Income Splitting and other Tax Credits for Canadian Families

March 10th, 2015 by

On October 30, 2014, the Federal Government announced certain income splitting measures aimed primarily at families with young children. The government’s proposal for the “Family Tax Cut Credit”, would permit parents with children under the age of 18 to split up to $50,000 of taxable income with an eligible spouse or common-law partner resulting in a new non-refundable credit worth up to $2,000 for eligible families (the “Credit”). The principle behind income splitting is that it permits the higher-income spouse to transfer income to the lower-income spouse, thereby reducing the family’s overall tax rate by taking advantage of a spouse’s lower income tax bracket.

You are eligible to claim the Family Tax Cut Credit for a tax year if:

  • You were a resident of Canada on December 31 of the year, or on the date of death;
  • You have an eligible spouse or common-law partner for the year who has not claimed the Credit (note: both spouses cannot claim the credit and the credit cannot be shared);
  • You have a child under the age of 18 at the end of the year who ordinarily lives with you throughout the year, or lives with your eligible spouse or common-law partner;
  • You were not confined to a prison or similar institution for a period of at least 90 days during the year;
  • Neither you nor your eligible spouse or common-law partner became bankrupt in the year;
  • Neither you nor your eligible spouse or common-law partner elected to split eligible pension income in the year; and
  • Both you and your eligible spouse or common-law partner file an income tax and benefit return for the year.

The transfer of income that results in the application of the Credit is a “notional”, rather than an actual transfer.  That is, the income isn’t actually being transferred from one spouse’s return to the other.  The legislation implementing the Credit has not yet been passed; however, the Canada Revenue Agency (“CRA”) is taking the position that the Credit is effective for the 2014 taxation year and subsequent years. All of the CRA-certified tax software programs have been updated to take income splitting into account.

Although this Credit has been deemed a “niche” benefit that favours only a small number of families with income in excess of $200,000 per year, single parents can also benefit from certain other tax enhancements which take effect in the 2015 tax year. These are: enhancements to the Universal Child Care Benefit, increases in the Child Care Expense Deductions and a doubling of the Children’s Fitness Tax Credit.

The enhanced Universal Child Care Benefit (“UCCB”) was introduced by the Government in 2006. The UCCB is a monthly, taxable benefit which has now risen to $160 per month for children under the age of six (up from $100 per month in prior years). In addition, a new benefit of $60 per month or up to $720 annually for children aged 6 through 17 has been added. Both benefits are effective January 1, 2015. The UCCB provides direct federal support to approximately 1.7 million Canadian families with young children. However, it is important to note that the UCCB replaces the existing Child Tax Credit which is currently based on $2,255 per child at the 15% credit rate or $338 per child.  The UCCB changes do not replace the Canada child tax benefit that a taxpayer may currently receive.

Furthermore, the Child Care Expense Deduction allows the lower-income spouse to deduct up to $7,000 per child under the age of 7, $4,000 for each child aged 7 through to 16, and $10,000 for children with disabilities who are eligible for the Disability Tax Credit. The October 30, 2014 announcement has increased each amount by $1,000 for the 2015 taxation year and subsequent tax years.

The Government had previously announced its intention to double the Children’s Fitness Tax Credit which will go from $500 to $1,000 effective for the 2014 tax year. Beginning in 2015, the credit will be refundable, meaning that even low-income earners who would otherwise not pay tax could get back up to $150 (15% of $1000) as a result.

The new measures will benefit Canadian children and families as the average tax relief and benefits are estimated to be about $1,140.00 for families in 2015. Although the impact of these tax proposals appears modest, the tax savings do add up to increased opportunities for Canadian families.  For example, these tax savings may provide opportunities to contribute to a child’s Registered Education Savings Plan (with the added benefit of government grants!), to pay down debt, or to contribute to the parent’s Registered Retirement Savings Plan.  With tax season upon us, now is the time to consider putting measures in place to help alleviate your tax burden for the current year and into the future.  We can help.  Contact DSF’s Tax Planning Group for advice and assistance at 416-449-1700.

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