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Family Tax Splitting


August1991

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I wonder if the income trust bomb the CPC dropped on retirees will now pave the way for income splitting for seniors. Senior pensioners are a key democraphic for the Cons, will they now throw a bone to their way to save support?

The Harper government put income splitting for seniors into the same package as the income trust sandbagging.

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I wonder if the income trust bomb the CPC dropped on retirees will now pave the way for income splitting for seniors. Senior pensioners are a key democraphic for the Cons, will they now throw a bone to their way to save support?

The Harper government put income splitting for seniors into the same package as the income trust sandbagging.

It's a net loss for most seniors IMO.

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It's a net loss for most seniors IMO.
By what logic do you arrive at that conclusion?

Income splitting by itself can only make married senior citizens better off.

----

Here's my view on income splitting in general.

If a spouse stays at home and performs tasks, that housework is exempt from taxation since it is outside of the organized labour market. That is a large tax gift to stay-at-home spouses. (Household work is like working under the table.) Ideally, we should put a value on this unpaid housework and then those families should pay income tax on that value.

We partly correct for the tax-exempt status of stay-at-home spouses by taxing the other, working spouse at a higher rate.

Hence, we should not allow family tax splitting.

In the case of seniors, both spouses (and indeed most seniors) are stay-at-homes and my argument doesn't apply. Most families can avoid the need for tax splitting by the simple expedient of registering RRSPs in the correct name. This might be a good thing since it means that family savings are not concentrated in one spouse's name alone. Wives would have some financial power.

With all of that said, taxes are political. Seniors have time to read newspapers and decide who to vote for. By and large, seniors pay less taxes and enjoy more government benefits than any other single group in society.

In a Confucian sense, that may be a good thing. Being a senior with all the benefits is reward for good behaviour when you are younger.

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It's a net loss for most seniors IMO.
By what logic do you arrive at that conclusion?

Income splitting by itself can only make married senior citizens better off.

Oh, just with the splitting? It's great. I love the splitting.

I think the new tax package overall is a net loss to seniors. The government has more money, that means we all (seniors included) have less.

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If a spouse stays at home and performs tasks, that housework is exempt from taxation since it is outside of the organized labour market.
Exempt from taxation???
That is a large tax gift to stay-at-home spouses.
That is ridiculous. The housework earns ZERO in pay and therefore, the tax owed is --- surprise, surprise: ZERO!
(Household work is like working under the table.)
No. It is like working under the table for nothing.
Ideally, we should put a value on this unpaid housework and then those families should pay income tax on that value.

We partly correct for the tax-exempt status of stay-at-home spouses by taxing the other, working spouse at a higher rate.

According to that logic, maybe we should create fictitious markets and attribute dollar values to transactions that do not occur.
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If a spouse stays at home and performs tasks, that housework is exempt from taxation since it is outside of the organized labour market.
Exempt from taxation???

If you hire a maid to do your housework, she would have to pay income tax on her earnings. If you then marry the maid and she continues to do the same housework and you continue to give her money, all that money is exempt from income tax.

The two situations are essentially identical except in the tax treatment. Family tax splitting will excerbate this problem.

Charles Anthony, I don't know if you understand how pernicious taxes can be.

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If a spouse stays at home and performs tasks, that housework is exempt from taxation since it is outside of the organized labour market.
Exempt from taxation???

If you hire a maid to do your housework, she would have to pay income tax on her earnings. If you then marry the maid and she continues to do the same housework and you continue to give her money, all that money is exempt from income tax.

The two situations are essentially identical except in the tax treatment. Family tax splitting will excerbate this problem.

Charles Anthony, I don't know if you understand how pernicious taxes can be.

I read this thread with considerable interest and wonder how some of the comments can be serious. Surely August1991 jests when he suggests that spouses who do housework, and don't pay income tax on the money (?) , are somehow getting a tax break.

That is exactly the argument many of us have been trying to make for years. If a spouse stays home to raise the children and care for the home, that work has value and the working spouse should be able to pay a salary to the stay at home spouse and deduct those payments from his/her income. The working spouse would then be happy to pay income tax thereby splitting the income and the tax.

