# INCOME Splitting



## gladaki (Feb 23, 2014)

New tax rules for 2015 will allow the income splitting. My wife is in school and I make close to 80k$. 
How much maximum, I can transfer to her?
Who are the people going to get benefit from this ?

Not sure if I understand it correctly
http://www.bnn.ca/Video/player.aspx?vid=521618
Thanks


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## dotnet_nerd (Jul 1, 2009)

I think you're allowed to transfer up to $50000 of income.

But only for families with kids under 18.


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## Davis (Nov 11, 2014)

Effective for the 2014 tax year, you will be able to claim a nonrefundable tax credit worth up to $2000 to reduce your federal income tax if you "transfer" $50,000 to your spouse. Because your income is $80,000, the tax cut will be worth less - you will be transferring less than $40,000. I don't think the actual calculations have been released yet, but they should be available very soon when the 2014 tax preparation software packages are out. And yes, you have to have a child under 18 to qualify.


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## WiseOwl (Jan 1, 2015)

Hi Gladaki,

The "Family Tax Cut" is not really income splitting although the media has been labeling it as such. In reality, it is essentially a tax credit that is applied to the higher income spouse which happens after you and your spouse's income has been calculated as it normally would be.

You would be eligible for the credit if you are married/common law (which you've indicated that you are), have a child under 18 that lives with you or your spouse, are resident in Canada, and didn't spend 90 days or more in prison.

The mechanics work like this:

1) First, calculate your combined tax liability (for you and your spouse) as you normally would.
2) Calculate your adjusted combined tax liability for you by equalizing your incomes (to a max of $50k equalization). So, for example, if you have $75,000 of taxable income and your spouse had $50,000 of taxable income, you would effectively transfer $12,500 such that you and your spouse each have simulated income of $62,500 for purposes of calculating this specific credit.
3) Your "Family Tax Cut" credit will be the difference between your combined tax liability as normally calculated under Part 1 and your adjusted combined tax liability under Part 2 to a maximum of $2,000.

Part 2 is really important to understand. The "simulated" income splitting is only for the purposes of calculating this federal credit. It doesn't actually change you or your spouses return beyond providing one spouse with a federal credit. Instead, the federal credit is calculated and deducted from the higher income spouse's return at the end of the process. True income splitting would affect the taxpayers' total combined taxes by planning income around the marginal tax brackets.

Also, FYI, the "Family Tax Cut" tax credit is nonrefundable, meaning it will simply help reduce your taxes payable to $nil but will not be refunded in the event your credits exceed taxes payable.

Hope this helps,
WiseOwl


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## joncnca (Jul 12, 2009)

WiseOwl, you consistently provide thorough and informative responses, thank you!

Since this "income splitting" is actually a tax credit for the higher earning spouse, and as you said above, "it doesn't actually change you or your spouses return beyond providing one spouse with a federal credit.", does this mean that if the higher earning spouse makes an RRSP contribution or other tax credits for various things, this Family Tax Cut Credit will not reduce the benefits associated with the RRSP contribution or other tax credits?

if the higher earner's income was actually split and redistributed tot he lower earner, it would reduce his/her marginal tax rate, so the benefit from refundable/non-refundable tax credits would also be reduced, right? in this case, one might need to optimize whether or not to split income, because it could reduce your overall tax refund if the lower earner wasn't eligible for as many tax credits as the higher earner...

but in this case of the family tax cut credit, you're saying it wouldn't actually reduce the benefit from other tax credits claimed by the higher earner? is this (the mechanics of the credit) explained somewhere on the CRA website?

thanks!

edit: see here for info: http://www.cra-arc.gc.ca/gncy/bdgt/2014/qa10-eng.html

edit2: i think i answered my questions here from above website:

If I claim the Family Tax Cut, will it change the Goods and Services Tax/Harmonized Sales Tax (GST/HST) credit, Canada Child Tax Benefit (CCTB), and other federal or provincial benefits and tax credits?

No. Unlike pension income splitting, your net income and the net income of your eligible spouse or common-law partner will not change if you claim the Family Tax Cut. As a result, benefits and tax credits that are calculated based on net income, such as the GST/HST credit, the CCTB, the age amount, and the spouse or common-law partner amount, will not change.


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## WiseOwl (Jan 1, 2015)

Hi joncnca,

Sorry for the delay in reply. Have been busy writing content for my site prior to heading back to work today and am only seeing your post now.

You have answered your own question. Your total income (line 150) and net income (line 236) aren't permanently changing as a result of claiming the "Family Tax Cut" credit. If it was true income splitting, those lines would change for both you and your spouse. This would have significant ramifications on your combined overall tax liability, as well as on all of the other government programs you have described as they use income as a base for calculating entitlement.

Cheers,
WiseOwl


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## nobleea (Oct 11, 2013)

WiseOwl said:


> Hi joncnca,
> 
> Sorry for the delay in reply. Have been busy writing content for my site prior to heading back to work today and am only seeing your post now.
> 
> ...


Are there any rules in regards to when a child is born? For example, is the tax credit the same if a child is born Jan 1 2014 vs Dec 31, 2014? It would appear that there is no difference from what I have read. As long as the child is 18 or younger on Dec 31, 2014.


