Income Splitting: What You Need to Know

Your income splitting updateWith the stage set for a federal election in 2015, the Conservative government is doling out a few early election goodies. Income splitting was a platform promise made during the 2011 election once the federal books were balanced. With the federal deficit expected to be eliminated in 2015, the Tories are delivering on income splitting, albeit a watered down version.

How Does Income Splitting Work?

The aptly-named “Family Tax Cut”  allows couples with children under 18 to transfer up to $50,000 from one spouse to the other to lower their tax bracket. The Tories have made a few slight tweaks since initially coming under fire with the first proposed iteration, which was criticized for benefiting middle to upper-class families, leaving those who need it most out in the cold. To address this, the non-refundable tax credit is being capped at $2,000 per year.

That’s not the only new development for families with kids. Starting in 2015, the Tories are boosting the universal child care benefit from $100 to $160 per month for children under six, and  are introducing a new monthly benefit of $60 for kids ages  6 to 17.  This is contrast to the NDP who are proposing a national child care program.

The Tories aren’t waiting for a balanced budget to deliver on this election promise. In fact, families who qualify will receive their cheque  in July 2015.

The Cost of Income Splitting

These election promises don’t come cheap. The provinces have predicted income splitting alone would cost them a whopping $1.7 billion each year. In addition, although the tax credit is limited up to $2,000, the tax breaks are predicted to cost the federal purse $3.1 billion in 2014-2015 and $4.5 billion in 2015-2016.

Will Income Splitting Benefit You?

Incoming splitting won’t benefit everyone – even if your family qualifies, you may not receive that much.

“The families who benefit the most are those where there’s a bigger income gap,” says Aurèle Courcelles, the director of tax and estate planning at Investors Group. “The bigger the gap, the closer you are to getting to the $2,000 tax credit.”

Income splitting has drawn sharp criticism from Federal Liberal leader Justin Trudeau for mostly benefiting well-off families like Prime Minister Stephen Harper’s and his family, not families that truly need it. Former federal finance minister Jim Flaherty also expressed his concerns about income splitting.

“The wealthy will still benefit  to a certain extent,” says Courcelles. “There will come a point where the gap isn’t large enough. It all comes down to the gap and which marginal tax rates the spouses are in.”

Courcelles uses the example of family where one parent earns $150,000 and the other makes $50,000. He says the tax break will result in an extra $1,920 back in their pockets.

With more money in the pockets of some Canadian families, it will be up to them to decide what to do with the tax savings. “These tax measures will benefit most families with minor children,” says Courcelles. “Each family will end up with more disposable income than they have today. That means these people will have a decision to make. Will they need it for personal consumption? Should they be investing it, or putting the money into an RESP for government grants? They should speak to advisor for the best use of funds.”

Sean Cooper is a pension analyst by day and financial journalist by night, living in Toronto, Ontario. He is a first-time homebuyer and landlord who aspires to be mortgage-free by age 31. Follow him on Twitter @SeanCooperWrite and read his blogs and request his writing services on his personal website:

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