I recognize that in some families both parents want to work full-time. For other families, one parent might want to stay at home to focus on raising the children. I expect that many parents try to find a middle ground where working part-time can provide a balance of both. I beleive that it should not matter what a family decides is the best balance for them, the government should tax the family fairly based on how much they earn together, instead of basing the tax rate on how much one parent earns compared to the other.
Last year (2014) tax rules were changed in order to make the challenge of finding that balance little easier. It no longer matters how our income was balanced between me and Katherine. We could choose the work-childcare balance that we felt was best for our family, knowing that as a household we would be taxed fairly based on the total amount of money that we earned, and not based on who earned it.
One of the key Liberal platform items is to undo this change. On their website, they presented it as “Ending Unfair Tax Breaks: We will cancel Stephen Harper’s tax breaks for the wealthy, to give Canadian families more money to raise their children.” It would appear that the Liberals have completely missed the boat on what the Family Tax Credit is, and what it is supposed to do. It would appear that the NDP also missed the purpose of this tax policy as they were campaigning with a similar element in their platform.
On my way home from work on election day, I saw my local NDP representative out encouraging people to vote and so I stopped to talk with him about this issue. He was instant that income splitting was primarily a benefit to wealthy couples with no kids. He did not believe that it was a benefit that only applied to families until I looked up the page on the CRA website that explains income splitting and showed it to him. I am deeply concerned that changes to this tax policy will be made by others who are equally ignorant of its purpose and effect.
The purpose of the Family Tax Cut is to balance the amount of taxes paid by a household with a stay-at-home parent so that taxes are similar to those households that earn the same net income by having both parents work. If it was understood that this is the purpose of the Family Tax Cut, then the Liberal Platform would have read “Ending Family Tax Equality: We will cancel tax equity for stay-at-home parents to encourage Canadian families pay someone else to raise their children.”
The Liberal platform lists all of the people that do not, and should not, benefit from income splitting as though this was a bad thing. They completely miss the point that those people do not need an adjustment to ensure equality.
- Income splitting delivers no benefits to working parents who earn similar salaries.
Working parents who earn similar salaries, already pay the lowest taxes for their household income. Despite having the same taxable income, a household were each parent earns $50,000 each pays substantially less tax than a household where one parent earns $80,000 and the other earns $20,000. The entire purpose of the Family Tax Cut is to ensure that all families pay the same low tax regardless of how that income is divided between parents. It shouldn't matter if the parents’ salaries are similar or dissimilar, one family should pay the same amount of tax as another family that has the same net income.
To make matters worse, the tax system is rigged to reduce the possibility of allowing parents to have similar salaries. Tax deductions for childcare must be applied to the parent with the lower income. The more a family pays for childcare, the greater the difference in taxable income will be between the parents.
- Income splitting delivers no benefits to single parents.
Single parents benefit from income splitting through Child Support deductions. The total taxes paid by a split household where one parent earns $60,000 and gives $10,000 in Child Support to the other parent who earn $40,000 is similar to the taxes paid by a household where each parent earns $50,000. However, if those parents weren't separated and were earning $60,000/$40,000, they would pay higher taxes than they would if they were divorced and balancing their incomes through Child Support payments. It seems absurd to me that there would be a tax benefit that favours breaking families apart through divorce over keeping families together, but that is how the tax system worked prior to 2014, and that is what the Liberals are suggesting needs to be done again.
I recognize that many single parents do not receive the Child Support. I agree that special policies should be implement to assist those parents. However, implementing such policies does not require families with stay-at-home parents to pay a disproportionately large share of taxes.
- Income splitting delivers no benefits to Canadians who do not have kids.
There is good reason that the proper title for income splitting is the Family Tax Cut. It was never intended to benefit Canadians who do not have kids. Couples that do not have children are free to work as they see fit given their situation. It is reasonable to expect that couples who do not have children should pay the same amount of tax whether they are married or not. The fact that this policy only applies to families with children prevents wealthy individuals from avoiding taxes by transferring income to a trophy-spouse.
