Family tax cut not for all

National Post

2011-04-02



If you're a family with young kids in which one partner has a significantly higher income than the other, chances are you were at least somewhat intrigued by the Tories' income splitting proposal.

The Conservatives' plan, dubbed the "family tax cut," would allow income sharing of up to $50,000 for couples with dependent children under 18.

The Tories claim that nearly 1.8 million families would benefit, saving an average of $1,300 in taxes annually.

The savings come as a direct result of our progressive tax system, which, at the federal level, taxes the first $41,544 of taxable income at 15%, the next $41,544 (i.e. the portion of taxable income between $41,544 and $83,088) at 22%, the third tranche between $83,088 and $128,800 at 26% and anything above that at 29%.

So, who exactly would benefit and how much could a family actually save in federal taxes? Let's take a look at four couples and see how their tax savings could stack up, using 2011 federal brackets and rates.

Adam and Eve, who have one child, each earn $37,000 for a total family income of $74,000. They would not benefit at all from income splitting since their family income is already equally divided between each spouse, both of them paying tax at the lowest federal rate.

Our second couple, Ernie and Bert, have no kids and therefore would also not benefit from the income-splitting measure. This is one of the criticisms of the Tories' tax cut in that couples with no kids or with kids over the age of 18 will save nothing under the proposed plan. Single people, with or without kids, also wouldn't benefit.

Ken and Barbie, on the other hand, have two kids. Barbie earns $80,000 annually and Ken works part-time pulling in about $10,000. Ideally, using 2011 tax brackets and rates, Barbie would elect to split $31,544 ($41,544 -$10,000) with Ken and the couple would save $2,208 of tax, equal to the split amount multiplied by the tax rate differential of 7% (i.e. 22% -15%).

Our final couple, Homer and Marge, with three kids under 18, would reap the most benefit since Homer earns $180,000 annually and Marge has zero income. In this scenario, which represents the maximum potential benefit under the proposed income-splitting plan, Homer would elect to split the maximum $50,000 of income with Marge.

This would produce a savings of $6,408 in federal taxes, which is made up of Homer's tax savings at the high rate, $14,500 ($50,000 X 29%), less Marge's tax owing of $8,092 (15% X $41,544) + 22% X ($50,000 -$41,544).

These examples illustrate federal tax savings. Whether the provinces could ultimately afford to tag along and provide provincial tax savings, as they did with pension income splitting, is another matter, which, luckily for the provinces, could be years away.