Evelyn Jacks: Income Splitting for Canadian Families

Income splitting and higher limits to TFSAs could make a big difference in Real Wealth Management™ for Canadians families, reducing tax on income both today and in the future when retirement income is drawn completely tax free. 

It will all depend on how the final legislation is written and whether the government is elected to implement the plan. But because this is an election issue, it’s important that the significance of the potential double gift – income splitting and new TFSA limits – is not lost in the rhetoric.

First, who will benefit: the provisions are targeted at Canadian families. Statistics Canada defines Canadian households as a group of individuals sharing a common dwelling unit, who are related by blood, marriage/common-law or adoption.[1]   Based on stats from the 2011 tax year in Canada:

• Two parent families with children under 18 had average market income of $106,100.
• An economic family of two people or more earned an average of $84,400. 
• Lone parent families earned an average of $39,100.

These figures put the size of actual market income – total income of the household minus government transfers – into perspective, so we can better answer the key question: Would family income splitting help average families with children? 

The answer is a resounding yes, particularly if it is a two-parent family with one spouse who has no income and the other spouse makes all of it. Early calculations done by Knowledge Bureau assume that any amount up to $50,000 can be split with a spouse. If that is the case, one can conclude: 

1. Those who pay more tax save more; the higher the level of income the higher the tax savings, but provincial taxes will cause these results to vary. 
2. The more disparity there is between spouses’ incomes, the greater the tax savings. The biggest savings occur when one spouse earns all of the income for the family.
3. The greatest savings as a percentage of taxes otherwise payable occurs when family income is about $90,000 and only one spouse earns the income.

The tax savings can then be re-invested into a TFSA for retirement savings, or any other purpose. To maximize the double gift, it’s important is to clearly define family and retirement goals. If we assume the average Canadian couple needs to save somewhere between $250,000 and $750,000 for retirement, depending on their intended lifestyles and available income sources, these potential new tax incentives can help you reach lifestyle goals faster. Consider that under current rules, $5500 invested each year in a TFSA for the spouse who did not work over the 25 year child rearing period, age 35 to 60, will create a free retirement fund of $275,624[2]. But, if the TFSA limits were doubled, and family is firm about putting tax savings there, tax free retirement income would double too. 

In addition, family income splitting will simplify the tax system, and that will make it fairer. Together with the tax savings and the TFSA changes, the proposed changes on the horizon could be a really good thing. Hopefully that message will not be lost in the politics.

It’s Your Money. Your Life. Putting more after-tax dollars into the hands of young Canadian families provides more choice in securing financial futures, while enabling the gift of more time with little ones at home. Would a tax windfall from family income splitting change the economic decisions young families could make? It’s very possible. An MFA–Retirement Income Specialist is trained to help a family budget for future saving and find new money through the tax system to accomplish those goals.