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It's Fair to Share - reducing taxes in Canada by sharing income

Arguments against income splitting and replies to them

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1. People already can split income. They can



a. lend spouse money for investments



b. contribute to spousal RRSP



c. have higher earner pay most bills



d. pay children and spouse as employees if you are selfemployed



e. lend funds to spouses business



f. guarantee a loan of the spouse from any financial institution







In fact most of these options apply mainly to the wealthy. The possibilities for incomesplitting for the ordinary citizen or ones in poverty are minimal







2. That if a person shares income, that person has no personal autonomy.







3. that if you permitting sharing income, this would encourage people to be home and not earning, and would be a disincentive to women working







.The social agenda is clear in such an objection, clearly implying that caregivers of children or the elderly do not work and should not be doing what they do. It is a biased antiequality and antiwomen assumption







4. That lower income earners, usually women and people of color, would suffer if they shared income with a spouse because their tax rate would be higher than it would be if they were taxed as individuals In fact the higher income would be taxed at a lower rate so it would still be a likely overall benefit this is not a race issue







5 that to share income would disadvantage gays and lesbians who are generally without children and are therefore dual income. To force them to share income

might make them pay more tax. no one is forcing anyone to share income.

They could be taxed as individuals if they preferred. This not an issue about sexual orientation





6 It is an outmoded view of the family Dr. Kathleen Lahey, Dean of Law,

Queens University



It is true that there are many people who live under one roof. Some are singles sharing, some commonlaw gay or heterosexual couples, some old friends or siblings and some parents and children or grandparents and children, and only some are the traditional married couple with or without children. However the existence of the many arrangements is not in fact new. Any genealogy study will find that households in the 1880s had many nonfamily members under one roof. The point of tax legislation to permit income splitting need not be seen as related to encouraging a particular definition of family It does not really do that. It only recognizes that some people share income. They may be blood relatives or not. The sharing is the pivotal point and that itself is voluntary. If they do share income, permitting income splitting is simply a way to recognize what is already being done. This argument in fact is akin to the recognition of gay rights. Since gays are living together anyway and sharing a life it is appropriate for a fair government to recognize the fact they are sharing finances, if they would like that to be noticed. This is therefore not about family but about sharing income.



7 if we dont allow income splitting, then people will be forced to formally transfer property title to each other and the transfer wont just be left to chance.

Not letting them be taxed as a household would make sure women got property.



In fact here we see again the state deciding what is best for women instead of trusting couples to work out their own financial agreements. In addition if we in tax law permitted the declaration of income sharing, then this would be as enforceable as any property declaration, and in effect as far as I know already is in divorce courts. Joint title of property is generally assumed if the property is for instance the matrimonial home.



8 Income splitting would not work anyway because the state cant go into the home and enforce it. Dr. Kathleen Lahey, Queens Some earners would not share income.



The assumption is that people should share income, an odd assumption of the case to not permit it. Allowing people to choose to be taxed as households does not force them to do so, so no state enforcement is necessary. If the state is concerned that those who say they share, do not in fact share, that is not necessarily a question of fairness of tax principle but a question of honesty in filing a tax form. There seems to be the assumption here that women need protection, that they tend to be financially abused in marriage and that they are in some ways tricked or forced into marriage. In fact in modern times in the western world, women enter marriage very knowledgeable and they are nearly never forced into marriage. How they decide to share income or not is a decision reached by the couple and a democracy should trust that they are competent and free to make such a decision. The state may wish to protect women but it should not assume that only one lifestyle is what women want. The state has no business in the cookie jar ledgers of the household.



Under a principle of vertical equity, people who earn more pay more tax not just in absolute dollars but proportionally, a higher tax rate which they can afford. There is however an equity in what part of their income is devoted to tax.

some may argue that the current system also lacks vertical equity since though the rich

Pay a higher tax rate in theory they also have more tax loopholes and deductions

And many very wealthy pay no tax. There is also the argument that even if the wealthy pay a higher rate of tax, they still have much more income and access to luxurious lifestyle than do the poor so they do not suffer’ due to a tax rate change nearly as much as the poor do. If the current tax system lacks vertical equity, then an adjustment to permit income splitting is not inferior if it also lacks complete vertical equity. It may enhance vertical equity in fact because it would remove from the wealthy some tax dodges since income would be taxed wherever it was, and at the same rate. It would not be as easy to escape paying tax.




