawed on two counts.
First, Ontario will have a $1 billion annual shortfall which will have to be made up elsewhere. For this reason, the proposal is retrogressive and may harm more families than are helped by the savings. We suspect that Ontario might respond by imposing income tax surtaxes on higher income earners in an attempt to retain the tax revenues. Such a surtax would affect many more taxpayers than are able to take advantage of the Federal “Family Tax Cut” proposal.
Second, the plan may have the effect of encouraging women to cease working to maximize the tax benefit. Women are already disproportionately lower paid and a plan like this may run counter to gender equality in the workplace.
We are also concerned that this proposal does nothing to address the needs of low-income families, or single parent families who do not have the luxury of a “stay-at-home-Mom”.
We expect to see and hear some backlash from the Provinces before this proposal is actually implemented. Interestingly, taxpayers in Harper’s home base, Alberta, benefit the most from the proposal with almost 25% of families qualifying compared with an average of 13.8% across Canada (Broadbent Institute).
Jerry Paskowitz is a Partner with Sloan Partners, with over 30 years’ experience in all tax and financial matters. Contact Jerry for an appointment to discuss tax savings opportunities and financial strategies for your business.