Chartered Accountants
4 Robert Speck Parkway, 15th Floor, Mississauga, ON L4Z 1S1 Tel: 905.366.5016 | Fax: 905.216.6726 info@sandhudhillon.com | www.sandhudhillon.com
THE TAX
CORNER THE FAMILY TAX CUT The Family Tax Cut is a new non-refundable tax credit of up to $2,000 available to couples with minor children. It allows a higher income spouse to transfer upto $50,000 of income to the lower income spouse in order to take advantage of the graduated tax rates in Canada. Eligibility for the Credit In order to be eligible for the tax credit one must: • • • •
Be a resident of Canada at the end of the taxation year Have an eligible spouse or common-law partner Have a child under the age of 18 at the end of the year who lives with you, and File an Income Tax Return (as well as their eligible spouse or common-law partner)
How the Credit Works In Canada, personal taxes are paid at graduated rates. What this means is that various levels of income get taxed at different rates. For illustrative purposes, assume an individual (living in Ontario) declares $70,000 of income and her spouse earns no income. The earning spouse would pay taxes at 20.05% on his first $40,120 of income, 24.15% on the next $40,121 to $43,953 of income, and 31.15% on income between $43,954 and $70,000. Whereas, the lower income spouse would pay no taxes at all. From an income tax perspective, this was disadvantageous in the past as one spouse would pay tax at a higher rate of 31.15% whereas the other spouse would report no taxable income. The new family tax cut transfers income over from the higher income spouse to the lower income spouse. In our illustration, this would allow income being taxed at 31.15% to be transferred over to the spouse so that the same income could be taxed at 20.05%. It should be noted that the maximum savings on the transfer is limited to $2,000.
Chartered Accountants
4 Robert Speck Parkway, 15th Floor, Mississauga, ON L4Z 1S1 Tel: 905.366.5016 | Fax: 905.216.6726 info@sandhudhillon.com | www.sandhudhillon.com
THE TAX
CORNER Comparison with Income Splitting Strategies Although the family tax cut provides some tax relief for families, it is not as effective as other income splitting strategies. For illustrative purposes, assume a family has $200,000 of household income. If the $200,000 of income was fully taxable by just one family member approximately $73,000 of taxes would be owed for the year. If this income was split evenly between two spouses, the total household taxes would be approximately $54,000. Through income splitting tax savings of $19,000 can be achieved. In comparison, the family tax cut only results in $2,000 of tax savings. In conclusion, it should be noted that various income splitting strategies are still relevant and useful to Canadian families. If you think that the Family Tax Cut is applicable to you or if you have any questions relating to income splitting please feel free to contact S&D LLP for more information at 905-366-5016 or at info@sandhudhillon.com.