Experts point to income-splitting alternatives

The Tories can campaign on plenty of popular ideas


OTTAWA – When the Conservative brain trust sits down to hash out a crowd-pleasing alternative to income splitting, hoping to undo the damage from backing off a key 2011 campaign promise, experts say there will be plenty of options on the table.

Critics of the controversial, three-year-old proposal — and there are many — say allowing spouses with children under 18 to share up to $50,000 of their income for tax purposes does little for low-income families and encourages one of the parents to stay out of the workforce.

The C.D. Howe Institute and the Canadian Centre for Policy Alternatives alike say roughly 85 per cent of households would gain nothing from the proposal, particularly single parents.

Some 40 per cent of the benefits would go to families earning more than $125,000, for whom the change could be worth $6,400 a year, the institute calculates. That would likely include Prime Minister Stephen Harper, who makes $320,400 a year and has two teenage children.

If the Conservatives want to provide tax relief for more families with children, there are some alternatives, said Alexandre Laurin, who co-authored the 2011 study. Increase the universal child care benefit, which gives $100 a month to families with children under six, he offers.

Kevin Milligan, an economics professor at the University of British Columbia, suggests extending the age range to older children, to the benefit of both low and high-income families.

Another example, the Canada child tax benefit for families with children under 18, provides a certain amount per child and is phased out by income level. And widening the employment insurance provision for parental leave would give parents to spend more time with their children, Laurin says.

But his personal preference would be an across-the-board tax cut and, as Finance Minister Jim Flaherty has suggested, paying down the $619-billion federal debt.

“The more you lower the tax rate, the less the need for income splitting, if the intention was to equalize the tax burden between two types of families,” he says. “It’s just simple arithmetic.”

University of Calgary economist Jack Mintz argues it’s time to change the tax system so single-income families aren’t facing a higher tax rate than other households. The income-splitting proposal can be tweaked so different families can share the benefits, he argues.

Right now, one spouse can transfer the unused portion of the basic personal tax exemption to the other spouse. One alternative would be to make that personal exemption non-transferable if they decide to take advantage of income splitting.

“Between income splitting and this provision, you actually create a lot of equality between families of different types,” Mintz says. “Because to me, this whole issue is how to treat families of different types.”

If the Tories were to lower the $50,000 transfer limit on the original proposal — $25,000, for example — they’d not only save on the cost of income splitting, it would also help middle-income families, says Mintz. Or it could also be clawed back from higher-income earners.

David Macdonald, the chief economist with the Centre for Policy Alternatives, says the Tories should abandon the income-splitting proposal entirely because it only helps wealthy, single-earner families.

“It’s sort of like a poison,” Macdonald says. “If you take too much poison, it’s going to kill you. If you take a little less poison, maybe you’re just going to get a sore stomach for a couple of days, and then if you take even less poison, maybe you’ll only get a headache.”

If the Tories want to help families with children, they could look at existing child-based benefits, such as the national child benefit supplement, he suggests. It provides monthly payments to low-income families with children, no matter if it’s one or two parents, and reduces them as they earn more income.

The working income tax benefit, meanwhile, helps single parents in particular by giving them an extra boost to join the workforce. “If you’re looking at helping families with children, it’s quite clear that these other measures are ones that are more effective.”

Finally, says Macdonald, a national child-care program would cost about the same as the income-splitting plan, which is estimated at upwards of $2.5 billion a year.


Experts point to income-splitting alternatives

  1. The Globe and Mail has taken a strong editorial stance against any form of income splitting, stating that it primarily benefits the wealthy. Unless of course you are really wealthy, in which case you can read articles promoting income splitting via family trusts in their Globe Investor pages.

    Point # 7 is my favourite:

    “It’s also possible to save taxes in other ways. For example, it’s possible to split income with lower-income beneficiaries by allocating income of the trust to those beneficiaries to be taxed at their lower rates…”

    Say what? How can this be? The Globe tells me income splitting is bad!

