No More Second-Class Taxpayers: How Income Splitting Can Bring Fairness to Canada’s Single Income Families

• Main Authors: Matt Krzepkowski, Jack M. Mintz
• Format: Article
• Language: English
• Published: University of Calgary 2013-04-01
• Series: The School of Public Policy Publications
• Online Access: https://www.policyschool.ca/wp-content/uploads/2016/03/krzepkowski-mintz-income-splitting.pdf

The Canadian personal income tax system does not pay much attention to whether the amount of money an individual brings home is supplemented by the income of a spouse or not. That means that families where one spouse earns more than the other get taxed at a higher rate than families where two working partners earn the same total income split evenly between two paycheques. In fact, a family with just a single earner making $70,000 a year pays 30 per cent more in taxes every year than a family with two partners making $35,000 a year. A single-earner family taking in $120,000 a year pays the same income tax as a dualearning couple making $141,000 between them. The federal Conservative government has at least suggested it wants to finally level that playing field — nearly six decades after a royal commission recommended that the income tax system be changed to recognize total family household income, rather than focusing on each individual’s income. Given that Canada’s income tax system aims to treat people in similar circumstances as equally as possible, it is certainly time to let couples split their income so they do not face a penalty in higher tax rates than those faced by couples bringing home the same amount of total pay. While couples with just a single earner enjoy some advantages, a dual-earning couple does not — namely the extra time the stay-at-home spouse is able to use to raise children and produce other unpaid, home-based benefits — that can be accounted for using other means. Specifically, cutting out the transferability of the unused portion of the basic personal tax exemption for couples splitting income — requiring couples splitting their income to each earn money in order to use this credit — is one way to account for the difference in unpaid benefits that single-income families do typically enjoy more than dual-income couples. That is one mechanism; there may still be others the government might consider. But the bottom line is that there are ways to account for certain non-labour-market-related differences between single-earner families and dual-earner families. No doubt many of these proposals would be an improvement over the current, where two different families subsisting on the same pay are taxed very differently, with one type of family penalized simply because of how their income is earned.