The Family Tax Cut
Steve Bennett
Senior Tax Professional
H&R Block
Smiths Falls, ON
The much-touted Family Tax Cut (FTC) has finally arrived! The announcement came very late in 2014, and the actual tax calculations were not revealed until CRA published the 2014 tax forms at the beginning of January.
The FTC provides families with a non-refundable tax credit equal to the federal tax savings that would be generated by transferring up to $50,000 of taxable income from the higher-income spouse to the other. The tax savings is limited to $2,000.
To be eligible for the Family Tax Cut, the taxpayer and their spouse must be Canadian residents and married or common-law at the end of the year. Either spouse may make the claim, but both spouses must file a return for a year in which the claim is made. The taxpayer or their spouse must have ordinarily lived with their child who is under 18 at the end of the year. A claim cannot be made by a taxpayer who was confined to prison for 90 days or more. Neither spouse can make the claim if either declared bankruptcy during the year or elected to split pension income.
In the case of ex-partners who have joint custody of a child, they would both be considered to be ordinarily living with their child. This means that both of the parents would qualify for the Family Tax Cut as long as they meet the other criteria.
The Family Tax Cut is often compared with pension income splitting, but the two are actually quite different. Pension income splitting actually lowers the income of one spouse and increases the income of the other. This changes the net and taxable income of the returns, affecting numerous other claims, credits, and calculations. In the case of the Family Tax Cut, the entire calculation takes place on one form: Schedule 1-A. All of these calculations are simply a “What if…?” scenario. There is no actually change to the income of either spouse.
On Schedule 1-A, the federal tax payable is recalculated as if the income was equalized – to a maximum transfer of $50,000. Let’s look at a two parents with two children under 18. Ross and Rachel have employment income of $60,000 and $12,000, respectively. Without the FTC, some of Ross’ income is being taxed at the 22% federal tax rate. Using Schedule 1-A, they will recalculate the federal tax as if their incomes were both $36,000. Both parents are now in the 15% tax bracket, which will realize a savings of $1,260.04. This final number gets added to Ross’ Schedule 1 as a non-refundable credit and reduces his federal tax payable. In this example, Ross must make the claim as Rachel does not have enough income to use the credit. In many other cases, either spouse would be able to claim the credit.
As mentioned above, the Family Tax Cut cannot be optimized in the same was as pension income splitting. No actual income is being shifted between returns, so the taxpayers are unable to shift income in order to optimize various claims such as medical expenses or child care expenses. As a result, there are fewer tax-savings opportunities, but the FTC is, mercifully, much simpler to implement.
This article provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this bulletin can be accepted by Steve Bennett or H&R Block Canada, Inc.
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The Family Tax Cut
Steve Bennett
Senior Tax Professional
H&R Block
Smiths Falls, ON
The much-touted Family Tax Cut (FTC) has finally arrived! The announcement came very late in 2014, and the actual tax calculations were not revealed until CRA published the 2014 tax forms at the beginning of January.
The FTC provides families with a non-refundable tax credit equal to the federal tax savings that would be generated by transferring up to $50,000 of taxable income from the higher-income spouse to the other. The tax savings is limited to $2,000.
To be eligible for the Family Tax Cut, the taxpayer and their spouse must be Canadian residents and married or common-law at the end of the year. Either spouse may make the claim, but both spouses must file a return for a year in which the claim is made. The taxpayer or their spouse must have ordinarily lived with their child who is under 18 at the end of the year. A claim cannot be made by a taxpayer who was confined to prison for 90 days or more. Neither spouse can make the claim if either declared bankruptcy during the year or elected to split pension income.
In the case of ex-partners who have joint custody of a child, they would both be considered to be ordinarily living with their child. This means that both of the parents would qualify for the Family Tax Cut as long as they meet the other criteria.
The Family Tax Cut is often compared with pension income splitting, but the two are actually quite different. Pension income splitting actually lowers the income of one spouse and increases the income of the other. This changes the net and taxable income of the returns, affecting numerous other claims, credits, and calculations. In the case of the Family Tax Cut, the entire calculation takes place on one form: Schedule 1-A. All of these calculations are simply a “What if…?” scenario. There is no actually change to the income of either spouse.
On Schedule 1-A, the federal tax payable is recalculated as if the income was equalized – to a maximum transfer of $50,000. Let’s look at a two parents with two children under 18. Ross and Rachel have employment income of $60,000 and $12,000, respectively. Without the FTC, some of Ross’ income is being taxed at the 22% federal tax rate. Using Schedule 1-A, they will recalculate the federal tax as if their incomes were both $36,000. Both parents are now in the 15% tax bracket, which will realize a savings of $1,260.04. This final number gets added to Ross’ Schedule 1 as a non-refundable credit and reduces his federal tax payable. In this example, Ross must make the claim as Rachel does not have enough income to use the credit. In many other cases, either spouse would be able to claim the credit.
As mentioned above, the Family Tax Cut cannot be optimized in the same was as pension income splitting. No actual income is being shifted between returns, so the taxpayers are unable to shift income in order to optimize various claims such as medical expenses or child care expenses. As a result, there are fewer tax-savings opportunities, but the FTC is, mercifully, much simpler to implement.
This article provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this bulletin can be accepted by Steve Bennett or H&R Block Canada, Inc.
