The federal government’s recent tax relief package for Canadian families, which includes the new family tax cut (FTC) that effectively gives couples the ability to split their income, will be a welcome boon for those couples contending with the considerable costs of raising children.
“All families with minor children will see an increase in their cash flow [with these proposed changes],” says Aurèle Courcelles, director of tax and estate planning with Investors Group Inc. in Winnipeg.
Couples may have the extra funds they need to make investments in their children’s future as a result of the FTC, he says, perhaps by contributing to a registered education savings plan, or to protect their family’s financial stability by increasing their disability or life insurance coverage.
“Couples should sit down with their [financial] advisors and decide the best use of this additional cash flow,” Courcelles says. “[These proposed tax changes] are family measures, so, hopefully, families will use this windfall to benefit the family as a whole.”
In late October, the Conservative government made good on its long-standing promise regarding income splitting for families. The FTC, available for the 2014 taxation year and beyond, is a credit with a value of up to $2,000 for couples with minor children.
Under the FTC, a high income-earning spouse effectively would be allowed to split up to $50,000 in income with his or her low income-earning spouse. The amount of the FTC credit is the difference between a couple’s combined taxes payable without income splitting being applied and the amount of combined taxes payable after an amount of up to $50,000 is notionally transferred to the lower-income spouse. The non-refundable FTC benefit is capped at $2,000.
Tax software will be necessary to help to determine the optimal amount of income splitting, as transferring income will have an effect, not only on each spouse’s tax bracket but on the ability of either spouse to access various, otherwise unused non-refundable tax credits. If there’s no overall benefit to be achieved by income splitting, a couple simply may choose not to make the election to split their income.
“It’s an elective provision – you can pick the amount of transfer you want [up to the maximum],” Courcelles says. “It’s all about maximizing the value of the FTC.”
Along with the FTC, the feds announced two other key proposed changes: an increase to the allowable amounts for the child care expense deduction (CCED) and an expansion of the universal child care benefit (UCCB) program. Both changes will be effective for the 2015 taxation year and beyond.
The government proposes increasing the amounts of allowable deductions in the CCED by $1,000: to $8,000 from $7,000 per child under seven years of age; to $5,000 from $4,000 for children aged seven to 16 and including infirm, dependent children over the age of 16; and to $11,000 from $10,000 for children eligible for the disability tax credit.
Ottawa also proposes increasing the dollar amount of the UCCB for children under age six to $160 a month from $100. The proposals also include a new UCCB benefit of $60 a month for children aged six through 17. The enhanced payments would begin in July 2015, including a lump sum to cover the benefits for January 2015 to June 2015. (UCCB amounts are taxable.)
The expanded UCCB program would replace the child tax credit (CTC), which is a non-refundable tax credit. This could be welcome news for low-income families, Courcelles suggests: “You could only benefit from the CTC if you had taxes payable to begin with. These individuals would be going from nothing to $720 a year [with the enhanced UCCB].”
These three changes announced by the Tories build upon an earlier announcement about doubling the children’s fitness tax credit, thus producing a savings of up to $150 per child.
By increasing the CCED and UCCB amounts, and by capping the amount of tax benefit achievable through income splitting, the Conservatives appear to be attempting to respond to criticism that income splitting, as originally proposed during the 2011 election, would disproportionately benefit only those couples with both a high income-earning spouse and a low income-earning spouse.
“[The federal government] has expanded the reach of the tax measures, which is good,” says Jamie Golombek, managing director, tax and estate planning, with Canadian Imperial Bank of Commerce‘s wealth advisory services division in Toronto. “This gives relief to a much broader group of families.”
By providing effective income splitting via the use of a tax credit rather than through actual income splitting via the transfer of income from one spouse to the other, the government can isolate the FTC as a federal tax credit alone. Under true income splitting, as is the case with pension income splitting, the provinces would have to match the federal tax credit. The loss of tax revenue at the provincial level could threaten provincial budgets severely.
“[The federal proposals] are a brilliant solution,” Golombek says.
The proposed tax changes, made at a time when the federal government is expected to return to a budgetary surplus and with a federal election looming next year, will be expensive. Debate no doubt will continue regarding the effectiveness and fairness of the proposed tax strategy.
“We’re talking about $26.8 billion in tax cuts over the next six years. That’s a lot,” Golombek says. “For families with young children, these changes are fantastic; for everyone else, they’re not so great.”
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