Family income splitting: you can’t please everyone but a good start


The master family income splitting strategist with his family (Facebook)

There’s some good coverage of Thursday’s family income splitting in Friday’s national newspapers. The general thrust seems to be that Stephen Harper has shrewdly made his modified family income splitting and enhanced Universal Child Care Benefit into a broadly based re-election platform for 2015. National Post columnist John Ivison (@IvisonJ on Twitter) sums it up aptly in his front-page story here.

Get married!

In the FP, Garry Marr (@DustyWallet on Twitter) quotes financial planner Ted Rechtshaffen to the effect single people need to settle down and get married if they really want to benefit from the Conservatives’ “Family Tax Cut.” The rest of us — singles and single parents, couples who have already raised children and who are now over the age of 18, and even dual-income parents whose jobs put them in the same tax bracket — will just have to get by without the extra tax relief, apart from those who will benefit from the extra childcare benefits ($160/month for kids under six, or a new benefit of $60/month for kids aged 6 to 17). Garry’s piece is here.

More than one way to skin the income-splitting cat

On the FP Comment page, tax expert Jack Mintz (of the University of Calgary), writes here that the package is a “good start” in that it removes some inequities and helps all families with kids. He notes that even before this, the Canadian tax system had elements of family taxation: the GST credit and child tax benefit are income-tested benefits based on family rather than individual income. As noted in Thursday’s blog, there’s pension splitting for retirees with disparate sources of pension income. There’s spousal RRSPs and of course high-income business owners often have sophisticated income splitting opportunities, not only with spouses but sometimes with children.

G&M: take what we can get with a motley crew of tax deductions

Over at the Globe and Mail, here, Rob Carrick aptly sums it up as we should take what we can get. And the Globe’s editorialists describe the measures as a “motley crew” of targeted deductions, here.

And what do I think? You can refer to my MoneySense blog yesterday. At one level, it’s slightly annoying to have raised a child all those years without much tax relief. As she is over 18 now, we’re out of luck even though she’s currently at home between her travel and work stints. Even if the move were made retroactive (which it won’t be), like most higher-income dual-income families, the $2,000 cap would limit any tax savings. We and others approaching retirement may be able to console ourselves with the fact pension income splitting is on the horizon.

You can sympathize with the legions of Canadians who don’t get a break this time around — those without children, single people who don’t have anyone with whom they can split income, dual-income earners with children but who are both in the same tax bracket — but hey, ultimately this is all about politics, as John Ivison reminds us. Governments have always encouraged us to have children because ultimately that’s the future, not to mention the source of future tax revenues.

In any case, those who feel strongly about the issue either way, should remember an election is looming in 2015. Those happy to be bribed with their own money can re-elect the Conservatives. Those who want the measures repealed can vote for the Liberals and Justin Trudeau. And NDP supporters will have to wait until Thomas Mulcair has figured out what this all means.

Happy Halloween.

Here comes income splitting

office binder taxes house family dollar symbolAs predicted in the morning papers, the Conservative government has formally announced its long-promised introduction of family income splitting. A $4.6 billion-a-year package of tax measures was unveiled Thursday afternoon in Toronto. As of 4 pm Thursday, here is the latest report from the Globe & Mail.

As expected, there was also an enhancement to the universal child-care benefit. The previous $100/per month for each child under six is being raised to $160/month. And parents with children between 6 and 17 will receive $60/month for each child of that age, effective January 1, 2015. However, the existing Child Tax Credit is being eliminated.

Also as anticipated, couples with children under 18 will be able to split income for tax purposes by transferring up to $50,000 of income from the higher-income earner to the lower-income partner, effective for the 2014 tax year now in progress. As speculated in the morning papers, the original proposal has been slightly watered down to impose a maximum (annual) benefit of $2,000: a sop to critics who carped that otherwise high-income earners would unduly benefit from family income splitting.

Pension splitting foreshadowed this

The precursor to family income splitting was pension income splitting, which provides a considerable tax break to retirees when one couple has a large employer pension and the other spouse does not. Introduced in the 2007 budget, pension income splitting already operates in a similar fashion to how family income splitting would work. Pension splitting is implemented when couples prepare their annual tax bill each spring.

