Tax Fairness for Families 

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With summer here, many families are looking forward to summer holidays and many politicians are looking forward to the summer recess. 

For some government departments, though, work is already starting on projects for next year. The Standing Committee on Finance in British Columbia, for example, just concluded a tour of the province, listening to recommendations for next year’s provincial budget. While not the most exciting, such consultations can be consequential. Just last year, for example, the federal Finance Committee endorsed a recommendation of the British Columbia Humanist Association to remove the “advancement of religion” as a charitable purpose.  

Given this opportunity to speak into the budget, ARPA Canada submitted three recommendations to the BC Finance Committee. Alongside a call to balance the budget over the next three years and a recommendation to cease public funding for morally fraught procedures such as abortion, euthanasia, and gender transitions, we also recommended something that has long been talked about but has never come to fruition: tax fairness for families.  

How Canada’s Current Income Tax System Works 

Canada’s system for personal income tax has always been based on the premise that the individual is the basic, taxable unit of society. Under this premise, even when a married couple lives together, pools earnings, and shares expenses, they must both file their own taxes. At its root, the Canadian tax system also largely ignores children. For example, a married couple with no kids and a married couple with five kids earning the exact same income will fall into the same tax bracket and pay the same tax rates. 

Over time, federal and provincial governments have introduced a range of tax credits and benefits that account for family size and structure that give some families a rebate on their taxes at the end of the year (or even each month). Some examples of tax policies that account for family structure include: 

• Canada child benefit (which gives families up to $7,787 per child per year, depending on the child’s age and family income) 

• Amount for an eligible dependent (which allows a single parent with children to effectively transfer one child’s basic personal amount – the amount of money he/she could earn before they begin to pay income taxes – to the parent, who then pays less tax) 

• Spouse or common-law partner amount (which allows families in which one spouse does not earn much income to effectively transfer his/her basic personal amount to his/her spouse and pay less tax) 

• Canada caregiver amount (which allows family members caring for infirm family members to pay less income tax) 

• Adoption expenses deduction (allows families to deduct adoption expenses from their taxable income) 

• Childcare expenses deduction (allows families to deduct childcare expenses from their taxable income) 

• Either spouse can claim charitable tax credits and certain other credits (e.g. a spouse with higher income can claim a credit for a donation made by the other spouse) 

• Parents or grandparents can claim a child or grandchild’s tuition tax credits 

• Pension income splitting (allows senior couples to share their individual income with each other and so fall into a lower tax bracket) 

As beneficial and laudable as these family tax policies are, they merely tinker around the edges of a system that still fundamentally views the individual as the basic unit of taxation. 

Historical Proposals to Change Canada’s Income Tax System 

In 1962, Prime Minister John Diefenbaker established a Royal Commission on Taxation, one of the most comprehensive reviews of Canada’s system of taxation. The authors of the report pulled few punches in criticizing Canadian tax policy: 

“[T]he present system is lacking in essential fairness between families in similar circumstances and that attempts to prevent abuses of the system have produced serious anomalies and rigidities. Most of these results are inherent in the concept that each individual is a separate taxable entity. Taxation of the individual in almost total disregard for his inevitably close financial and economic ties with the other members of the basic social unit of which he is ordinarily a member, the family, is in our view another striking instance of the lack of a comprehensive and rational pattern in the present tax system… [I]n order to achieve equity, we recommend that the family be treated as a tax unit and taxed on a rate schedule applicable to family units. Individuals who are not members of a family unit would continue to be treated as separate tax units and would be taxed on a schedule applicable to individuals.”  

Unfortunately, this recommendation went unheeded. 

In the 2011 election, Prime Minister Stephen Harper promised to introduce income splitting for families, allowing one spouse in a family with children under the age of 18 to transfer up to $50,000 of their income to their spouse. This would allow a higher income spouse to transfer a significant portion of his/her income to a lower income spouse and fall into a lower tax bracket. For example, if a husband earned $88,000 and a wife earned nothing, the husband could transfer $44,000 of his income to his wife. Both would face a top marginal tax rate of 15% instead of the top marginal tax rate of 26% if all the income was taxed under the husband. 

This form of income splitting – first announced in the fall of 2014 and implemented in the 2015 budget – would have greatly benefitted families where one spouse earned significantly more than another spouse (e.g. where one spouse stayed at home, worked part-time, or worked full-time in a particularly high paying profession). Unfortunately, it was cancelled in Prime Minister Justin Trudeau’s first budget in 2016. 

An Example of Family Taxation 

France is a leader in recognizing families in their tax system through their family quotient system. France bases its tax rates not only on how much you earn (a progressive tax system that most countries use) but also on family size. Total household income is split according to family size: one share for a single person, two shares for a couple without children, half a share for each of the first two dependent children, and one full share for the third and each subsequent child. Consider how this system of taxation would affect two households earning the same amount of money. A single person earning €60,000 will pay a top marginal tax rate of 30% and pay just under €7,000 in income tax because they have only one “share.” A married couple with two children has thee income “shares:” one from each spouse and half from each of the children. This will essentially split their €60,000 into 3 income buckets of €20,000. Each of these buckets face a much lower marginal tax rate (11%) and so the family of four will pay less than €1,000 in taxes. 

A New but Realistic Proposal 

Fully transferring to a system of family taxation instead of individual taxation would radically transform our approach to taxing income. Income splitting between spouses (which is already allowed for seniors) is one of the most substantial policies working within the existing framework that would move us closer to taxing family units. More comprehensive changes would likely have to start at the federal level. Given the tax agreements between the provinces and the federal government, provinces must use the same tax base as the federal government, likely making it impossible for the provincial government to directly switch to taxing families rather than individuals.  

However, both federal and provincial governments could build off existing tax credits and introduce new credits that would better take family structure into account. One such example would be changing eligibility requirements for claiming the amount for an eligible dependent.  

Here’s how the policy works now right now. The “eligible dependent” federal-provincial tax credit allows parents who are single or separated to claim a child under 18 years of age (and possibly other relatives) living with them as dependents. But this credit can only be claimed once (e.g. a single mother with three children living with her can only claim the amount for one eligible dependent). In effect, the amount for an eligible dependent allows the adult to claim all or most of the dependent’s basic personal amount, the amount of money he/she could earn before they start paying income taxes. This provides the parent a tax rebate equal to these basic personal amounts ($16,129 federally and $11,073 provincially in BC) multiplied by the lowest income tax bracket (15% federally and 5.06% provincially in BC). So, right now, claiming this amount for an eligible dependent would save a single parent $2,979 ($2,419 in federal income tax and $560 in provincial income tax). 

This policy gives single parent families some tax relief, recognizing the cost of raising a child and offsetting it somewhat. But it’s very limited. ARPA recommends that both provincial and federal governments extend this policy to two-parent families and allow parents to claim the credit for every dependent they support. After all, a dependent is a dependent, regardless of who supports them or how many there are. 

If both the federal and the provincial governments did this, a two-parent family with three children that was previously ineligible to claim the amount for an eligible dependent could claim the new credit three times. The changes at the provincial level would save the family $8,937 ($7,257 in federal income tax and $1,680 in provincial income tax). 

Conclusion 

In an era where fertility and family formation are on the decline and cost of living is high, governments need to look for ways to aid families. The ultimate goal should be for Canada to treat families or households as the basic taxable unit – as France has done. Short of that, simply re-introducing income splitting for families or reforming the amount for eligible dependents would also be steps in the right direction.