Stephen Harper recently announced a new family tax credit that will come into effect for the upcoming tax year. The tax credit, which was a 2011 Conservative election promise, allows couples with children under 18 years old to split up to $50,000 of income for the purpose of creating a non-refundable tax credit up to a maximum of $2,000.
Although the new family tax credit should help many families with a stay at home parent or in situations where one spouse is in a higher tax bracket than the other spouse, opposition to the new tax credit argue that the new credit doesn’t help single parent households , couples without children or couples with similar income levels. As a result, Opposition, say that the new family tax credit isn’t actually helping enough Canadian families. Liberal leader, Justin Trudeau, has even gone on to say that if elected he will revoke the Conservative’s new ‘Family tax cuts.’
In addition to the new Family Tax credit, changes to the Universal Childcare benefit (UCCB) have also been unveiled. Under the new program, parents with children under the age of six will receive $160 per month per child (up from $100 per month per child) and parents with children aged six to 17 will receive $60 per month per child (previously nil). This enhanced UCCB is not as much of a change as it appears on the surface as this also comes with the elimination of the Child Tax Credit, which was a non-refundable tax credit of $2,234 per child under (2013). These changes will take effect as of January 2015 and will be reflected in monthly payments to recipients starting in July 2015.
How does the Family Tax Credit work?
Let’s take the following scenario to see what the tax implication would be without the new family tax credit
- Mr Jackson works and earns $25,000 per year
- Mrs. Jackson works and earns $80,000 per year
- They have 3 children aged 7, 9, 11.
- The Jackson’s live in British Columbia
- Mr. Jacksons can claim 3 children under the old Child tax credit (Credit is 3 x $2,234)
- For simplicity, let’s assume there are no other deductions such as childcare costs applicable.
- 2013 tax rates apply
In this scenario, Mr Jackson would pay approximately $2,173 total tax (BC + Federal) and Mrs. Jackson would pay $15,855 (BC + Federal). The combined tax they pay on their $105,000 family income ($25,000 + 80,000) is approximately $18,028.
Now let’s look at the same scenario except we take into account the new “family tax credit”:
Prior to splitting any income, Mr. Jackson would owe the same amount of $2,173 in total taxes (BC & Federal) and Mrs. Jackson would owe roughly of $16,860 (BC & Federal). Mrs. Jackson’s initial tax is $1,005 greater than in the original scenario due to the removal of the child tax credits. Their total tax owing before the income split is approximately $19,033.
Now, in this example, Mr. Jackson is in the 15% federal tax bracket and his wife is at the 26% federal tax bracket. The upcoming tax year will allow the Jackson’s to income split up to $50,000 for the purpose of creating a non-refundable tax credit up to a maximum of $2,000.
Given that their federal tax rates are 11% different, each $1,000 that Mrs. Jackson splits with her husband will result in a $110 tax credit (tax savings), until her income is reduced to a lower tax bracket or his is increased to the next higher tax bracket. For simplicity lets assume the 15% federal tax bracket goes to $45,000 of taxable income. That would mean that Mrs. Jackson could transfer $20,000 to her husband and that would all be taxed at the 15% rate as opposed to being taxed at her federal rate of 26%. (He has $25,000 of income plus $20,000 transferred). As a result, a tax savings of 11% (15% vs 26%) of $20,000 or $2,200. Since the maximum tax savings is $2,000, Mrs. Jackson would qualify to transfer roughly $18,182 to obtain the $2,000 max credit ($18,182 x (26%-15%)). Although the tax credit would be larger if she transferred more than this amount, the credit is capped at $2,000 and therefore there would be no additional benefit available.
After the transfer of income, The Jackson’s would pay total tax of roughly $17,033, or $2,000 less than the $19,033 they would have owed had they not been able to income split up to the $2,000 tax savings.
What is the overall impact?
Prior to 2014, the Jackson’s would have paid approximately $18,028 in tax. With the new family tax credit and removal of the child tax credit, they will pay roughly $17,033 in tax. This equates to about a $995 tax saving.
From here, since the Jackson’s have 3 children over 6 years old, they will receive an additional $60 per child per month for the 2014 calendar year under the new enhanced UCCB scheme. This equates to $2,160 in additional funds (which will be taxable to the lower income spouse). For simplicity, lets estimate this to be $1,728 after tax (20% estimated tax rate).
In the end, the Jackson’s have received $2,723 ($995 + 1,728) in tax savings.
Issues and Overall Thoughts
The scenario above is one of the optimal situations where a family has one higher income earning spouse and one lower income earning spouse and they have children. A scenario where a family with children has one spouse not working, the benefit could be greater as the UCCB benefit may not produce any tax for the spouse who has no income other than the UCCB.
For a family with children where each spouse makes a similar amount of income, the benefit will be much less given that the couple may not generate any benefit from income splitting and they will no longer be able to claim the child tax credit. As a result, they will actually pay more tax on their 2014 tax return. They will however get $60 more per child under the new enhanced UCCB but which will offset the increase in tax, but the overall benefit is likely to be very minimal.
For single parents families, there will be no opportunity to benefit from the family tax credit since they do not have a spouse to split income with. The increase of $60 to the UCCB payment per child in many cases will do little more than offset the loss of the child tax credit.
Overall, there will be some families who will benefit from the ability to split income with their spouse. For those who do not get any benefit from income splitting aspect of the tax changes, the changes to the UCCB program in many cases do little more than offset the impact of the removal of the child tax credit.
Do you have any questions about the new changes to the Universal Childcare benefit program or the Family Tax Credit? What are your thoughts about the new changes?