Editorial: Just back away from income splitting - Macleans.ca

Editorial: Just back away from income splitting

The Conservatives seem poised to break their biggest promise. That may be a good idea.

Blair Gable/Reuters

Blair Gable/Reuters

The importance of this week’s federal budget lies not in what new promises the Harper government offered; as expected, the budget was a low-key affair. Rather, the real interest stems from what old promises the Tories now appear ready to reconsider, if not abandon altogether.

In the lead-up to Tuesday’s budget, Finance Minister Jim Flaherty was asked about the status of one of the Conservatives’ keystone promises from the 2011 election: to implement income splitting for families with children once the budget deficit disappeared. With a balanced budget now scheduled for next year, however, Flaherty appears to have developed cold feet. Asked for an update by Global Television, he said, “I think, in the next year, it will be healthy for Canada to have a fulsome debate about that issue. There are some people who benefit and lots of people who don’t, in that world of income splitting.” Pressed to confirm whether the policy is still on the table, Flaherty’s body language and response evinced an obvious desire to distance himself from any final decision: “That will be up to the Prime Minister, at the end of the day, whether he chooses to go ahead with it or not.”

Considering Prime Minister Stephen Harper once called income splitting “one of our highest priorities,” such a lack of pre-budget enthusiasm from his longest-serving cabinet minister seems a point worth noting. Plus, the 2014 budget itself contains no mention of the three-year-old promise, despite the fact that a balanced budget is now clearly in sight. There’s good reason for reluctance on this issue.

It is certainly a worthwhile goal to ensure Canada’s tax system treats families equally. And it’s a demonstrable fact that our progressive tax structure requires single-earner families to pay more taxes than dual-earner families with identical combined incomes. The Tories’ 2011 election promise was that families with children up to the age of 18 would be able to shift up to $50,000 in income to a lower-earning spouse, dramatically cutting total family taxes owing in cases where there’s one dominant breadwinner. It also goes without saying that income splitting is politically advantageous, targeting as it does mostly middle- or upper-class families with stay-at-home spouses: prime Tory vote territory.

However, Harper’s version of income splitting will add yet another layer of complication and mystery to an already Byzantine tax system. And at great cost. As currently proposed, taxpayers would cycle in and out of income splitting during the normal course of their lives: Young married couples would file individually. When kids arrive, they’d be able to split their income. After the kids left, they’d go back to filing separately. Finally, upon retirement, they’d be splitting once more, thanks to the Harper government’s previous innovation of pension splitting for seniors.

Such a back-and-forth process creates all sorts of unusual and undesirable incentive effects with respect to work and child-rearing. (Future tax tip: Maximize your income-splitting potential by having your kids as far apart as possible.)

“Income splitting is just one more way to increase the complexity of the tax system,” observes economist Tammy Schirle at Wilfrid Laurier University in Waterloo, Ont. “It will result in even less transparency and a lot more confusion.” She notes, as well, that the total cost could be as much as double the original $2.5-billion-per-year estimate, given spillover effects on provincial treasuries. What is also true, as Flaherty suggested to Global, is that the bulk of these benefits will flow to a relatively small number of wealthy, single-income families.

Of course, confusion, opaqueness and narrowly defined benefits have long been hallmarks of Tory tax policy. The maze of dubious boutique tax credits for such things as public transit, children’s sporting activities and art lessons is another example of how the Harper government has made tax time ever-more difficult and obtuse. In many cases, families most in need are the ones least likely to receive these tax breaks. According to recent research by former Statistics Canada head Munir Sheikh, adding up Ottawa’s spending on these sorts of tax expenditures increases the size of government by seven per cent of GDP, a massive sum that, for the most part, lacks regular legislative oversight or public scrutiny.

As much as all politicians seek to favour middle-class families and to laud the benefits of marriage, there are better ways to lend a hand at tax time than income splitting. If Harper really wants to help stressed-out Canadian families, he should make the entire tax system easier to understand, less politicized and more efficient in delivering benefits to folks who really need them. Spending less time doing taxes is a gift every parent can appreciate.


Editorial: Just back away from income splitting

  1. No income splitting because it will be too complicated? Income splitting for seniors is a single line on the T1 return, one for the deducting spouse, and one for the declaring spouse. Making the entire tax system easier to understand, less politicized and more efficient in delivering benefits… is laudable, but an entirely separate issue from income splitting.

