Income splitting aids wealthiest families most, says study

A proposal to allow couples with children under 18 to split their incomes for tax purposes would provide no benefit to 86 per cent of Canadians, according to a new study by the Canadian Centre for Policy Alternatives (CCPA).

The measure would also cost the federal and provincial governments billions of dollars in revenue.

The study, entitled Income Splitting in Canada. Inequality by Design, by senior economist David Macdonald of the CCPA, concludes the richest five per cent of families would benefit more than the bottom 60 per cent combined.

Macdonald estimates the top five per cent of families have incomes of over $150,000 a year.

Finance Minister Jim Flaherty has said that if the budget is balanced by 2015, he plans to introduce income splitting for families with children, similar to the policy he introduced in 2007 that allows pension splitting for senior couples.

"This is guaranteed to provide the wealthiest families with the biggest benefit and the poorest families with the least benefit, "said Macdonald in a phone interview. "One in 10 of the top 10 per cent of families are going to get a $5,000 cheque."

Income splitting is a benefit when one member of a couple earns significantly more than the other or if one member has no income at all. The tax burden is spread between the two adults, reducing the overall amount of tax the family pays.

Macdonald, who says his study used the most recent Statistics Canada tax-modelling software, concluded that income splitting benefits sole-earner families the most.

Lower-income families, however, cannot afford to have one partner drop out of the workplace in order to take advantage of income-splitting. "The people who can most take advantage of these programs are the people who least need support in the first place," he said.

Macdonald said income splitting and pension splitting are hugely expensive programs. He estimates pension splitting will cost $1.7 billion in 2015. "These costs are going up over time," he said.

His study calculates that income splitting for families with children, if it happens, will cost the federal government $3 billion and the provinces $1.9 billion, for a total of $4.9 billion.

The pension splitting scheme already in place benefits well-off seniors the most, he said, adding that the lost government revenue could have been directed instead to lift seniors out of poverty, especially the poorest group — older single women.

"This is income inequality by design, purposefully making Canada a less equal place, " he said.

The federal Finance Department could not be reached for a response in time for publication.