The federal government recently announced the new family tax cut which will “allow a spouse to, in effect, transfer up to $50,000 of taxable income to a spouse in a lower income tax bracket, providing tax relief up to a maximum of $2,000.”
This new credit has frequently been referred to in the press as income splitting for families with kids under 18,1 but in reality it’s a “notional” form of income splitting.2 The family tax cut is actually a non-refundable federal tax credit worth up to $2,000 that will have the most notable impact on families where the parents are in different tax brackets.
A tale of three families
Let’s take a look a three different Ontario families that, in 2014, will earn a total of $80,000 of employment income and receive $2,400 in UCCB payments. Each family has two kids under six years old and complete very simple tax returns.3
Family A: One parent works full-time and earns $80,000, while the other parent stays home with the kids. This family will receive the maximum $2,000 credit so their total family tax bill goes from $15,390 down to $13,390, a 13% decrease. After tax and childcare expenses ($0), this family has $69,010.
Family B: One parent works full-time and earns $53,333, while the other parent works part-time and earns $26,667. This family has part-time childcare expenses of $600 per child, per month. The impact of the family tax cut on this family is $657, taking their total tax from $8,991 down to $8,334, a 7% decrease. After tax and childcare expenses of $14,400, this family has $59,666.
Family C: Both parents work full-time and earn $40,000. This family has full-time childcare expenses of $1,200 per child, per month. The impact of the family tax cut on this family is $0, leaving them with a total tax bill of $7,718. After tax and childcare expenses of $28,800, this family has $45,882.
We also took a look at the effect of this credit, if any, on these three types of families (and on single parent families) at various income levels. You can see the results here.
Some other things to consider
Any other credits or deductions will have an impact on your family’s situation. For example, if the higher income parent in Family B made an RRSP contribution of $5,000, the family tax cut is reduced to $307.
Because this is “notional” income splitting, it won’t have any impact on your provincial tax and does not favour residents of one province over another.4
How to apply
SimpleTax will automatically include the family tax cut on your return if you use linked profiles. Both partners will need to complete their returns at the same time to get this credit, since any change to one partner’s income or tax credits will impact the other.
Updated December 29, 2014 with new calculations from the CRA. The linked PDF includes federal tax only.
1 This credit won’t provide any relief to single parent families.
2 “Actual” income splitting has much more significant impacts on your tax return than “notional” income splitting, as the former transfers income from the higher income partner to the lower income partner. A change to your net income can impact your tax bracket, your provincial tax, and your entitlement to various other tax measures. For an example of “actual” income splitting currently available in Canada, see pension splitting.
3 The $80,000 family income amount was extrapolated from Canada’s 2012 median income of $74,540. The family also receives $100 per child per month in UCCB. The only things included on their tax returns are: employment income, UCCB, the child tax credit, the employment amount, and childcare expenses.
4 When the government first announced family income splitting, several studies came out showing how such a measure would impact residents of one province over another and would favour high-income individuals. This is probably why the government introduced a tax credit instead of true income splitting, and limited the credit to $2,000. See footnote 2.