By the way, I am not yet a senior but I am retired and to listen to the rants of many about how seniors should have planned better for retirement prompts me to ask them if they have any idea how the RRSP program worked for most of the seniors out there today. Don't tell them they should have put more into a spousal RRSP when for much of their working lives, RRSPs were only of much use to people not contributing to a pension plan. The contribution limits were so low that even for much of my working life my maximum spousal RRSP contribution was less than $500.00/year. Because my job required me to move often a career for my spouse was not practicle and in many cases, not possible as opportunities in small towns are limited.

In over 44 years of work I never received a single days UI/EI benifit, never received a cent of the GST rebate or any of the other so called government benefits except for the family allowance on which taxes were paid.

Would it be such a disaster if seniors were allowed to split pension income for tax purposes? Notice, we are not talking about total income (investments, RRIF, real estate, etc) - just pensions.

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So if I it takes me an hour and a half to fix a leak in my downstairs water line, I should pay tax based on the 1 1/2 hours I would have been charged by a plumber (even if at a reduced rate)? Are you for real? What about the stay-at-home parent that looks after his or her own children? Should that family have to pay taxes on an amount relative to the cost of professional daycare?

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If you hire a maid to do your housework, she would have to pay income tax on her earnings. If you then marry the maid and she continues to do the same housework and you continue to give her money, all that money is exempt from income tax.

The interesting thing about Canadian Tax law is that the same money is taxed multiple times. It is taxed when the employee recieves it. If the employee purchases labour with the funds. It is taxed again in the hands of the recipient. It continues to get taxed again if that person purchases labour

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What about the stay-at-home parent that looks after his or her own children? Should that family have to pay taxes on an amount relative to the cost of professional daycare?

Actually the stay-at-home parent is on par with the working parent when it comes to paying for daycare. Daycare is one of the few kinds of services in which the cost is tax deductable from income earned, so the working parent isn't paying tax on the income used to fund the daycare.

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What about the stay-at-home parent that looks after his or her own children? Should that family have to pay taxes on an amount relative to the cost of professional daycare?
Why, of course!

Next, we will have stay-at-home parents forced out of the home because they can not afford to work under-the-table for free.

If a spouse stays at home and performs tasks, that housework is exempt from taxation since it is outside of the organized labour market.
Exempt from taxation???

If you hire a maid to do your housework, she would have to pay income tax on her earnings. If you then marry the maid and she continues to do the same housework and you continue to give her money, all that money is exempt from income tax.

The two situations are essentially identical except in the tax treatment. Family tax splitting will excerbate this problem.

Those two situations are not the same as your original example. Your first example ("spouse at home and performs tasks") is not the same as your second (still-paid-newlywed-maid) example.

Family tax splitting is unfair, but not because spouses work under the table.

Charles Anthony, I don't know if you understand how pernicious taxes can be.
Yeah, you are right. My objection to taxation is solely reactionary. I doubt Satan himself could pull off a better trick than what we have now: everybody convinced they have a moral obligation to owe taxes.

Are you ready to teach the entire voting population how taxes foul up and distort an economy? I am not.

If a spouse stays home to raise the children and care for the home, that work has value and the working spouse should be able to pay a salary to the stay at home spouse and deduct those payments from his/her income. The working spouse would then be happy to pay income tax thereby splitting the income and the tax.
What would that salary be? Who is going to determine that it is fair? If I make $1,000,000 a year, should I be able to pay my spouse $500,000 for taking care of my home?
Would it be such a disaster if seniors were allowed to split pension income for tax purposes? Notice, we are not talking about total income (investments, RRIF, real estate, etc) - just pensions.
No, it would not be a disaster. However, it is clearly a voting-buying scheme and it would not be fair.
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I read this thread with considerable interest and wonder how some of the comments can be serious. Surely August1991 jests when he suggests that spouses who do housework, and don't pay income tax on the money (?) , are somehow getting a tax break.

August is quite right. They are getting a tax break. Government would tax all labour if it could, however it can't find a way to easily tax labour if no funds are changing hands, thus it escapes tax.

Let me give you another example. If I help my neighbour build a fence, and in return he helps me sod my yard, in essence an exchange of value has taken place. What is the difference then if he paid me $500 to help build the fence and then I paid him $500 to help sod the yard? According to tax rules, I should be declaring the $500 and paying tax on it as income, as should he.

