Crunching the new Family Tax Cut credit
For many Canadians, this weekend will mark the beginning of tax season, a time when you start to gather all those T-slips and receipts and begin the process of preparing your 2014 return.
But if you are one of those rare taxpayers who still enjoys the mathematical, yet mindnumbing challenge of doing your tax return by hand, this is the year you may want to switch to a computer-based tax preparation package or use a web-based program, especially if you plan to take advantage of the new Family Tax Cut credit.
The credit is a version of income-splitting that allows you to notionally transfer up to $50,000 of income to your presumably lower-income spouse or partner, provided you have a child under 18.
You then get to claim a nonrefundable federal tax credit for the notional tax savings. This credit, however, is capped at $2,000, presumably to limit the governmental cost of the program, which is why I like to refer to the new credit as "fake" income splitting.
If there was real income-splitting with no cap to the credit, the true 2014 federal tax savings of moving $50,000 of income from a top federal taxpaying individual at the 29 per cent marginal rate to a bottom tax rate taxpayer at the 15 per cent/22 per cent marginal rates would be $6,577. The other issue with the credit is the calculation's complexity. To claim the credit, you must complete new Schedule 1A, "Family Tax Cut."
According to the report, Time to Grow Up: Family Policies for the Way We Live Now, issued by the Canadian Centre for Policy Alternatives in January, "gaining access to income-splitting will require the correct calculation of up to 85 new steps in the 2014 tax forms. Given the complexity of the benefit, not only of the calculations but even of its basic understanding, it will almost certainly be misunderstood by tax filers."
The CCPA report also estimated that 89 per cent of Canadian families would get no benefit whatsoever from the Family Tax Cut and the full $2,000 capped credit would benefit only three per cent of families.
There are also a few odd conditions to be able to claim the credit. You cannot have been imprisoned for more than 90 days in the year and neither you nor your spouse or partner can have declared bankruptcy in the year. Finally, if you split your pension income, you can't also claim the Family Tax Cut credit.
And unlike pension income splitting, you and your spouse's or partner's actual net income does not actually change. As a result, any benefits and tax credits based on net income, such as the GST/HST credit, Canada Child Tax Benefit, the age amount, and the spouse or common-law partner amount, will not be affected.