During the 2011 election, the Conservatives floated a promise aimed at families with children up to 18 years of age; it would permit the higher-earning parent to transfer up to $50,000 a year of income to the lower-earning spouse. In effect, this would reduce tax levied at the highest marginal tax rate for the higher earner, while the lower-earning spouse would be taxed at their likely lower tax rate.  Seen as a family unit, the net tax paid by such couples would be potentially thousands of dollars less.

The classic example is to compare a one-income family where the sole breadwinner earns $100,000 a year and is taxed accordingly, versus a family where both spouses earn a more modest $50,000 a year and are taxed relatively less. A 2011 research paper from C.D. Howe Institute said the tax savings could run as high as $6,400 a year for some high-income families earning at least $125,000 a year. It said 40% of the benefits of family income splitting would go to those high-income families.

Many families — and singles — would gain nothing

While it’s nice that seniors and families with children can gain from income splitting, in between are many Canadians who would not benefit from the measure. CD Howe found 85% of households would gain nothing. That would include families where both spouses are in the same tax bracket and of course single parents who have no spouse with whom income could be split for tax purposes.

Looming election issue

I’m all for anything that boosts the financial independence of heavily taxed Canadians. Part of me thinks that all taxpayers should be treated equally, rather than singling out seniors and parents. On the other hand, there would be a high cost to the federal treasury if income splitting were applicable across the board. Because it potentially affects so many of us, family income splitting is bound to become a major political issue the next time we go to the polls. Liberal leader Justin Trudeau has said he would repeal family income splitting if he were to be elected next year. The NDP is sitting on the fence on the issue, saying it wishes to study the measure before deciding on its position.

When I posted a link this morning on my Linked In account, Allen Scantland — an accountant in Metcalfe, Ont. who is running for city council  — said “the arguments against income splitting in my mind are baseless, derogatory and wrongly associated with old notions of who earns money in the family.” Scantland said relatively few families have a primary earner making more than $100,000. Most make less and have to make tough choices on childcare, homes and where to work. “Almost all families spend their money together and should be able to level their taxes by income splitting. It is a social good.”

Tickets still available for Saturday retirement event

On a related note, the MoneySense retirement event is on Saturday morning. Last I checked, tickets were still available. Details can be found at MoneySense’s website here. marketfoolery

Also, if you listen to Motley Fool’s podcasts, I was a guest of Chris Hill on Thursday’s edition of MarketFoolery. The 14-min clip can be found at iTunes here. We talk about how Canada’s stock market resembles Australia’s, the fact Canada is concentrated in just three sectors, longevity, retirement versus Financial Independence, and even a prediction I made in 1983 about cell phones.


Retirees: don’t plan to be a financial burden on the kids

Daughter with elderly parents.Here’s my latest blog for MoneySense, bearing the title Money in Retirement: Don’t Rely on the Kids.

A recent TD Wealth survey on providing care to aging parents struck a cord on a couple of levels, at least for me. For those who missed it (it came out the day of the Ottawa shootings last week) TD found two thirds of Canadians between the ages of 40 and 60 expect they will have to provide care for their aging parents at some point. One in five already provide financial help to their parents or expect they will have to in due course. TD went on to say many Canadian “pre-retirees” also want to avoid putting their own children in the same situation. (You know the stoical stance of the self-reliant elder who “doesn’t want to be a burden” on their children).

No plans to burden the kids when it’s our turn

That struck me as quite ironic. As the parent of a 23-year old who alternates between travel, freelance promotion jobs and short stints at home, the last thing we’re planning for is depending on her for financial support in our old age. Of course, all four of the grandparents in our family have passed away, so we tend to look at this intergenerational dynamic in a different way than TD’s intended audience: those still working and whose parents are still alive.

Indirect costs can still arise

Social worker Gary Direnfeld, billed in TD’s material as a family relationship expert, is quoted as saying it’s “understandable” that people approaching retirement age will be reluctant to have to ask their grown children for financial support once they do retire. But they need to recognize this possibility may arise and at least have a frank conversation with their children about it. Even if the kids don’t end up providing direct financial support, Direnfeld says they may end up bearing indirect costs like retrofitting a house or apartment so their parents can “age in place.” And if it’s necessary to step in and provide care-giving for a parent or inlaw, at least one of the children (or their spouse) may have to take leave from their jobs to do so, meaning a loss of earnings. The alternative is to keep working but to pay a third party to care for the old folks, which is another way finances will be impacted for the grown children.

