Hana Maqsood Security, Trade and the Economy

Navigating the Tax Maze: Income Splitting


Last week, Prime Minister Harper announced the government would begin to allow income splitting in 2015, giving families with children under 18 the option to transfer up to $50,000 from the higher earner to the lower earner to benefit from lower tax brackets. These tax breaks, capped at $2,000 per household, are expected to return over $3 billion to taxpayers in 2015 and $4.5 billion in 2016. Even with this program, the federal government is projecting a budget surplus of $1.9 billion next year, and $4.3 billion for the next.

The controversial program aims to eliminate inequalities between households making the same amount but paying at different rates. For example, one couple may have both spouses making $50,000 while another couple has one spouse making $100,000 while the partner is a stay-at-home parent. The household with one spouse making $100,000 pays more in taxes overall than the other, even though their combined income is the same. Under income splitting, the spouse could transfer up to $50,000 to the lower earner and benefit from lower marginal tax rates, earning up to $2000 of the difference.

Income splitting will “add … real dollars in the pockets of Canadian families” Stephen Harper said at a campaign speech in Vaughan, ON. His opponents in the Liberals and NDP see many faults in the plan. Studies from the Canadian Center for Policy Alternatives and Broadbent Institute have shown that much of the benefits of the program will go to higher earners over those in the lower class, although it must be noted they contribute more into the system. Liberal leader Justin Trudeau argued “middle-class families … should not have to pay more to give families like mine or Mr. Harper’s a $2,000 tax break”.

Critics argue that couples where one partner makes much more than the other, or even all of the household’s income, are in a different socioeconomic class and therefore deserve to contribute more. A couple where only one partner is working will give the other partner time for child-care, household tasks and leisure. The question arises over whether it is fair to reward couples in these situations, when other couples may be forced to have both partners working full time. Working couples will benefit less from income splitting tax breaks, yet face a financial burden because they have no other option but to pay for day care.

The focus of critics has been on the reality in urban areas. However, over 6 million Canadians live in rural areas, where often it is very difficult for both spouses to earn equally. In many of the rural occupations necessary to sustain the economy, from mining to agriculture, men are the primary earners and opportunities for women in the area are very limited. Income splitting would equalize the playing field for these families and allow these couples not to be punished for their decision to work in remote areas, producing what are often essential goods for the rest of the economy. In the table below, the refund amounts are displayed according to the household income. For many middle class, hard working rural families, the benefit is a significant amount that can have a positive impact on their livelihood and the local economy.

income-splittingOver the next 6 years, the tax cuts will amount to $26 billion in decreased revenue for the federal government, which both the Liberal party and NDP believe would be more effectively spent on investment. The liberals believe investment in infrastructure would spur economic growth and financially benefit Canadians more than tax breaks. The NDP believes that more money should be invested in daycare to provide cheaper child care for working families. Critics also argue that income splitting does not benefit single parent families and single households, who now make up 20% of families and 27% of the population respectively. However, not every tax break needs to be applicable to everyone to be effective. It should be noted that single parent households and other low income groups already receive a variety of other tax breaks and credits. It is also important to note those who benefit the most are the ones pay higher taxes in the first place.

Tax policy is riddled with complexities and normative judgments. There are an infinite number of deserving causes and only a limited amount of money to spend. Plenty of suggestions have been made to the Conservative government on how to spend their future surpluses. Canada’s debt could be paid down, investment could be boosted or other tax breaks could be given across the board or to more deserving groups. All of these alternatives need to be debated by the government to arrive at the best way to harness the budget surplus and have the most positive benefit to Canada. FM Filza Maqsood

Hana Maqsood
Hana Maqsood is the Program Editor for International Business and Economy at the NATO Council of Canada. She went to school at both McGill and Concordia University in Montreal and graduated with a Bachelor in Economics. She previously worked in the trade sections at the Embassy of Canada in Washington D.C. and the U.S. Consulate General in Montreal. She successfully promoted business expansion for U.S. and Canadian clients in various sectors, including aerospace, infrastructure, medical technology, finance and cybersecurity. While in D.C. she also provided policy analysis on security and trade issues. Her research interests include economic development and public policy. In the future, Hana hopes to continue to work for the Canadian federal government.