    I like # 6 too:

    “…if a trust owns shares of a qualifying small business corporation, it may be possible to utilize the $800,000 LCGE of each beneficiary.

    Got that? Transfer ownership of a family-owned small corporation into a trust, and convert the share-holders into trust beneficiaries so they can all take advantage of the $800,000 lifetime capital gains exemption (LCGE). Normally it’s $800,000 for the entire business, not for each shareholder. A properly-designed trust makes that exemption available to each individual owner. 800,000 tax free income multiplied by however many beneficiaries are in the family sounds like a pretty sweet deal to me. Yet the Globe argues that allowing salary earners to split a measly $50,000 to a spouse (and only a spouse, not the kids, nieces, nephews and in-laws) in a lower bracket is inequitable?

    • but you didn’t even mention the best part. No. 9. preserving disability benefits. “If a beneficiary is eligible for certain disability plan payments in
      your province, it’s possible that those benefits can be eroded under a
      means test if there are assets in his name or set aside for him. A
      properly worded trust can be used to hold assets for the beneficiary
      while still meeting the requirements of your province that will entitle
      him to receive those payments. This is often called a “Henson trust.””

      lol. hide your assets so you can keep collecting ODSP benefits! i bet it works for federal means test benefits too like child tax benefit and gis. it even has a name – Henson Trust. They shoudl call it the Hide Some trust since it allows you to hide some assets so you can pretend to be poor and get more freebies.

      • Yes and no. Being disabled is no free ride, in fact able people get more on welfare and immigration and other social assistance programs. To be disabled in Canada is certain subsistence poverty unless you have a non-government means of support. Here is how it really works for disabled in Canada.

        First of USA SSI disability pays for more including medial, dental and drugs. Hate to bust the Canadian socialists water but Canada’s federal plan sucks. You get at most $13k/year to live on. Disabled in Canada get neither drugs nor dental and long waits for health care behind everyone else.

        Now after you loose everything in expenses, taxes and rising food costs, your savings depleted, you have sold your home, you become homeless literally, then you can apply for provincial benefits and subsidized housing. But only after you are broke can you do this or you will be denied. You only really qualify for provincial assistance after you have lost your home, have no car, few possessions and almost no financial assets at all, not even with a RRSP can you qualify for much provincial support.

        I am disabled and know disabled. I live it. I am fortunate I saved enough in good times, had may home paid off early, have healthy savings and good investments, so I can keep my home. I don’t get breaks in 6.5% property tax increases and 9% utility increases, at some time I will have to sell the home…..and become destitute poverty. Inflation assures I will lose.

        Otherwise I would be better off as a refuge.

        • Where do you live Dave? In Alberta, we have AISH for the severely disabled and it allows people to collect $1,566. per month with $100K net assets (not including their own home and one primary vehicle). It also allows them to make $800. per month at a job without loss of any benefit and pays for all their medical prescriptions and necessary dental checkup and fillings and eye glasses. For families the benefit is almost $2K per month.

          • He’s probably in Ontario. ODSP pays about $1100 per month, and they’re pretty strict on how many assets you can own. Employment dollars are clawed back at 50%. It’s not nearly as generous here.

    • Limit the transfer to $50k or something or just forget the propaganda as this is really about government tax greed.

      USA does this splitting and it works well. Plus rich benefit little when both partners are int he top 40%+ tax bracket so for rich it is self limiting as their tax brackets quickly become top rate for both partners. Globe and Mail is blowing political BS and propaganda.

      An example, one partner makes $100k/year, the other makes $60k a year. Splitting will save them very little as they are both at or very near top tax rates for both so splitting has no value.

      But if one makes $50k/year and the other makes $10k a year, the benefits are much much larger.

      So in fact Globe and Mail is feeding you statism tax greed propaganda.

      Income splitting helps those with average or below average incomes and inequality between spouses the most. Rich don’t benefit much at all as a percentage of income.

