During the last federal election, Stephen Harper promised that the government would introduce an income-splitting proposal, after balancing the federal budget.
Income splitting has the worthy objective of making it easier for two-parent families to choose to have one parent work, or work part time, in order to spend time caring for children. Realistically, this option is not available to most of today’s families, who need two full-time incomes in order to meet their basic living costs, including the costs of looking after children.
Under the Conservative government proposal, parents with children under 18 would be allowed to split up to $50,000 of income with their partner, meaning that some additional income could be declared for tax purposes by the spouse in the lower tax bracket, thereby reducing the overall taxes paid by the couple. This arrangement would primarily benefit families where one partner has no earnings, or low earnings from a part-time job, and the other partner pays a much higher tax rate on high earnings.
According to a study by Canadian Centre for Policy Alternatives (CCPA) senior economist David Macdonald entitled Income Splitting in Canada, the Conservative proposal would provide no benefit to 86 percent of Canadians.
“This is guaranteed to provide the wealthiest families with the biggest benefit and the poorest families with the least benefit,” said Macdonald in a CBC interview. “One in ten of the top ten percent of families are going to get a $5,000 cheque.
The Conservative approach to income splitting provides no benefit at all to single-parent families, despite the fact that 28 percent of all children live in families headed by a single parent. Nor would there be any benefit at all to families where both parents work and have incomes below $43, 561, and are thus both taxed at the same 15 percent rate. Effectively, this proposal provides zero relief to families with children who are most in need.
Macdonald said income splitting and pension splitting are hugely expensive programs. His study calculates that income splitting for families with children, if it happens, will cost the federal government $3 billion and the provinces $1.9 billion, for a total of $4.9 billion.
“This is income inequality by design, purposefully making Canada a less equal place,” he said.
Seniors and retirees who want to split their pensions should recognize the difference between pension sharing and pension splitting. According to the Service Canada website, “Spouses or common-law partners, who are both at least 60 years old, and who are both receiving the CPP retirement pension can share their CPP retirement benefits. This is called pension sharing, and may result in tax savings. If only one of you is a CPP contributor, you share that one pension. The overall benefits paid do not increase or decrease with pension sharing.”
To share your CPP retirement pension you must apply and be approved. Both spouses or common-law partners will receive a monthly cheque. This option has been allowed since 1987.
On the other hand, splitting eligible pension benefits while you are completing your tax return has only been in effect since 2007. Eligible income includes any pension that qualifies for the $2,000 Pension Income Tax Credit. Generally speaking, most pension income that is paid regularly can be split for those over 65.
Still confused? Check the Canada Revenue Agency website, for a broader explanation.