The Conservative government announced an income-splitting tax break for parents last Thursday.The measure will allow the higher-earning parent of children up to 18 years of age to transfer as much as $50,000 of income to the lower-earning spouse for tax purposes.
Income splitting allows the spouse in the higher tax bracket to shift income to the partner with a lower level of earnings so the overall rate of taxation is reduced. The Conservative government introduced income splitting for seniors in the 2007 budget, allowing people to split some pension income, but the ability for single-income families to split income is something new.
In a move designed to lessen criticism that the tax break disproportionately benefits wealthier parents in Canada, the tax break for couples will be capped at approximately $2,000, modifying the income-splitting pledge made in the 2011 election campaign.
This tax measure comes as Ottawa prepares to balance the books for the first time in several years, adding fuel to a already simmering debate about surplus spending and equity in Canada’s tax system.
Income splitting has tremendous significance for some Conservative Party supporters and cabinet ministers who are upset about what they consider a bias in Canada’s tax system against stay-at-home spouses. It became party policy in 2005.
However, the measure will pit Mr. Harper against opposition parties that have assailed such a measure as a niche tax break that doesn’t benefit enough Canadians. Liberal Leader Justin Trudeau has already pledged to repeal the measure if he wins office in an election expected next year, although he has stated he would not touch pension splitting for seniors.
The tax break is expected to cost an estimated $2.5-billion a year, according to projections made in the 2011 election campaign.
A recent analysis by TD Economics that didn’t account for a $2,000 cap said the annual cost would exceed $3-billion a year. It’s unclear how much the cap will affect the tax break’s overall price.
The change is the biggest remaining promise from the Conservatives’ 2011 election platform and Tory MPs have said there is a strong desire within the caucus to see the government deliver.
A 2011 research paper by the C.D. Howe Institute found 40 per cent of total benefits from the tax cut would go to families with incomes above $125,000 a year – with some high-income families receiving a tax cut of more than $6,400. The report also found that 85 per cent of all households – including single parents – would gain nothing from the policy.
Advocates for income splitting argue that two-parent families where one parent stays home are taxed more than two-income families – and say it is a matter of treating family units fairly under the tax system. For example, at present a two income household with a total income of $100,000 would pay almost $16,000 in federal tax, compared to a single income household paying over $19,000 on the same income.
The NDP is also critical of the income-splitting proposal. However NDP Leader Thomas Mulcair has declined to say whether he would repeal such a move, stating recently that he would wait to see what the government proposes before responding.