Splitting Income For Single Income Families

in CRA, Income Tax

This was written before Line 423 appeared on your CRA allowing for partial Family Income Tax Credit, but I still can’t get my head around why they don’t make it a complete tax credit. Isn’t it great there is splitting income for single income families?
Given the latest changes to the Tax system, this post is actually a valid rant (again).

One of the earliest articles that I had on-line (back in 2005) was that the Canadian Government Hates Single Income Families, and I still feel that the Government really isn’t trying to help out single income families. The set of articles was a bit inflammatory (as I was want to do in those days), but the point about Income Splitting still is an interesting discussion point.

My guess is that the Government does not want to change the tax system to allow Income Splitting, for a lot of reasons, but one of the biggest reasons is they don’t want to cut one of their income streams down  (this is not me putting on my Aluminum Foil hat and claiming this is a government conspiracy, just that it is only good business sense to not decrease your incomes, especially when you carry as much debt as all levels of government do).

I have written about the joys of income splitting for the retired folks out there (who have pension income), but a family with a single bread-winner (who isn’t retired), is not extended that same privilege. Typically a single income families’ major tax breaks are (assuming there is a spouse or common-law partner involved):

  • Schedule 5: Line 303 where you can claim up to $11038 (minus whatever your spouse’s net income comes out to)
  • Family Care Giver credit, if you are taking care of a disabled family member

That is pretty much it. With lower incomes you may be able to claim medical expenses and such, but that is about it.

The concept of a Household Income, that can pool two folks’ income into one and then split in half (for tax purposes) sounds fair to begin with, but evidently the CRA and the Government are not in agreement on that. Think about:

  1. Lisa is a designer and earns $80,000 a year, while her spouse stays at home with the kids
  2. Gunther earns $45K at his job and his spouse earns $35K at her (or his) job, and they have their kids in daycare
Inequal Tax Solutions

Only in the Tax World is this statement True

At first blush you’d think that these two families pay the same taxes, wouldn’t you? However, we know that this is not how the tax system works, and that in fact, Gunther and his spouse have a higher net income because they both earn in a lower tax bracket, where Lisa is taxed in the higher bracket for that part of her income (remembering that the tax brackets have graduated income levels).

What To Do About This?

Is this right? My opinion is no, but then again, Mrs. C8j and I lived in a scenario where she stayed at home with the kids, and I worked, so naturally I would be more inclined to think a Household Income or Income Splitting would make more sense.

I am curious to hear what my readers think of how the Canadian Tax system treats dual-income families as compared with single-income families.

{ 5 comments }

  • Greg October 9, 2014, 5:48 PM

    I’ve long complained about not being able to split family income isn’t fair but I can’t help but think it is more about self interest for me. The Harper government has promised to allow income splitting for families with children once the budget is balanced. My kids aren’t children any more so I now see it as another a targeted vote buying tax break that I won’t get. My idea of fairness seems to change depending on whether fair benefits me or not :).

    Reply
    • bigcajunman October 9, 2014, 5:51 PM

      Kind of where I am as well, but every little bit could help. The Harper “balanced” budget should be interesting to see when they claim they have done it.

      Reply
  • Matt October 9, 2014, 3:34 PM

    I think its not the fairest of systems; a family unit should be able to split their income in a way that is most beneficial to them otherwise there is virtually no reason to tell the CRA that you’re marries. Your example is the perfect illustration of just how this is unfair to the higher income earner; my opinion is both groups should be taxed the same way.

    I think if taxes were fair people would be less inclined to try cheating on them; also if they were less complex and convoluted then maybe it would be easier to file and get them correct.

    Reply
  • Robb Engen October 9, 2014, 9:13 AM

    I think a household income tax makes a lot of sense, but then again I’m in a single-income situation so I’d be one of the “nine percent” that stands to benefit the most from a change in taxation.

    Reply
    • bigcajunman October 9, 2014, 9:23 AM

      I wouldn’t benefit from this change as much now, but it still might be nice to have (but really, highly unlikely).

      Reply

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