Most families have little to gain from income-splitting, says think-tank

By Special to MoneySense on January 28, 2014
Estimated reading time: 2 minutes

Transfer of up to $50,000 to a spouse in families with kids called "an expensive tax gift for the rich."

OTTAWA – A new report maintains that some 86 per cent of Canadian families will find nothing to be gained from the Conservative government’s long-promised plan to allow some of them to split their income for tax purposes. The Canadian Centre for Policy Alternatives says it looked at the potential impact of income splitting in three scenarios: on pensions, for those families with children under 18 and for all families across the board. The left-leaning think tank says the impact in all three cases is very unequal, while the cost to Canadian governments would be substantial. Senior economist David Macdonald says income-splitting for families with minor children would cost Ottawa $3 billion in lost revenue and another $1.9 billion provincially. Macdonald says it wouldn’t help the middle class either, since the top third of Canada’s richest families would receive $3 of every $4 spent on income splitting. Macdonald says seven out of ten senior families get no benefit at all from pension income splitting, while the richest 10 per cent of senior families receive more than the bottom 70 per cent combined. “Income splitting creates a tax loophole big enough to drive a Rolls Royce through,” Macdonald says in a statement. “It’s pitched as a program for the middle class but in reality it’s an expensive tax gift for the rich.” The report estimates that pension income splitting — which was implemented in 2007 — will cost about $1.7 billion in 2015. Income-splitting to all families would cost about $11.8 billion, it said. University of Calgary economist Jack Mintz has argued that the current tax system is unfair because it penalizes single-earner families with higher tax rates than those faced by couples bringing hope the same amount of total pay. But he said reforms should also recognize that single-earner families have some advantages that dual earners do not, such as more unpaid time spent raising children and taking care of the home. Finance Minister Jim Flaherty has promised to balance the books and post a surplus in 2015, just before Canadians go to the polls. The money would help them deliver on previous campaign promises, such as partial income splitting for families. They pitched the idea in the 2011 federal election campaign, saying they would allow individuals to transfer up to $50,000 to a spouse as long as they had at least one dependent child under 18. However, since the measure would cost billions every year in foregone tax revenue, the Conservatives said they would not implement the measures until the federal deficit was eliminated. Any surplus money would be better spent providing universal child care or help lift seniors out of poverty, Macdonald said. “Income splitting is a policy choice that would purposely exacerbate already high income inequality in Canada,” he said. “This is inequality by design, not by accident.” Others say income-splitting makes a lot of sense, as long as it is accompanied by other measures so that the benefits would be shared by all kinds of families.