In the fall of 2014, the federal government announced the new Family Tax Cut.
Now you’ve probably heard the term ‘income splitting’ before. It’s a classic tax savings opportunity only available to select individuals with particular circumstances. How does it work? It’s simple. Basically, one fictionally attributes income from one spouse to the other. And, because in Canada the federal personal income tax rates increase as the level of taxable income of the taxpayer increases, a higher income earning spouse can take advantage of a lower income earning spouse’s tax rate.
Although the Family Tax Cut has been loosely referred to as a new income splitting opportunity for taxpayers, that’s not quite the case.
The Family Tax Cut is non-refundable tax credit (worth up to $2,000) for eligible couples with minor children.
It’s based on the net reduction of federal tax that would be realized if up to $50,000 of an individual’s taxable income was transferred to the individual’s eligible spouse or common-law partner. Similar to the income splitting technique, it allows a taxpayer with a higher income tax bracket to take advantage of a spouse’s lower income tax bracket.
When is it available?
Effective for 2014 and subsequent taxation years
Who’s a qualifying individual?
The following individuals qualify:
1. You were a resident of Canada on December 31 of the year (or on the date of death);
2. You have an eligible spouse or common-law partner for the year who has not claimed the Family Tax Cut;
3. You have a child who is under 18 at the end of the year who ordinarily lives throughout the year with you or your eligible spouse or common-law partner;
4. You were not confined to a prison or similar institution for a period of at least 90 days during the year;
5. Neither you nor your eligible spouse or common-law partner became bankrupt in the year;
6. Neither you nor your eligible spouse or common-law partner elected to split eligible pension income in the year; and
7. Both you and your eligible spouse or common-law partner file an income tax and benefit return for the year.
What’s an eligible relation?
You must have an eligible relation with a spouse or common-law partner. This means:
1. Your spouse or common-law partner must be a resident of Canada on December 31 of the year (or on the date of death); and
2. You were not, because of a breakdown in your marriage or common-law partnership, living separate and apart from each other at the end of the year and for a period of 90 days or more beginning in the year.
What if you have joint custody of a child?
You may have a joint custody arrangement which resulted in your child ordinarily living with both you and your former spouse or common-law partner throughout the year. You can both claim the credit for the year, so long that you and your former spouse each have an eligible spouse or common-law partner for the year, and all of the other conditions for claiming the credit are met.
Will your net income or taxable income calculations change?
No. The credit is calculated as if an individual allocated up to $50,000 of taxable income to an eligible spouse or common-law partner of the individual. Your actual net income and taxable income will remain unchanged.
Will it affect the credits you receive?
No. Claiming the Family Tax Cut will not change the credit you receive. The credits I’m talking about include the Goods and Services Tax/Harmonized Sales Tax (GST/HST) credit, Canada Child Tax Benefit (CCTB), and other federal or provincial benefits tax credits that you receive, such as the age amount, and the spouse or common-law partner amount
Can two people claim the Family Tax Cut?
No. The credit must be claimed by either you or your eligible spouse or common-law partner for a year, but not both. It cannot be shared.
Take advantage of it!
Make sure you properly complete the applicable schedule on your tax return to claim your Family Tax Cut credit starting this year.
Caveat: The information in this publication is current as of the time it was written. This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Deuzeman & Associates to discuss these matters in the context of your particular circumstances. Deuzeman & Associates does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.