That is exactly the argument many of us have been trying to make for years. If a spouse stays home to raise the children and care for the home, that work has value and the working spouse should be able to pay a salary to the stay at home spouse and deduct those payments from his/her income. The working spouse would then be happy to pay income tax thereby splitting the income and the tax.

That would only be fair if that same privlidege was extended to others. I should be allowed to deduct the salary I pay my maid, because her work has value too.

By the way, I am not yet a senior but I am retired and to listen to the rants of many about how seniors should have planned better for retirement prompts me to ask them if they have any idea how the RRSP program worked for most of the seniors out there today. Don't tell them they should have put more into a spousal RRSP when for much of their working lives, RRSPs were only of much use to people not contributing to a pension plan. The contribution limits were so low that even for much of my working life my maximum spousal RRSP contribution was less than $500.00/year. Because my job required me to move often a career for my spouse was not practicle and in many cases, not possible as opportunities in small towns are limited.

If your complaint is that RRSP contribution limits were not high enough, did you save an equivalent after-tax amount outside RRSPs?

Would it be such a disaster if seniors were allowed to split pension income for tax purposes? Notice, we are not talking about total income (investments, RRIF, real estate, etc) - just pensions.

Disaster no, unfair yes. The question is why should one specific group get prefferential tax treatment, implying higher tax rates for everyone else.

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As a recently retired pensioner this certainly works for me even though our RRSP's and other investments in the market are taking a bit of a hit right now. Glad our adviser was not a big fan of income trusts. That being said I do think taxing household incomes across the board rather than individual incomes would be more fair for everyone.

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I just noticed this:

Well, fools rush in where angels fear to tread. Frankly, I would prefer to abolish income tax entirely and rely solely on the GST and environmental charges, carbon tax, road fees and the like.

I like it. It eliminates both a lot of discrimination and TONS of red-tape tax filing confusion.

More importantly, it eliminates the dis-incentive to work more.

A transition could be simple: gradually reduce income taxes and raise GST, user fees and enviro charges every few years.

Politically, it might even be easier to sell the platform too.

Now, comes the question: how stable or predictable would such a tax revenue be?

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If a spouse stays home to raise the children and care for the home, that work has value and the working spouse should be able to pay a salary to the stay at home spouse and deduct those payments from his/her income. The working spouse would then be happy to pay income tax thereby splitting the income and the tax.
The flaw in your argument is the right to "deduct those payments from his/her income". The stay at home spouse should declare the income (or work effort) but why should you be able to declare the expense on your report?

If I hire a mechanic to fix my car, the mechanic declares this as income and pays tax. But I can't declare this cost against my income.

But let me honest here: I'm not suggesting the government do this. What I'm saying is that this is a bias in the tax system and and tax splitting would make the bias worse.

Renegade has drawn this distinction above in the examples of child care (deduction allowed) and sod laying (deduction not allowed).

As a recently retired pensioner this certainly works for me even though our RRSP's and other investments in the market are taking a bit of a hit right now. Glad our adviser was not a big fan of income trusts. That being said I do think taxing household incomes across the board rather than individual incomes would be more fair for everyone.
Would you agree that entire family income should be taken into account when calculating support payments? That is, should your high-earning new spouse be included in the calculation of how much you must pay an ex-spouse?

As others have noted, what constitutes a "household"?

I'm not averse to the idea but I wonder whether it changes anything. When it comes to taxes, the fairness issue quickly goes out the window. There is no fairness. We are left with two meaningful criteria: 1. will it work in political terms and 2. how much nonsense will it lead to.

Tax splitting for seniors passes both criteria - sort of.

As a recently retired pensioner this certainly works for me even though our RRSP's and other investments in the market are taking a bit of a hit right now. Glad our adviser was not a big fan of income trusts. That being said I do think taxing household incomes across the board rather than individual incomes would be more fair for everyone.
Anybody who put all his savings in income trusts was foolish.

The Toronto (& Montreal) investment community is small and every so often they get into fads. Income trusts are an example. Many of the trusts were bad but the term "income trust" became sexy. (The term "hedge fund" used to have the same cachet.)

The government grandfathered existing trusts until 2011 which is more than generous. Your advisor gave you good advice. Don't put all your eggs in one basket but if you do, accept nonchalantly the downside of risk.