Parents of children receive tax advantages over those who do not have children. The intent of these policies is to ensure that parents have the resources needed to raise children so that they can contribute to society. There seems to be a universal agreement that this is appropriate, as all of the political parties campaign on improving benefits for families. Income splitting is another such benefit with the specific goal of allowing parents to choose the balance between providing for their children's financial and nurturing needs as they believe will best benefit their children.
- All told, income splitting benefits only about 15 percent of Canadian households.
Who is that 15 percent? If you think about it, it is obvious who is getting the benefit: they must be parents of children under the age of 18, and one parent must be earning more than the other. What is the most obvious reason for one parent to earn more than the other: because one parent is more focused on raising their children than trying to match the income of his/her spouse. Like I said earlier, ending income splitting is effectively saying “We will cancel tax equity for stay-at-home parents.”
Is there a group of people who could be benefiting from this tax rule more than they probably should? Possibly: Wealthy parents of teenagers where one parent earns a high income and the other earns a modest income do stand to benefit substantially from this policy.
I do not have access to the statistics to figure out what potion of the Family Tax Cut goes to families that are in that sort of situation. However, if that does account for an excessive portion of the Family Tax Cut the solution is not to abolish it. If the parents of teenagers are gaining too much benefit from the Family Tax Cut, then it could be refined by lowering the age requirement for the children; as a possible example, the Family Tax Cut could be applied to families with children 12 and under instead of children 18 and under. If wealthy families are gaining too much benefit, the 50,000 limit could be adjusted based on household or individual income so that high-income families have a shrinking transfer limit. There are countless ways that the Family Tax Cut could be tweaked to better achieve the goal of providing tax equality for stay-at-home parents.
In any case, I would point out that it is not necessarily a bad thing that upper-class families with teenagers benefit from this tax equality. There are key balances built into the existing system that prevent abuse of this tax credit.
First, there is a limit to how much inequality can be balanced. At most only $50,000 can be transferred between spouses. That means that a family where one parent earns $200,000 and the other earns nothing can only balance their incomes so that they pay the same taxes as a family where one parent earns $150,000 and the other earns $50,000. It does not matter how much more the higher income parent earns, the most that they can transfer is $50,000, and once a person has an income that exceeds $186,270 they cannot transfer enough to their spouse to get out of the highest tax bracket, making it irrelevant how much more they earn. An upper-class family might run into this limitation, while a middle-class family cannot.
Second, the more the lower income parent earns, the less benefit there is from the transfer. If the lower income parent’s income is more than $136,270 after the equalization is applied, then further income splitting is completely irrelevant. Both parents would end up in the highest tax bracket, so it does not matter how unequal the parents’ incomes; they would pay they same amount of tax. Therefore, income splitting cannot benefit families where both parents have high incomes. Again, this limitation only affects upper-class families.
Next, a wealthy household is likely to have more disposable income. That disposable income provides flexibility such that a wealthy household can use RRSP Contributions along with other deductions and tax strategies to reduce the difference in income between spouses. A wealthy household, is more likely to be able to balance the taxable income between each other. Low and medium income families are unlikely to have such flexibility, making the Family Tax Cut the most relevant way for them to equalize their taxable incomes and thus reduce the taxes they pay.
Remember, the Family Tax Cut (aka income splitting) is about ensuring equality so that families pay similar taxes to other families that have similar household incomes. One wealthy family shouldn't pay more taxes than another wealthy family that has the same taxable income just because they choose to have one parent stay home to raise the kids. If wealthiest families need to take on a greater share of the tax burden, then they should take it in a fair and equal manner. The tax increase should not be biased against families with a stay-at-home parent.
I hope that our new Liberal government can look past the fact that the long overdue equalization of our tax system made possible by the Family Tax Cut happened to be implemented by a different political party. The Liberal party has had many opportunities in the past when they could have been the ones to implement this much needed policy. They can still be the ones to fine tune it to perfection.
I fully support initiatives to decrease costs for daycare, help parents that do not receive the proper Child Support and generally benefit middle-class families. However, those initiatives should not be funded by taking an extra $2 billion a year from stay-at-home or part-time working parents.
To our Members of Parliament: Please don’t cancel tax equity for stay-at-home parents; please don’t cut the Family Tax Cut.
