Family Income Splitting and choosing more leisure over work

family drawing money house clothes and video game symbol on theHere’s my latest MoneySense blog, which looks at recent criticisms of Income Splitting for Families with children under age 18: aka the Family Tax Cut.

Its headline is Can the Family Tax Cut Entice Families to Work Less? Read more

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.


Budget 2012: Older boomers dodge OAS bullet

While the pre-budget hype was that Canadian baby boomers were going to have to delay their retirement after Thursday’s federal budget was unveiled, their Findependence Day has not been severely postponed for anyone who is now 54 years old or older as of March 31, 2012.

As expected, the Old Age Security eligibility age will rise gradually from the current 65 to 67 but this doesn’t start to happen until 2023, according to the just-released budget.  When you add the 11-year notification of this change to the six-year phase-in between 2023 and 2029, I’d agree with Finance Minister Jim Flaherty that Canadians [or their financial planners] have “ample time to make adjustments to their retirement plans.”

For younger people born on or after Feb. 1, 1962, OAS eligibility will be age 67. Technically, boomers were born between 1946 and 1964 but in my view, if you were born between 1962 and 1964, you likely didn’t grieve over the JFK assassination and can hardly be considered a true baby boomer.

Delaying retirement: OAS takes a leaf from deferred CPP benefits

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