5 ways the government could tweak income-splitting promise

The late Finance Minister Jim Flaherty rarely beat around the bush and that was certainly the case when he offered up this assessment of his own government's proposed income splitting for families:

"It benefits some parts of the Canadian population a lot and other parts of the Canadian population virtually not at all," hetold reporters in February of this year.

Flaherty saidthe measure needed"a long, hard, analytical look" by experts "to see who it affects in this society and to what degree. Because I'm not sure that overall itbenefits our society."

The income-splitting promise, made during the 2011 election campaign, would allow families with children under 18 years of ageto transfer up to $50,000of income from one partnerto the other.

Shifts money between brackets

Income-splitting is meant to lower a family's overall tax bill by having that transferred money taxed at a lower bracket allowing the family to keep the difference. It is also meant to encourage those who want to stay home to raise their children to do so.

Doing the math, it's easy to see how Flaherty came to the conclusion he did.

Those who head single-parent families would not benefit at all, as there is no one to split income with. Those families where both parents earn similar amounts of money in the same tax bracket would also see no benefit.

Looking at a couple with twochildren where one spouse makes $60,000a year and the other has no income, the savings are about $1,400 a year in federal taxes.

But fora couple where one spouse has no income and the othermakes more than$191,000 what a2011 Statistics Canada surveyidentified as the top oneper cent of income earners the savings jump to more than $7,200 a year.

The spread gets wider if provincesgo along with the scheme.

If our couples were in Ontario, for example, they could save an additional $1,800 and almost $6,000, respectively.

It's the fact that the more money you make, the more you stand to save that is behind why few in government and virtually no experts outside government expect the 2011 election promise to be fully implemented with no restrictions next year.

Possible changes

So what are the possible approaches that have been suggested to implement incomesplitting to make it palatable both politically and as policy?

1. Cap the program. Put an upper limit on the income eligible to be split.

Pros: It is simple and will be seen to be excluding millionaires and is more targetedat the much coveted "middle-class"voter.

Cons: Doesn't address the concerns of those who point out this does nothing to help single-parent families or families with lower incomes.

2. Lowerthe age of eligibility for dependants. Right now, the plan is to cover all families with a child under 18years of age. There are suggestions to drop that age to 12 or younger.

Pros: Could be sold as a means to help parents who can't afford daycare for their school-aged children. That could also bethe Conservatives' answer to the NDP's affordable daycare plan.

Cons: Further limits the pool of eligible families,which would erode the voters the Conservatives attracted with the promise in the first place. Also, this would represent a partial breaking of the election promise which said the cutoff would be children up to 18 yearsold.

3. A gradual phase-in of the plan. Conservative MP Maurice Vellacott is calling for the income splitting for families to be phased in over a number of years, starting with children under sixyears of ageand eventually raising it to 18 as the economy (and the surplus) grows.

Pros: Limiting the pool of eligible families will cost less and not threaten early (possibly fragile) budget surpluses.

Cons: Voters attracted by this promise in 2011 will soon be ineligible for the program and could punish the party at the polls.

4. Make it a non-refundable federal tax-credit.

Pros: This would not affectprovinces as the taxable income of individuals wouldn't changeand the credit would be applied only toward what's owed to Ottawa. Making it non-refundable would mean other deductions and exemptions would reduce the value of the income-splitting,thereby reducing the impact on federal coffers.

Cons: It adds yet another complication to a taxsystem this government has already loaded up with various credits and deductions. (Note: this point would fall under the "Pros" category if you are an accountant paid to help people file their tax returns.)

5. Doing somethingelse. Many critics of this kind of income splittingsay the government could help families a lot more by boosting the Child Tax Credit or reducing personal income taxes for all.

Pros: Would reach more people and satisfy many critics from both ends of the political spectrum

Cons: Represents the breaking of a clear election promise, which makes this option highly unlikely.