    • Did you read the rest of the article? You income split when you have kids, and don’t when you don’t. CRA has to enforce this, of course, to catch tax cheats. Now throw in the realities of life in that couples more frequently split these days than stay together. Who has the kids and how does that count for income splitting?

      And no, less politicized and more efficient in delivering benefits are not entirely separate from income splitting, as pointed out above.. those who benefit from it are primarily prime Tory vote territory, and it’s demonstrably less efficient at delivering benefits because the vast bulk of the benefits accrue to those who do not need them. They accrue to people who have someone at home to raise the kids and thus don’t need to pay day-care, even though they may be able to afford it. While those who need to pay day-care because they’re both working don’t see the benefit. That’s not at all efficient if the goal of these benefits are helping those who need it most.

      • CRA already has to enforce all the family-related benefits, like the Canada Child Tax Benefit, National Child Benefit, GST Credit (really a benefit but called a credit for some reason), even the Guaranteed Annual Income Supplement and the Working Income Tax Benefit. All these are means-tested benefits based on family, not individual, income. So Canadians are already filing jointly in order to receive a host of benefits. And you’d better believe it gets complicated when couples split, or when joint custody situations arise (and there are millions). Yet CRA is doing it. Yet we are to conclude that joint filing is too complicated?

        And your example of joint filing, with a stay at home parent and a single income, is but one scenario among many. What if both parents work, but one earns $70,000 and the other one $20,000? Nobody to stay at home with the kids, the same child care costs, but highly differential incomes nonetheless. Plug those two incomes into your tax software, then plug in two incomes of $45,000 each, then tell me which couple pays more tax. The fact remains, the progressive income tax system contains an inherent bias in favour couples earning similar incomes. Joint filing fixes that bias, while still retaining the progressivity of the tax system.

        Your argument seems to boil down to “There are better uses for that money.” But that means you are perfectly OK with using a glaring inequity in the tax system to raise revenue to put towards other uses.

        • You’re right. It’s but one scenario among many.

          Why should that scenario get rewarded far more than the many others?

          Never mind the fact that even in your 70/20 scenario, you still have the problem that income splitting provides that family with a significant disincentive, well and above the normal disincentive of progressive taxation, to raising the lower wage. After all, half any increase seen by the lower wage earner gets taxed at his much higher rate.

          Do we really want to encourage a country where half the citizens are productive?

          • It’s not a reward, it’s the amelioration of an arbitrary penalty built into the progressive income tax system. The beauty of joint filing is that it creates a level playing field across various income scenarios. You’re looking at how much the couple with the 70/20 split is “getting”. What they’re getting precisely equals – to the penny – what the 50-50 couple is already “getting” from their distribution of income. To say that joint filing “rewards” couples with differential income is like arguing that universal healthcare “rewards” those who get sick. No, what universal healthcare does is allows those who get sick to keep their house and not go bankrupt, putting them on a somewhat more equal footing with the healthy people down the street. Of course, joint filing isn’t near the benefit healthcare is, and I’m not trying to say it is. But the more extreme example seemed useful here to make the point. Allowing couple A to pay the same tax on the same income as couple B is not rewarding anyone anything, it is removing a built-in penalty.

          • but progressive taxation isn’t in itself a penalty. If we treated the family as the unit of taxation, both incomes would be added together, the lower income in effect being ALL taxed at the marginal rate of the higher system.

            The fact that we don’t do that and let people file separate taxes at different rates is ALREADY the inherent fairness in the system. Making it worse by ‘splitting’ exacerbates the problem and makes it obscene.

          • Plug it into your tax software, you will see that joint filing would result in two couples earning the same combined income paying the same combined taxes. This is obscene?

          • I would add here that if you think the higher marginal tax rates would then be a disincentive for the lower earning spouse to get a job, or a better job, then that’s an issue to be addressed by lowering marginal tax rates. If they’re too high, they’re too high regardless of splitting or not. Would the higer income earning spouse turn down a promotion or a better job because of the higher marginal rate? Maybe, but I doubt it. So why would the lower earning spouse turn down a similar increase in income?

          • Because, when the higher income spouse gets a raise, it’s typically a much larger one than the person at the lower end would see, so even with a higher marginal rate, the actual after tax amount of the raise is meaningful.

            Consider a 1% increase.
            1% of 150,000 is 1500. 1% of 20,000 is 200.

            29% of 1500 leaves you with 1065. That’s close to an extra $100/paycheque You can probably do something new with that.

