Income splitting can make our tax system fair for taxpayers with young children

Tasha Kheiriddin / National Post

The issue of income-splitting — a tax policy whereby income is reattributed within a household from a higher-earning spouse to a lower-earning spouse — has been front of mind among tax experts, federal Conservative ministers and, most recently, the left-leaning Broadbent Institute. The practice advantages households in which income is predominantly earned by one spouse, since it allows a taxpayer in a high tax bracket to attribute income to a partner who pays at a lower marginal rate (or who earns nothing at all).

In a report released this week, the Broadbent Institute concluded that the proposed Conservative policy to allow income splitting in two-parent households would not benefit 90% of Canadians, and that most benefits would accrue to families in Alberta and Saskatchewan, where there are more two-parent households with only one breadwinner. Quipped Broadbent Institute Executive Director Rick Smith, “It would increase inequality and is skewed heavily toward a Mad Men-style family with a high-income earner and a stay-at-home spouse.”

Invoking the image of TV’s favorite ad-man, Don Draper, and his stay-at-home wife Betty may be clever, but it’s misleading. Mad Men actually features diverse family models, including divorced families, blended families and single mothers. But all these fictitious families have one thing in common: They have children. And levelling the fiscal playing field for households with children is what income splitting is all about. In those households, income is taxed at the same rate as that of families without children — despite the fact that it’s split between more people.

The Broadbent report thus is misleading when it attacks the plan for not helping “9 in 10 households.” In fact, as it later notes, 40-50% of families with children would benefit, depending on where they live.

Under the way the proposed Conservative plan is assumed to work — splitting income only between two parents — “[less than] 1% of households would be eligible for a benefit in excess of $5,000 [per year],” the report claims. But about 14% would benefit to the tune of $2,000 or more, and 12.8% would receive something less than $500.

The right question to ask is thus not whether families with children should be able to split income; but rather what is the best way to do so, in order to increase fairness and benefits. Splitting income between parents and children — a policy that has been implemented in France, and which has been endorsed by the Institute for Marriage and Family Canada — is one obvious way. The Broadbent report notes that this would benefit an additional 20% of families.

The government also could make income splitting part of a larger strategy on child-care, focussed on increasing choices available to parents. Such a plan could include a larger monthly child benefit, increased tax credits for child care-costs, and longer parental leave. Families could choose the tax planning that fit them best, at different stages of their children’s lives.

As the Broadbent report correctly notes, the “traditional” one-income earner model is concentrated more in western Canada. “It turns out there are few families of that type, but there are more of them in Alberta than in Quebec,” says Rick Smith. This could lead to the conclusion that income splitting is merely a political ploy to reward Conservative voters.

But this is a false conclusion. It stands to reason that in places such as Alberta, where the economy is strong and wages are high, it is easier for a family to afford to have one parent stay home all or part-time. But that does not mean that households in less advantaged parts of the country might not choose to have one parent spend more time taking care of the kids, instead of paying someone else to do it, if economic conditions so permitted.

No one is saying that income splitting will create a nation of Don and Betty Drapers. That is not its intent, nor should it be. It should exist to correct inequities and offer choices to parents — choices that benefit not only their pocketbook, but their children.