---

I still say this was a very good deal for seniors and the only real losers are Bay Street lawyers. Many just lost their year-end bonusses.

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Would you agree that entire family income should be taken into account when calculating support payments? That is, should your high-earning new spouse be included in the calculation of how much you must pay an ex-spouse?

I don't have any first hand experience but am I wrong in believing support payments are no longer tax deductible so I don't see what you are getting at. Seems to me when the courts made that change they were saying your tax situation and support payments were not related. Not that they couldn't make an exception to that in a heartbeat. I don't see how your new spouse would have any financial obligation to your old one.

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Wilbur, I think what he was getting at was whether or not the "family" income would be the number that support payments would be calculated from.

For child support: Right now, if the ex-husband (non-custodial parent) is single and is required to support two children then the child support payments are calculated on his income alone, but if he has other children living with him, they are not taken into account in the current formula.

Now if he is married, and has four kids, the combined income is used for the formula but his custodial children are still not taken into account.

If the tax-splitting model were to be applied, then support payments would be based on combined income, except the children that live with him would count equally as much as the ones he is making payments to. Effectively, this would greatly reduce the amount of support due. (ie. payment amount / 6 kids * 2 kids instead of the current method of payment amount / 2 kids * 2kids).

The same method would apply to alimony payments, but could likely result in much higher payments as it would be calculated on combined income.

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I think you are making an assumption here. All that is being done here is income splitting for tax purposes. When the courts determined that support payments are not tax deductible, they as much as said your tax situation has nothing to do with the amount of support you owe, IMO. Like I said, I don't see how your new spouse could be made financially responsible for your ex. I assume you would also still have the option of filing separately. The government is not going to complain if you give them more money. That said, I'm sure there would be a lot of ex wives and their lawyers lining up to test it in court.

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Don't get divorced to find out Wilbur. Your ex can now take you back to court years after the divorce if your income rises, and get back pay on your increased income to boot. In fact it is household income that courts look at when determining payments. The is a schedule carved in stone that will be enforced upon a divorced parenty making payments for child support based on income, but there doesn't appear to be an upper end to it. The same applys to spousal support. At least in Alberta that is the way it works.

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I think you are making an assumption here. All that is being done here is income splitting for tax purposes.

Wilber, I think you are missing the point. The justification for allowing income splitting is that the "family" is the fiscal unit and not the individual. If we accept that we should be consistant across the board when income is used as a consideration. That is both for income tax, child support, or any other program.

When the courts determined that support payments are not tax deductible, they as much as said your tax situation has nothing to do with the amount of support you owe, IMO.

It is true that after 1997 the tax you owe doesn't depend upon the child support you pay. However the chid support you pay does depend upon the income earned. The question is earned by who, the individual or the family?

Like I said, I don't see how your new spouse could be made financially responsible for your ex. I assume you would also still have the option of filing separately. The government is not going to complain if you give them more money. That said, I'm sure there would be a lot of ex wives and their lawyers lining up to test it in court.

When income is pooled you cannot clearly delineate between the financial responsibilities of one spouse over the other. Just as their income is pooled, their debt obligations are pooled, so in fact yes if you considered family income, the new spouse does assume the support obligations of the other.

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I don't think I am missing the point at all. As far as I know the new legislation just concerns how income will be taxed. You are reading everything else into it. I think that is a stretch at this point. If you can show me where this legislation refers to anything other than how income will be reported for taxation, I would be interested in seeing it. I'm sure you will still report your income separately, just allowed to split it for tax purposes. Family's are already fiscal units but not for tax purposes. Individuals are responsible for support, not family's. I don't see this changing because of the way income is taxed but am quite willing to admit I could be proven wrong.

Not about to get divorced voluntarily Jerry. After 37 years, I'm too old to be retrained and too lazy to train someone new.

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Wilbur, in Alberta the support payer must provide, at a minimum, a copy of their T4 at the end of the year. If you adjust how taxes will be collected, it would have to be reflected in some tax document that would then be used to determine changes in support payments.

The minute tax-splitting is allowed, would it not enshrine in law that the family is now treated as a single income unit? This would affect all income-related payments you can be sure.

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