Income Splitting: A Contentious Debate within the Canadian Church

From the Spring 2014 edition of The Catalyst.

Income splitting, also known as family taxation, would change the tax system so that it takes into account total family (rather than individual) income. It would allow higher income earners to transfer a portion of their annual income to the lower income partner to reduce the household’s overall tax burden. The federal government has proposed income splitting for families with children under the age of 18, allowing them to shift up to $50,000 a year in income between partners.

Note: The income splitting measure put forward on Oct. 30, 2014 caps the maximum benefit at $2,000 per family.

What are the arguments in favour?

Christian groups in favour of income splitting like the Institute of Marriage and Family Canada (IMFC) argue that the current tax system unfairly penalizes families who choose to have a parent stay at home or work in a lower-paying or part-time job. Some believe it creates a disincentive for parents to stay at home with their young children.

Families with one partner who makes significantly more than the other currently pay more tax than families with similar incomes spread more evenly between partners. For example, a family with two income earners each making $40,000 would pay a total of $12,000 ($6,000 each) a year in federal income tax. A sole earner family where one person makes $80,000 — the same total amount as the family in the first scenario — would pay $14,080 in federal taxes since they would be in a higher tax bracket. Proponents maintain that this is unjust and that all families should be taxed equitably.

Who would benefit?

According to a 2014 study by the Canadian Centre for Policy Alternatives (CCPA), families in the top 50 per cent of Canada’s income distribution would receive 97 per cent of the benefits, while the bottom 50 per cent (those making under $46,000 a year) would only receive 3 per cent.

Looking at this another way, the bottom 60 per cent (families making $56,000 or less) would receive an average benefit of $50 per year while the richest five per cent of all Canadian families (those who make over $147,000) would receive an average annual benefit of $1,100.

The IMFC suggests, however, that countries currently using family income splitting show that the measure could instead be designed to benefit lower and middle income families. In France, for example, single parents are able to split their income with children.

What do opponents say?

A large number of social policy organizations, including the CCPA and the Broadbent Institute, oppose income splitting. They argue that income splitting won’t provide any benefit to singleparent families or to dual-income families where both partners are in the lowest tax bracket.

Some claim that income splitting promotes what they deem to be an outdated model of family with a primary breadwinner (presumably a man) and a stayat- home spouse (presumably a woman). They feel income splitting would create a disincentive for some women to enter or remain in the workforce, as families with one high-income earner would see a significant increase in taxes if the second partner were to work. As a result, they believe it would represent a step backwards for gender equity.

How much would it cost?

The CCPA estimates that income splitting would cost the federal government $3 billion annually in lost tax revenue, and an additional $1.9 billion provincially. A study by the C.D. Howe Institute has similar findings, estimating that the cost would be $2.7 billion federally and $1.7 billion provincially.

Note: The government's current income splitting proposal is estimated to cost about $2.4 billion for the current fiscal year, and $2 billion per year for the next five years, according to the the Department of Finance.

Where do the political parties stand?

The Conservatives had promised to introduce this measure once the federal budget was balanced. It was introduced on October 30, 2014, about one year before the 2015 election. In February 2014 Jim Flaherty came out against income splitting noting that it “benefits some parts of the Canadian population a lot and other parts of the Canadian population, virtually not at all.”

The NDP and Liberals also oppose the government’s current income splitting proposal, while the Green Party supported income splitting in their 2011 election platform.

What might public justice have to say about income splitting?

A public justice framework requires that we evaluate government policies and initiatives in terms of the common good rather than personal benefit. As such, we must seriously question any policy that disproportionately benefits the wealthy while significantly diminishing federal revenues and therefore the government’s ability to carry out its own public justice tasks of reducing poverty and inequality, protecting the environment, and caring for the most vulnerable.

CPJ aims to promote a civil discourse that respects families’ childcare choices and recognizes the value that stay-athome parents contribute to society. At the same time, it is reasonable and fair for a progressive taxation system to place a slightly smaller tax burden on dual-income families due to their higher expenses (e.g. childcare, transportation, work-related costs, etc.).

At the end of the day, we need to evaluate whether the government’s proposed income splitting measure makes the tax system more fair, accomplishes worthwhile policy goals, and is the best use of a significant amount of government revenue. In CPJ’s view, it fails on all counts. 

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Simon is CPJ's former Socio-Economic Policy Analyst.

Comments

Submitted by Jonathan Patrick on
This is a utilitarian argument (justice defined as whatever policy benefits the most people) that ignores the fact that currenlty families with the same income pay different amounts of tax. You can argue that they have more costs as you mention but that only applies for families where a spouse stays home and not to a family where both work but at very different pay scales. So I am not sure how you can state (without argument by the way) at the end that income splitting does not make the tax system more fair. It may not be a good use of scarce resources (i.e. this may not be an inequity that is high on the priority list) but it surely is a means of increasing fairness in the tax system. After all, we do not spend our income as individuals but as families. A family of 4 has the same basic needs regardless of income division among the parents so why should one have to hand over more of their expendable income than another? How about we address the inequity so that families with the same income pay the same tax and then adjust the tax rates so that the net effect is no change in revenue? This addresses the inequity without wasting any resources.

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