The income tax filing deadline of April 30th has come and gone for another year. While nobody enjoys paying taxes, single-income families pay more than their fair share, according to economist Jack Mintz.
Mintz says the Canadian personal income tax system treats households with only one earner as “second-class taxpayers.”
The Conservatives dangled what's known as income splitting in front of taxpayers last election, and with plans of paying down the federal deficit by 2015, income splitting could very soon be a reality in a few years.
Marginal tax rate
What is income splitting and how can it benefit households with only one earner?
Single-income families, where only one spouse works, pay more taxes than dual-income families where both spouses are employed. This is due to marginal tax rate -- the amount of tax paid on your next dollar of income. Your marginal tax rate depends on a number of factors, including which province you reside in and the type of income you earn (i.e. interest, capital gains, or dividends).
The marginal tax rate is very important for tax planning. According to Mintz, a family with a single earner income of $70,000 per year pays 30% more taxes than a family where both spouses work earning $35,000 a year each. In fact, a single-earner family earning $120,000 a year pays the same income tax as a couple earning a combined income of $141,000. The Canadian tax system is supposed to be about equality; this puts single-income families at a significant disadvantage.
This isn’t the first time we’ve heard about income splitting in Canada.
The Conservatives included it in their platform during the last federal election. They pledged to allow higher income spouses to transfer up to $50,000 of income to their lower income spouse; the only catch was the family had to have at least one dependent child under 18 years old. That was then and this is now; the Conservatives seem to have put this promise on hold until the books are balanced in 2015.
It's a change that doesn't come cheap – according to the Conservatives it would cost $2.5 billion in lost tax revenue. While the government has pledged to take a tougher stance on tax cheats, perhaps they could extend that to wealthy Canadians who are evading tax with offshore bank accounts. That would at least help pay for income splitting who honest, hard-working Canadians who want to pay their fair share of tax.
Income splitting already exists
Retirees have been reaping the rewards of income splitting for years. Income splitting comes in handy where one spouse has significantly higher income than the other. Although you may be many years away from retirement, you can start tax planning today; spousal RRSPs are a great way to attribute some of your income to your lower-earning spouse. Not only will the income be taxed at a lower rate, you can protect yourself from the Old Age Security clawback. Your spouse can also claim the pension tax credit for up to $2,000 of pension income.
Income splitting in the U.S.
Retirees aren’t the only ones income splitting.
Wealthy individuals can set up trusts and corporations to pay taxes at a lower rate. As well, when it comes to finances, Americans have a lot of advantages over Canadians, such as lower mortgage rates, tax deductible mortgages and capital gains exemptions.
Joint filing is another advantage Americans have; in the U.S., couples can file a joint tax return, which allows households where only one partner works to be treated equally to dual-income households.
While Canada might get there one day, it’s a very expensive proposal and would put the Conservatives' plans of a balanced budget on hold for a few more years.