Income Splitting: What is it?

There has been a lot of talk on my feed amongst my peers (and even politicians) about income splitting. I thought I would write a blog and try to put my thoughts about the issue down on paper. Many of us are just entering our careers and probably starting to think about having kids, and I thought it would be discussing some of the facts behind income splitting, and hopefully addressing some myth’s that I have seen posted by some of my friends. As well, I would love to hear some other perspectives about this important issue that is going to be a key theme in the 2015 election.

The Rich Benefit The Most From Income Splitting: True or False?

This is true, but I think you need to be careful about how you interpret this statement.

In Canada, we have a progressive tax system, meaning that you are taxed more as your income increases. Your marginal tax rate goes up, and the amount that you pay in tax increases as your income rises.

Therefore, any tax relief that is tied to income is going to see more money returned to the wealthy, but it is going to be returned at a progressive rate across income levels.

John Geddes from Macleans wrote a great piece that identifies that families with a combined income under 60k have see the largest share of relief, while also having the highest average relief relative to income.

What is all this talk about combined income?

This is the second interesting part of the income splitting debate, the argument surrounding tax equity.

Generally, quality of life for families in Canada is not relative to how many parents work, but how much income they bring in. To illustrate this, I think it is important to compare two families side by side.

Family A: Two parents, one who works and makes $100,000. One who doesn't. Two children. One dog.

Family B: Two parents, both who work, each earning $50,000. Two Children. One Cat.

Before taxes, these families have the exact same income. They can probably afford to live in the same neighbourhoods and drive similar types of cars.

On average, they will probably use the same amount of government services in their lives (health care, education, public safety, etc.)

So, let’s compare their federal tax burden in 2014.

The family with one earner that makes $100,000 will pay $17,736 in federal taxes.

The family with two earners will pay $12,056 in federal taxes.

This is a whopping $5,000 difference in taxes for two families taking home the same amount of money. In my opinion, that is not fair.

The Role of Government

Government should not be in the business of telling people — or even caring for that matter — about how citizens decide to go about earning their income for their household. If parents want to stay at home, lowering the income for their household, they should be treated the same way as other households earning the same amount of income.

There is a lot of debate about income splitting but I think that it is important to recognize its merits and truly understand how different people will benefit from it. This is more about creating more equity in the tax system.