It’s hard to argue with the common sense dispensed by TD Wealth senior vice president Dave Kelly: that pre-retirees should maximize their retirement savings during their peak earning years, so as to be less of a financial burden on their kids once they retire. I’d go further: if you feel that strongly, why limit retirement saving to one’s peak earning years? Make it a priority as soon as you enter the workforce, take advantage of the time value of money (especially in TFSAs) and your fears of being a burden on the kids should be dissipated.

Decumulate first from non-registered funds

The second thing I noted about TD’s release is the focus on a theme I’ve been writing a fair bit about lately: that of decumulation. As I noted in my column in the magazine recently, more and more baby boomers are moving from the mode of wealth accumulation to that of decumulation, or drawing down on their savings. I argued only a minority of financial advisers have also made this shift but Kelly’s comments suggest this sea change is becoming top of mind with wealth managers. He says pre-retirees need to consider withdrawing money first from their non-tax-sheltered investments, as opposed to tax-deferred vehicles like RRSPs or RRIFs.

“While money in an RSP can be converted into a RIF at any time, once it’s converted there is a minimum annual withdrawal based on either the age of the fund holder or spouse,” Kelly says in the release, “If your spouse is younger than you, your minimum withdrawal would be lower than if it were based on your age, but you have to elect whose age to use before your first RIF withdrawal, and once you choose, you can’t change your decision.”



Give and ye shall receive — reflections on U2’s iTunes giveaway


Apple’s Tim Cook and U2’s Bono

This post is only distantly connected to this blog’s normal theme of financial independence, although on reflection it may have bearing on the rock group U2’s financial independence.

Like many iTunes users, I was at first annoyed when a free copy of U2’s latest album appeared magically on my iPhone. I’d bought a few U2 albums on vinyl and cassette in the early days but was underwhelmed by my CD of Rattle & Hum, and pretty much stopped buying them or listening to U2 for the last decade or so.

I am, however, an enthusiastic fan of what I’d term “Melodic Rock,” which is why the subplot of Findependence Day revolves around vinyl music and its (arguable) cultural renaissance.  I tend to be a serial monogamist when it comes to bands. I’m the opposite of a “Shuffle” person or listeners who are happy to listen to the radio or whatever random songs that new applications like Songza throw at them.

I’m a musical serial monogamist

I tend to listen to one group at a time and play them to death for roughly two months, then latch on to a new group or rediscover an old one I hadn’t really focused on before. In the spring of this year, I went through this cycle with Orchestral Manoeuvres in the Dark, then Ian Tyson and then in late summer The Killers. If I like the music, I’ll burn all my old CDs onto iTunes, and purchase older albums if I missed them when they came out.

Just as my time with the Killers was about to expire, along came the free download of U2’s Songs of Innocence. I hadn’t ordered it, hadn’t given much thought to U2 at all lately but hey, a bargain is a bargain. I gave it a listen and it sounded okay, listened again and quite liked it. Sure as shooting the old pattern kicked in and the Killers had been supplanted not by some newer group like the Shins (which I’ve sampled) but U2, which for me had ceased to exist since the late 1980s.

Wondering what else they might have done that I’d have liked, I read the iTunes reviews of all the U2 albums that were new to me. Since many of them cost only about $5.99, I bought two more: Achtung Baby and How to Dismantle an Atomic Bomb. If they continue to please, no doubt I’ll round out the entire collection before tiring of the group around — let’s see — Christmas.

I remember reading on the web a recent interview with Bono, in which the singer professed to being somewhat baffled by the uproar over what was essentially a gift to music lovers. I know plenty of people went to elaborate lengths to find a way to purge the album, unlistened, from their devices. If you’re one of them and have happened upon this blog, do yourself a favour and at least listen to the opening track or try the cut Sleep like a baby tonight.