            29% of 200 leaves you with 142. That’s just over $10/month. Considering that you’re already in a household pulling down 170k, is the extra $10/month really going to be worth any additional hours or duties it comes with?

          • In any case, this is all moot now. There will be no income splitting for salary earners. The Tories are furiously back-pedaling. Of course the wealthy and the self-employed will continue to split incomes through myriad legal means, just as they always have. And salary earners will be prevented from doing the same.

            One farmer client of mine years ago was paying his 17 year old son and his wife $90,000 per year each in salaries. CRA was perfectly OK with it, just as long as he didn’t pay them so much that he created a loss for tax purposes (salaries paid to family members are considered “non-arms length transactions”). But he did get his income low enough that he qualified for disaster assistance when he had a below average year. If you’re wondering how much tax he saved by splitting the income, plug $270,000 into your Turbo Tax, then plug $90,000 in and multiply it by 3. And remember he saved more than what your calculations will show now – this was 12 years ago when the brackets were much tighter.

            Joint filing would have been but one tiny measure that could have evened the playing field out a bit, giving salary earners – at least those with kids – a small opportunity to spread their income out a bit.

          • Its actually worse than that. I told my wife not to work, she was more valuable to me as a domestic engineer in smart shopping and as a tax deduction. Unless your second lower income is making more than $50k, it may not pay to work.

            Lets examine why one worker, one stay at home is better:

            – 1 car not two, savings $10k/year in depreciation, maintenance, fuel, insurance….

            – add $11k tax deduction to the larger income, $5000 saved as less taxes and no EI/CPP taxes.
            – smarter shopping, less costs, save $5000/year
            – no baby care, save $10000/year per child.

            Quality of life.

            So unless the second income can justify the added costs, it easily could be you have to make $40k/year to really make any money for you.

            Me, I told my wife not to work for the quality of life. My job was to make money, hers was to assure I was cared for and could make money. Less family stress and more time.

          • You don’t get an 11k deduction, you get an 11K credit for spouse, which saves you tax at the lowest rate (15%), not the highest. My wife and I both work – we still only have one car, and have no intentions of changing that. We take public transit to work.

        • So why not make it like USA does, file a joint return, and looks simple too as they didn’t employee people to make it more complex when its actually quite simple.

          The real reason is tax greed, it might save a family $500 in taxes.

    • Just too complicated for Flaherty’s small minded economics of governemtn tax greed. And even CRA people don’t understand their own rules….let the computers do it with some tax program.

      The real reason is government is becoming tax greedy. I am in my 3rd dispute in 10 years with CRA, won the first two and will win this next one.

  2. I am going to make this very easy for any Tory’s who may read this. I am a 43 year old who has never voted anything other than Reform, CA and Conservative in my life. My wife would like to stay home and raise our kids for a few years rather than leave them with strangers. You have screwed us over OAS..we could potentially lose 24,000 combined from your little stunt last year. I am completely fed up with your lack of interest in reducing taxes. Yet you find half a billion to give to US automakers? A couple of hundred million for high speed internet? A billion + for the CBC? Listen carefully to me…I will not vote for you, and neither will my wife if you pull this. I will not give you any more money at all. I will sit back and let Jughead turf you out and let his bungling destroy the country…and then I will take my highly subsidized taxpayer education and leave.

    • awwww, look who thinks Stephen Harper actually cares what he thinks! (and thinks the government owes him the life he wants – funny that).

      • Not just that. Apparently he’s quite prepared to leave and or let someone he’s convinced will destroy the country win by default if he doesn’t get exactly what he wants…nice how he gives his wife the same option.
        A peek at CPC core values mebbe?

  3. .

    “If Harper really wants to help stressed-out Canadian families, he
    should make the entire tax system easier to understand, less politicized
    and more efficient in delivering benefits to folks who really need them”

    Oh he does, he really does…but not at the risk of him losing an election over it.

  4. “An already Byzantine tax system”. if that is what it is, demands to be scrapped in the absolute need for clarity for all of us who are individuals and small business owners. In it’s place we require a tax system that supplies the forecast operating monies that the government needs to operate day by day…those comprise only federal and provincial sales taxes, only on purchased goods not services, to do exactly that…plus a column that covers parliament’s and legislatures’ borrowing ceilings for the year, (which will thereby become matters of intense public interest), plus a column to pay down the national debt until we are debt free…..a magical state. No masses of overpaid and pension receiving CRA employees, who will be replaced by one super computer…. no tax credits…. no dodges…. no tax accountants and no confusion. A one page tax form. Simplicity has it’s virtues, amongst which will be found the confounding of dynamic, spending happy politicians with political schemes. The additional taxing of corporations, of course, requires other considerations of continuing complexity…..but never-the-less offering simplicity with it’s accompanying clarity.