      Hey, if you are a CEO and make $10m a year, and wife doesn’t work, it would save you less than 0.01% in taxes. Yet a lot more for middle to lower class.

      Harper said it best just before Christmas, “….it costs government….”. Only way this phrase works if government views it owns you. As it really costs taxpayers and not government. Its about tax greed.

  2. Fact is the ultra complex tax system is screwing everyone. Why not just raise the basic deductions by say 10,000 so the working poor don’t get taxed?

    Here is the real problem Ottawa is examining. How to tax us more and present government in good light.

    Hey, if you tax singles more for other peoples kids, then they will have less money to setup a nice home for their own kids. And after having kids and paying huge taxes in a tax inflated economy of debt, you enter retirement broke and taxed.

    Reality is we are all over taxed. Taxes so high with benefits of it so low, it has become parasitical on the economy as people with less money, less value money spend less on each others jibs.

    Heck, we even tax food and cloths as part of the hidden $45 billion in CBSA collected taxes, tariffs, excise et al border and protectionism taxes to drive up all our costs, GST/HST extra. Yep, we even tariff/GST/PST kids stuff and not just food and clothing.

    So how about lowering taxes for everyone, especially the tax inflated cost driving hidden taxes on food and clothing. Lowering taxes helps singles get a financial start and home, helps families make dollars go further, allows seniors to have less poverty in retirement as it all went for taxes…..

    Even employed more people as people with value money, more of their own money spend more on each others jobs creating jobs.

  3. i’m no expert and I can probably name a dozen better plans than income splitting. Many will have their drawbacks or a downside, but they’d be better than income splitting.

    • So you’re fine that the wealthy, or even the moderately successful self-employed, continue to enjoy the benefits of splitting incomes, as long as salary earners aren’t allowed the same opportunity to pursue some measure of tax efficiency? Because that’s the current scenario. And it has been like that for longer than I’ve been alive (I’m in my mid-40s).

      The kids I grew up with whose parents were farmers all received “salaries” from their parents, which was nothing more than a means of reducing taxable income on the parents’ behalf. They never kept those salaries of course, they cashed the cheques and the money went right back to the parents. Standard practice on the farm, and the CRA wont’ do a thing. Other family businesses do it too, though they need to be a little smarter about it. CRA is less patient with non-farmers.

      Pick up any Evelyn Jacks book on tax planning. A recurring theme throughout her – and other tax gurus’ – books is the advantage of income splitting with other family members. It’s not a trick or a dodge, it’s a standard operating practice to spread tax liability out among family members and thus reduce taxes owing. But allowing salary earners the ability to do the same on the T1 is a bad idea because “there are better plans”?

      The answer I usually get at this point is that two wrongs don’t make a right. That, of course, is predicated on the assumption that there is something wrong with legally and ethically attributing business income in a manner that achieves tax efficiency. If it’s legal and ethical for them, why not salary earners?

      • if the CRA wants to tax gifts from non-arm’s length transactions (I am assuming actual work was done on the farm justifying the salary) that is reasonable and their business. That isn’t really what we’re talking about with income splitting of the individual

        Considering the family as a taxation unit but allowing income to divided amongst those who actually earn it is a tremendous advantage. Dividing it amongst everyone in the family would make that advantage obscene.

        • Which is why I would limit it to spouse only for salary earners, or in the case of single parents, to their equivalent to spouse (the child designated for the spouse credit on their T1). And I’d shut down those trust structures I mentioned in my first post. Of course, governments are terrified to do so, because capital flight is so easy nowadays. Lot’s of warm, friendly islands waiting to grant wealthy families tax free status.

          • Your system might be an improvement on the current CPC plan but there are still probably better.

            and yes the owner of a business can sometimes bring the advantages of they way we tax business to bear by bringint it into their family situation (although usually the only way to do it 100% cleanly is to hire a family member to do some real work, and pay them a premium over what they would get in the market but not enough to be grossly unreasonable). But taxing business and employment income the same would create all sorts of other craziness.