13. The rate of the joint filing may be too high or too low



This is an administrative decision and can be changed. Recent flat rate taxes exist in







Alberta 10%



US Mass, Michigan 5.3%, Pennsylvania , Illinois 3% and Indiana



Romania 16%, Slovakia 19%, Latvia 25%, Estonia 24%, Russia 13%, Lithuania 33% and are being considered for Greece 25% and Croatia.



Again if the option of joint filing were permitted, people would not be forced to use a plan if it did not benefit them







14. The state may lose tax revenue if we permitted some people to share income and therefore save tax.







This argument assumes that whatever current revenue the state gets is its fair due and is by definition ideal To require any changes to be revenue neutral is merely an administrative convenience and one which should not be the main concern. The main concern should be fairness in taxation not maintaining the status quo. Obviously if the state lose money in personal tax in this way, it could consider increasing corporate tax or other avenues of tax.







15. If we tax people as individuals, they often want a lot of exceptions to be forgiven, and a lot of deductions to be permitted. The argument is made that if we had a single rate tax as a type of joint filing, many of those deductions could no longer be claimed such as contributions to political parties or charities.







It would be perfectly possible to have deductions on joint filing also but need for the fine adjustments might be less if the basic tax system was considered mostly equitable.







16 .We are told that we should keep the present system because the winners in it if forced to pay tax differently, eg. wealthy who can claim many tax breaks might feel discouraged with Canada and might leave the country, going to a more favorable tax climate.







In fact this is already happening in the brain drainto the US where the highest income tax bracket only starts at an income level much higher than in Canada. People make decisions about where to live based on many considerations however, not just tax. One is military policy and health care coverage and another is standard of living, job opportunity and quality of life. We dont need to bribe people to stay in Canada. It is a country with a lot of life quality benefits.












9. Income splitting would not permit vertical equity because the way it works in the US, a couple can declare as 2 individuals and pay on that tax scale, or they can declare jointly and pay on a different tax scale. It has been noticed that by the way they scales are designed, the tax rate for the couple goes up faster than does that for individuals and at some points it would end up cheaper for the couple to declare as two individuals. This is a problem of the tax rate design not of the principle of the option of income sharing. Obviously in the case of such rate shifts, couples could choose the way to be taxed that benefited them most. They are not forced to use either scale



Under a principle of vertical equity, people who earn more pay more tax not just in absolute dollars but proportionally, a higher tax rate which they can afford. There is however an equity in what part of their income is devoted to tax.

some may argue that the current system also lacks vertical equity since though the rich

Pay a higher tax rate in theory they also have more tax loopholes and deductions

And many very wealthy pay no tax. There is also the argument that even if the wealthy pay a higher rate of tax, they still have much more income and access to luxurious lifestyle than do the poor so they do not suffer’ due to a tax rate change nearly as much as the poor do. If the current tax system lacks vertical equity, then an adjustment to permit income splitting is not inferior if it also lacks complete vertical equity. It may enhance vertical equity in fact because it would remove from the wealthy some tax dodges since income would be taxed wherever it was, and at the same rate. It would not be as easy to escape paying tax.



10. here are many charity and government helps for those with low income. If we permit sharing of income, those who seem to have low income as individuals might now earn too much to get access to those help programs.



Obviously the help programs are probably designed with different cutoffs for the individual than for the couple. Government cannot object to another government policy as unchangeable since government itself could change it. Change the cutoffs for qualifiers for those in poverty who are in households



The couple that earns nearly equally eg. $30,000 and $30,00 pays the lowest tax, and the couple that earns vastly unequal salaries eg. $5,000 and $55.,000 pays the highest tax even though they both total $60,000 per household. The argument is made that if we permit income splitting the people who will be happiest about the change will be the ones at the extremes, the $55,000 and $5,000 earners and that the equal earners will benefit least from the switch. So the claim is made that having a joint filing option benefits mostly the higher earner.