    • Not that I disagree, but think what that would do to the unemployment rate when all those accountants, lawyers and government workers are suddenly told they are no longer necessary?

      • Most of the money is in corporate tax now anyway. And high-income wealth planning. Eliminating all boutique credits and other schemes would do little or nothing to reduce the complicated tax planning people with a lot of money engage in.

      • The army of tax lawyers and accountants are non-productive. We’d be better off if they did something useful, like flip burgers at McDonalds.

  5. Harper decided to take control of the media and policy agenda and get the country talking about he is going to cut taxes for families (something the Liberals and NDP will not do) 18 months before the election.

    The Conservatives are going to cut taxes for families. We are going to have a big debate how. The taxers in the Liberal and the NDP and in the media can begin squirming. Harper is going to talk about something middle class families care about. Lower taxes on them. Not legal pot, and not legal brothels. Justin’s pet projects.

    Game ON:

    Steve is back.

    • This only helps a specific slice of the electorate. He’ll have to do something broader if he really wants to win over enough to keep his majority. For the rest of us, who don’t fall into his definition of family, this just p!sses us off.

    • Another myopic opinion form a Harper booster.
      He could cut taxes to 1% and you’d be over the moon, but the debt would keep piling up. Debt creation will result in another form of taxation, but in the future, a future where Harper and Co won’t care who pays it, as long as it isn’t them.
      Harper Conservatives are the worst kind of moochers and welfare Queens, but that has always been the way. Conservatives increase debt.. anyone else has to pay it off.
      So you and your moocher family might want to address the debt you created before passing it on to the next generations.

    • Wrong. Steve is going to cut taxes for families with young children who can afford to have one spouse stay home or has a spouse with a very low income and another with a high income. Only 14% of Canadians would be affected.

  6. Actually the current system is grossly unbalanced wit huge tax breaks to equally earning couples and bigger and bigger penalties for everyone else. Income splitting simply adjusts that back to a level, so income is taxed itself not based on who earned it.
    There is no problem with transparency- the bias is clear. We need to get rid of the bias. Otherwise it is a male-based economy that favors roles men have always done, and devalues completely the at-home care role, whoever does it. It’s so 1950s. We need to recognize that households share what comes into the home and share standard of living.
    The nonearner or lower earner is a full partner not a dependent. That’s women’s equality speaking.

    • We’re currently devaluing the role of at-home care by taxing its benefit at exactly zero percent?

      I am not sure you understand what you are talking about.

    • Income splitting provides a large disincentive for a stay-at-home spouse to re-enter the workforce, as they would face a high marginal tax rate and each new dollar of income.

      Are you suggesting we apply a value to the home production provided by the stay-at-home spouse?

      I think you have this exactly backwards. I suspect you started with your conclusion and tried to draw in an argument. Income splitting treats the stay-at-home spouse as a dependent whose efforts outside of the formal economy have no value. You are saying that a couple that earns $100k with both partners working produces as much value as a couple with the same combined income with one person working and the other working in the home. Basic logic suggests that the home production is thus worth nothing.

  7. You can see why people shouldn’t vote It’s just another scam from from this individual is normal Regardless how you look at it Someone’s gotta pay in taxes The Citizens Regardless who gets hit And their eyes Will this buy me a brand new pair shoes It looks like I’m on my way back to toronto don’t forget about the bridge 631 million for us to go shopping in the USA to buy their stuff

  8. can’t wait to get rid of the CON LIARS

  9. Income spiting is good and fair. USA has done it for decades as married couples can and do file jointly.

    It is done to recognize the stay at home spouse in fact aids in income and family, like work. It is work to take car of two kids, do laundry, shop efficiently to save money, drive kids to school, cook and clean. So when the working spouse comes home, there is less to do, just do dinner, cooking, cleanup and more quality family time as there isn’t as much to do.

    The stay at home spouse does in fact work. Unpaid work, and in fact shares the income earned by the working spouse in ehtical and supportable ways.

    So why not let them average income? If you go to divorce court, they average the assets…if it were a business, each would get equal shares. So why discriminate against families?

    Tax greed, they might save a few bucks in taxes. thats the real reason.