Income-splitting, marriage, and children

I read an article in the news and did not understand why this was such an issue.  Income-splitting is a method that would reduce the amount of taxes the government would collect.  The article can be found at http://www.cbc.ca/news/background/personalfinance/income-splitting.html.  I decided to do some research and look into the different things the government has accepted or rejected.  My findings are below.

The following websites were used to do the calculations on this page.

Canada tax rates for different provinces
http://www.taxtips.ca/marginaltaxrates.htm
Child and family benefits calculator for Canadians
http://www.cra-arc.gc.ca/bnfts/clcltr/menu-eng.html
Income tax calculator for Canadians
http://www.taxtips.ca/calculator/cdncalculator.htm

If we calculate the income tax owing for each scenario, we will see that there are some issues with income-splitting.

Assuming net income of $40,000 and a resident of Ontario

Single person owes $6,568 in taxes
Single parent with one child used as equivalent to spouse owes $4,389 in taxes
Married with one spouse working making $40,000 owes $4,689 in taxes
Married with two spouse working making $20,000  each, owes $3,710 in taxes combined
Each additional child reduces taxes by $300

Assuming net income of $80,000 and a resident of Ontario

Single person owes $20,217 in taxes
Single parent with one child used as equivalent to spouse owes 17,792 in taxes
Married with one spouse working making $80,000 owes $18,092 in taxes
Married with two spouse working making $40,000 each, owes $13,137 in taxes combined

With this noted, income-splitting is a bad thing for the government.  A couple making $40,000/year with each spouse making half the yearly income will pay less taxes.  In this case, $4,689-$3,710= $979 less/year.  As the income increases, so do the difference.  In the case of $80,000/year, a couple with each spouse making half the yearly income will save $18,092-$13,137= $4,955/year in taxes.

The reason why Revenue Canada wants couples to declare common-law when children are involved is given below.

Assuming the person or couple is a resident of Ontario
Single person that has no income and one child gets $327.66/month

Single person or married couple that has a net income of $20,000 with one child gets $327.66/month

Single person or married couple that has a net income of $40,000 with one child gets $105.39/month

Single person or married couple that has a net income of $80,000 with one child gets $38.72/month

If a person has a child, his/her child tax benefit increase as his/her income decreases.  This can become a serious drain on government coffers if the person claiming is making little income.  In many cases, the care-giver cannot work as much and his/her income would decrease.

Therefore, the reasons marriage is good is that:

1.    If there is a divorce, either party can sue for spousal support.  This means that the government will not pay welfare to either party unless spousal support cannot be collected.  Spousal support can be collected up to two times the length of the marriage. This is only an average and can be longer or shorter depending on the courts.

2.    A couple will most likely adopt children.  This will relieve the government of orphans in their care.

I am pretty sure there are other things that the government looked at before allowing this.  If it benefits the government, it will be allowed.

Income-splitting using RRSP’s can be seen at http://www.tdcanadatrust.com/planning/investing/spousal.jsp

Income-splitting using children can be seen at http://www.vancouversun.com/business/Splitting+income+with+kids/4615338/story.html

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