Who really benefits from income-splitting

Hint: it’s not families struggling hardest to get by

<p>Prime Minister Stephen Harper and Finance Minister Joe Oliver walk together as he arrives to table the budget on Parliament Hill in Ottawa on Tuesday, April 21, 2015. THE CANADIAN PRESS/Justin Tang</p>

Prime Minister Stephen Harper and Finance Minister Joe Oliver walk together as he arrives to table the budget on Parliament Hill in Ottawa on Tuesday, April 21, 2015. THE CANADIAN PRESS/Justin Tang

Justin Tang/CP
Justin Tang/CP

There is a figure much in the air in the aftermath of Finance Minister Joe Oliver’s 2015 federal budget: 15 per cent. You might wonder what it really signifies. The answer: nothing much.

I’m referring to the by-now-familiar claim that the Conservatives’ $2-billion income-splitting tax break helps out mainly, or even somehow only, the richest 15 per cent of Canadians. It comes up all the time. For instance, Liberal Leader Justin Trudeau alluded in the House to the Tories’ “$2-billion tax break for the wealthiest 15 per cent of Canadians,” while the NDP’s Thomas Mulcair said just outside the Commons that the “Conservatives are finding tax breaks for the wealthiest 15 per cent.”

That talismanic 15 per cent figure seems to be derived, in a distorted way, from a couple of prominent studies into income-splitting, most notably, the Parliamentary Budget Officer’s March 17 report on the controversial tax measure, which Prime Minister Stephen Harper announced last fall and dubbed the “Family Tax Cut.”

The cut lets couples with kids transfer income from the higher-earning to the lower-earning spouse, allowing that income to be taxed at the lower rate, up to a maximum saving of $2,000. The respected, independent PBO estimated that only 15 per cent of Canadian households would qualify, or about two million families.

But are these somehow the richest 15 per cent of Canadians? No, they are just those households with two parents and kids under 18. Not included are, for example, well-off empty-nesters or prosperous singles. (Struggling single-earner families and poor individuals are also out of luck, but more on that later.)

So income-splitting is clearly not only for the richest 15 per cent. But another question is worth asking: Among the two million eligible families, how is the $2 billion in total income-splitting tax relief divided up among those at different income levels? This is a question I tried to answer some weeks ago.

Oliver’s Finance department was typically unco-operative. But the PBO was extremely helpful, and provided this breakdown of where benefits flow.

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Among other things, the PBO’s figures show that, of all the families eligible for income-splitting, about 12 per cent, or some 233,000, earn $180,000 and better, and that top 12 per cent will pocket 13 per cent of the total benefits, or around $292 million. Most of the money is actually going to middle-income families.

More than one million families making $60,000 to $120,000 qualify, and they will collect 52 per cent of the total tax gains from income-splitting. On average, each family in this $60,000 to $120,000 range will cut its tax bill by $1,140, compared to an average household saving of $1,250 for those $180,000-and-up families.

If middle-income families are set to do fine out of income-splitting, the same can’t be said for lower-income households. Here’s the main problem. Finance department figures show there are 1.2 million families with kids that make $60,000 to $120,000; fully 83 per cent, more than one million, stand to benefit from income-splitting. But of the 1.7 million families with children that the department says have incomes falling under $60,000, a paltry 22 per cent, or 376,000, have the income structure that allows them to gain from income-splitting.

That is not fair. The problem with income-splitting isn’t that it is designed to benefit the best-off families; it’s that it is not designed to benefit those who are really struggling to make ends meet.

(NOTE: The headline on an earlier version of this post suggested that all Canadian families except the poorest benefited from income-splitting. That was incorrect and I’m sorry for the error. JG)