This argument does not note that currently the system favors the equal earners and penalizes the ones at the ends. To correct an unequal system will of course look unequal as a correction but the effect is now to attain equal treatment.



11. the claim is made that if the lower earner is now taxed as sharing income with someone who earns more, this person may not be eligible for welfare any more, or for dental and health benefits people on social assistance can get. The person will have hit the welfare wall and be suddenly earning too much on paper to get help with the dental and medical bills.



In fact were joint taxation to be an option, this would simply change the qualifiers for welfare programs because obviously the person is no wealthier than before. This is an argument based not on fairness but on administrative red tape which can easily be corrected



12. If there is income splitting in the form of a single rate tax, the poor end up paying more than their share. For the rich a 15% tax may be much less than they used to pay and will leave them with a lot of luxury. For the poor a 15% tax leaves them still with a much smaller amount of money than the wealthy and proportionately much less spending money



There are in most single rate tax systems, cutoffs so that the very poor do not pay tax still. Some systems also permit deductions.

17. The argument is made that the nonearner never gave to the pension plans so is not entitled to take money out of it.











18. The state dislikes any options taxpayer may have to evade tax by declaring income in the hands of another party who then pays less tax on it. Income splitting is discouraged because it permits people to do that.







In fact the wealthy have many ways currently of reassigning income to spouses as employees of their professional corporation, or to have family trusts for their children. To permit income splitting would make moving around income to evade tax less attractive since income would end up taxed at the same rate wherever it was declared. Income splitting then would encourage more compliance with tax rules and would level the playing field of options for the poor.







Current tax law requires that if a person transfers cash to a lower earner, the



Transfer is not taxable to the receiver but to the giver, except in a few circumstances. attribution rules







19. Income splitting would make some couples pay less tax than they currently pay. Others would not get that tax break. So it would be an unfair adjustment.







There are several responses to that argument. The first is a philosophical one.



Obviously if a tax system is unbalanced and there are winners and losers, the losers will cry out for adjustment. The reply to them that it would be a windfall for them and would give them way more than the current winners get as adjustment is not logical. Of course an adjustment that corrects imbalance will have to be revere imbalanced to correct it. However the end result is balance.



Currently all households of disparate income are paying a tax penalty but the biggest penalty, a 4245% higher tax rate, falls on the single income household.



To see that household style as getting unfair advantage by an adjustment, or unfair encouragement, is not consistent with the realization that right now they are the most heavily penalized. To permit income splitting simply levels the playing field. There are already winners and losers. This would be a correction of unfairness.







But second, when a government decides how to adjust taxation to be fair, the guiding principle is fairness. Once a decision is made to be fair, there is no logical reply that we can&t afford to be fair. A way must be found.







20. Income splitting would cost too much in lost revenue for government.



Estimates in Canada have been made of the cost of this tax adjustment. MP Garth Turner has estimated that permitting pension splitting, which has recently been approved, will result in a loss of $301 million per year for government. He estimated that permitting income splitting for those currently earning would cost $3 billion a year. The Department of Revenue has estimated that the cost of permitting income splitting for all age groups would be $4 billion a year.







Those numbers must be understood in context however. The cost of a one per cent cut in the GST as promised, will cost more than the entire income splitting adjustment.







The current government has a budget surplus and has vowed to give tax breaks rather than to continue the Liberal tradition of large surpluses. Finance Minister Jim Flaherty has just announced Nov 10 2006 that his government is projecting after inflation economic growth of 2.8 % this year. The surplus for the fiscal year, ending March 31 2007 is forecast to be $4.6 billion, at least $1 billion more than previously estimated.







In the US the cost of income –splitting has been estimated at $18$30 billion per year and yet that nation has seen merit to permitting it and one must recognize that not all households will use the opportunity so costs are often less than projected.







Calling a loss of tax revenue from an unfair tax, a cost however is somewhat misleading.