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## WiseOwl (Jan 1, 2015)

From a child perspective, the proposed amendment only stipulates that the child must be under the age of 18 at the end of the year and must ordinarily reside with you/your "eligible relation" (in other words, your spouse). So, from that perspective there does not appear to be a difference between a birth on Jan 1/14 or Dec 31/14.

If CRA wanted to get very technical in interpreting that they could perhaps challenge the claim on the second part of that qualifier. If a child was born on Dec 31/14 birth and was still in the hospital (and mother/father wasn't), there may be an argument that (for the one day of the child's life), the child didn't ordinarily reside with you. Would CRA challenge it from that perspective? Too early to tell and there are no court cases as a precedent at this point. However, in the event that they did, taxpayers do have options to fight it (first step being the filing of a "Notice of Objection").


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## nobleea (Oct 11, 2013)

I ran through the excercise in Ufile 2014 tonight. We were able to transfer about $34K. It depends what income is used to calculate the equalization - is it Net Income or Total Income?
Either way, the 34K of income splitting (34 from me to wife) resulted in only a cut of $837. What situation would it take to reach the $2K cut with 50K transfer or less? Both very high incomes? Or one super high income, and the other no income? I assume the second scenario due to the spread in marginal rates.


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## Jon202 (Apr 14, 2009)

nobleea said:


> I ran through the excercise in Ufile 2014 tonight. We were able to transfer about $34K. It depends what income is used to calculate the equalization - is it Net Income or Total Income?
> Either way, the 34K of income splitting (34 from me to wife) resulted in only a cut of $837. What situation would it take to reach the $2K cut with 50K transfer or less? Both very high incomes? Or one super high income, and the other no income? I assume the second scenario due to the spread in marginal rates.


Correct see: https://twitter.com/kevinmilligan/status/529694234723373056


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## Davis (Nov 11, 2014)

At $80K you're not in the top tax bracket. To get the $2,000 benefit, you need one spouse at the top and one at the bottom -- maximizes the spread in tax rates, as you suggest.


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## axelis (Jan 13, 2015)

Thanks for sharing the graph... that's exactly what I was looking for!

On a similar topic, if anyone is in the situation of having one spouse with a high income and the other with little or no income, how do you handle that (beyond spousal RSP contributions)? Is anyone making a loan to their spouse who can then invest and declare the income (at the lowest tax bracket)?


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## joncnca (Jul 12, 2009)

nobleea said:


> I ran through the excercise in Ufile 2014 tonight. We were able to transfer about $34K. It depends what income is used to calculate the equalization - is it Net Income or Total Income?
> Either way, the 34K of income splitting (34 from me to wife) resulted in only a cut of $837. What situation would it take to reach the $2K cut with 50K transfer or less? Both very high incomes? Or one super high income, and the other no income? I assume the second scenario due to the spread in marginal rates.


how were you able to get this to work on uFile 2014? i specified that i wanted to claim the credit, answered all the questions, but in the Results it did not show anything for the Family Tax Credit. My wife has been off taking care of our baby, so we have a pretty wide spread, and I figured we would qualify. In fact, I downloaded Schedule 1A from CRA and manually did the calculations, and I should get most of the credit. But it's not showing up in uFile....any suggestions?


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## Allan Madan (Jan 23, 2015)

Income Splitting for the 2015 tax year is for families with children under 18. 
The higher income spouse is eligible to transfer up to $50,000 in taxable income to the lower income spouse. 

Sincerely, 
http://www.madanca.com
Madan Chartered Accountant


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## nobleea (Oct 11, 2013)

joncnca said:


> how were you able to get this to work on uFile 2014? i specified that i wanted to claim the credit, answered all the questions, but in the Results it did not show anything for the Family Tax Credit. My wife has been off taking care of our baby, so we have a pretty wide spread, and I figured we would qualify. In fact, I downloaded Schedule 1A from CRA and manually did the calculations, and I should get most of the credit. But it's not showing up in uFile....any suggestions?


Did you enter your baby as a separate dependent? That's what I had to do and then the calculation came in. Thats also where you enter the child fitness tax credit and such.


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## Davis (Nov 11, 2014)

Allan Madan said:


> Income Splitting for the 2015 tax year is for families with children under 18.
> The higher income spouse is eligible to transfer up to $50,000 in taxable income to the lower income spouse.
> 
> Sincerely,
> ...


You're a chartered accountant and the best you could do was to provide general, high-level information that's a already been covered by earlier posts? Pfft.


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## Guban (Jul 5, 2011)

^ have to agree with you Davis. Thought that Wiseowl's explanation was more detailed, and better. This CA states that the income splitting is a transfer to the lower income spouse, and that is clearly incorrect from what the Owl wrote.


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## WiseOwl (Jan 1, 2015)

I've always found practicing in tax to be almost that of an art. The Income Tax Act as it is written is super technical and there are so many complexities which often create 'grey' areas.

It's difficult to find the right balance between communicating concepts/law in a simple enough manner such that it can be easily understood vs. going too much in to detail such that you 'lose' the person you are communicating to. The risk with too much simplicity however is that the person you are communicating to doesn't receive the full picture.

As described in my earlier post, the "Family Tax Cut" is really only notional income splitting. That's a very important concept to understand because it in no way replaces 'true' income splitting. Although the media has been labeling it as 'income splitting', I think it's crucial for the tax community to differentiate between the two when communicating to readers/clients.

Cheers,
WiseOwl


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