Okay, now how do I seque to the topic of financial independence here? The obvious lesson in my case is that it cost U2 virtually nothing to give me the free download but it has since made $12 from me that it might not otherwise have earned. Before I’m done, they’ll probably make another $50, and of course they may get a few more sales from the modest publicity this blog provides. But that’s nothing compared to the many other free copies of the album that went to iTunes users: even if only one in a hundred reacts as I did, the group stands to make a mint on its back catalog on iTunes or other distribution outlets.  So this seems to be at least one good example of the spiritual proposition that “give and ye shall receive.”

Other examples where freebies generate sales

I can think of one other similar example involving Greek yogurt. One day in the grocery store, someone offered a sample of Oikos “Honey on the Bottom” Greek Yogurt. It was delicious and I’ve been a customer ever since.

A third example, closer to the U2 iTunes one, is the current rage of publishing low-cost and practically free e-books. In fact, there is an entire e-book out there that outlines a strategy of issuing almost-free ebooks or giving away totally free ebooks for short periods of time: Crush it with Kindle (which itself costs just $2.65). In the next week or so,  using these principles, I will be releasing a Kindle-only ebook called A Novel Approach to Financial Independence. It will probably cost $2.99. I’ll devote a whole blog to it when the time comes early in November.

But right now, I have to get back to listening to U2.


  Should your retirement date be a surprise?


Kevin Press, Sun Life Financial

Sun Life Financial assistant vice-president Kevin Press has penned a retirement planning article carrying a provocative headline: “Your retirement date will probably be a surprise.”

Published at, Press cited the most recent survey of Sun Life’s Canadian Unretirement Index and its startling finding that only 31% (fewer than a third) of Canadian retirees said they stopped work on the date they had actually planned. This attracted a fair bit of social media commentary, including my own predictable quip attributed to deceased Beatle John Lennon in his final album: “Life is what happens to you while you’re busy making other plans.”

Employers set the date a quarter of the time

At one level, the inimicable Press is of course correct. The precise date of retirement isn’t always a variable under one’s complete personal control. In these days of corporate cost-cutting, there’s little guarantee that one’s employment in a particular firm will last to the exact and convenient day of your projected retirement. One in four said they left their jobs because an employer decided that was the way it was going to be. The decision was forced by the employer for 10% of those surveyed, while another 15% took their employers up on their offers of early retirement.

Health is another major factor

But even if they love you and are willing to throw frequent raises and bonuses your way, your health may not cooperate. Sun Life found a whopping 29% reported their work lives ended prematurely because of “personal health or medical reasons.” Another 2% left not because of their own health but because of the deteriorating health of a loved one for which they had to care. Adding 14% more who experienced unexpectedly early retirement for other “unspecified” reasons, that’s 69% who did not finish their career as they had originally planned or expected.

This is all interesting data but should not be viewed as a particularly disturbing trend. Retirement planning is as much an art as an exact science and any financial planner will tell you that, even if employers and health are in your favor, there are many variables that will change the exact finish line. Stock markets will vary, as will interest rates, currencies and other factors. Even the related concept I call “Findependence Day” I have described as a moving target: if markets go on a tear the last few years before your planned departure from the workplace, your liberation from work may happen a few years earlier than it might otherwise have been. If markets languish in an extended bear market, you’ll probably decide to hang in there a few extra years, again assuming robust health and a willing employer.

Freedom 66?

In fact, a Sun Life ebook authored by Kevin Press quantified this in the wake of the 2008 financial crisis. Based on the traditional retirement age of 65, Sun Life surveyed Canadians as to what they thought they’d be doing at age 66. In 2008, 51% thought they’d be retired by that age, and in 2009, 55% thought so. This plummeted to just 28% in 2010 and has hovered between 27% and 30% in the subsequent years to 2013.

At the same time, the percentage who thought they’d still be working full time at 66 rose from just 16% in 2008 to 27% in 2013. Two thirds of those expecting to be working past 65 said they‘ll do so because they “need to” financially. By 2010, the average age at which Canadians expected to retire had jumped from 64 (in 2009) to 68 by 2010 and 69 in 2011. As confidence has returned, this average expected retirement age has since fallen back to 66.

Press’s e-book can be found here, and includes links to several calculators that should make your rough retirement date less of a surprise.

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