OTTAWA - The federal government is overhauling its tax treatment of families with children to bring in a limited form of income-splitting, increase monthly baby bonus payments and expand the tax deduction parents can claim for child care expenses.
Income splitting, which the government has labelled the Family Tax Cut, would benefit families with children under age 18 where only one spouse works or where one spouse earns significantly more than his or her partner.
The couple could lower combined income taxes by shifting up to $50,000 of taxable income to the spouse in the lower income tax bracket. The government will allow families to take advantage of this tax break in the current 2014 tax year.
Responding to critics who say the measure would help mainly high-income families, the government is capping the benefit of the tax break to $2,000 a year per couple. It will cost Ottawa $2.4 billion annually in foregone revenue and, according to the government, will not impact provincial tax revenues.
The government is also increasing the Universal Child Care Benefit, a kind of baby bonus introduced in 2006, to $160 a month from $100 a month for children under age 6. And beginning in January, these taxable payments will also go to families with children age 6 through 17, at $60 a month per child.
Also, Prime Minister Stephen Harper announced an increase in the Child Care Tax Deduction, as of 2015, to $8,000 from $7,000 per child under age 7. For children age 7 through 16, it will rise to $5,000 from $4,000.
As part of this overhaul, the government will as of 2015 scrap the standard Child Tax Credit, a change that will add $400 million to federal coffers in 2014-15 and $1.8 billion in 2015-16.
Overall, the new measures will cost the federal government $3 billion a year. Benefits are expected to go to 4 million families with children, according to the finance department.
Harper, who unveiled the new measures in Vaughan, has been rolling out tax breaks in recent weeks in anticipation of Ottawa balancing its books next year for the first time in half a decade. Some of the new tax goodies will land in the hands of Canadians in advance of the election expected in late 2015.
Income-splitting has been widely slammed as a giveaway for high-income earners in families with one working spouse. A study by the C.D. Howe Institute concluded that 80 per cent of families would see no benefits from income-splitting.
Former finance minister Jim Flaherty raised questions about the wisdom of income splitting, saying he wasn’t sure it would be of overall benefit to Canadian society. Speculation at the time focused on a possible rethinking of the measure by the Conservatives, but Tory MPs reportedly voiced renewed support for the idea, especially since scrapping it would mean backing away from a key 2011 campaign promise.