Right now when the state gets free work done, birth of new citizens, attentive care raising these children to be honest and caring, it is the state that benefits and yet if it allots no funding to those who provide each new generation, it in essence is ignoring a huge financial benefit it already gets. In tax policy there are government expenditures; which are areas the state could tax but chooses not to, such as contributions to political parties, expenses to run a business, and it does this and foregoes revenue in order to permit society to have some leeway and function. If it is willing to write off some lost revenue in those situations, it is only logical for it to admit that it is also ignoring something on the other side of the ledger benefits that it is getting but not paying for. Unpaid caregiving has always been in that area and has rarely been acknowledged. When it finally does become acknowledged that all along government has been living off this free labor, usually of women, and just assuming that someone would be home and taking care of children or the elderly or dying, this recognition is not a cost or loss but is deserved and even long overdue funding.







It should also be noted that in the bigger picture, when people have more options about how to balance career and family, through income splitting, as one avenue, there is greater happiness, less poverty, less reliance on food banks, more productivity on the paid job and less use of the criminal justice system. With adequate funding in the home there is better nutrition and better health. So there again, a ‘cost’



Of having an option of income splitting has to be counterbalanced by the gain the state will get in reduced payments needed for health care or criminal court justice, for stress leave and for welfare.







An amount of $34 billion per year also has to be put in context of other costs. Transfers of the federal government to the provinces in 2002 alone were $30 billion. The government spends $3.2 million in direct health care for the military and first nations. The government collects employment insurance premiums and since 1994 has collected more than it has spent. The current surplus, growing at $2.5 billion per year is now $53 billion. The money is redirected to general revenue.







With 2 million preschoolers in Canada, the cost of a daycare program for each one, at $10,000 per space per year would be $20 billion.



This amount need not be spent however if we permitted income splitting and then parents would be better able to afford to create and fund the childrearing style they actually wanted.







21. Income splitting is unfair because it is simply a tax dodge







In a 1998 Supreme Court Case Newman a man transferred shares from his company into the hands of his wife, where income from them would be taxed at a lower rate. He was challenged for having done so because she had not been an officer of the company. The court ruled that section 562 of the Income Tax Act is not a general provision against income splitting. It said Taxpayers are entitled to arrange their affairs for the sole purpose of achieving a favorable position regarding taxation and no distinction is to be made in the application of this principle between arms length and non arms length transactions



































































This argument is one of simple merit. It assumes that the earners income was only for the earner, which in many cases was not the case, that the earner earned purely on his own merit and not due to the backup support at home of the nonearner, and it assumes that the work of the nonearner was irrelevant to the earners availability for evening shifts, long hours, corporate travel and other obligations of the job. Those assumptions are often in error. The nonearner in fact has been recognized by some universities, some corporations and even in divorce law as having had a major part in enabling the earner to earn. So it could be said she did her part of the earning and her part of the deserving of pension.































































22. The argument is made that the household benefited from the unpaid work of the caregiver at home, getting its childcare and housework done without having to pay someone to do it, and getting more leisure time, so it is only fair that the couple with the single income lifestyle pay more tax.































































The imputed benefit of the caregiving at home is seen as an undeserved plus and it is being suggested the family on one income should be paid for having given up a second income. This double penalty loss of income and now penalty for losing it seems very unfair.































































































23. The argument is made that the dual income household has more expenses than the single earner home because it has to have two work wardrobes, two vehicles, and it has to pay for childcare































































In fact the single earner home also have two people in clothing, has two people who go places every day and is paying a very high cost of childcare the salary loss or the person at home. To ignore those costs is unrealistic since they impact a household budget significantly. Both households have expenses of roughly equivalent nature. Only one may have receipts but both have the expenses.































































24. Government would lose too much revenue if it permitted income splitting.































































Recent estimates of all public tax expenditures of the federal government, being benefits it does not tax such as EI, deductions and pensions is $90 to 120 billion per year. The estimate of the cost of income splitting have been made by MP Garth Turner. The current government is in surplus so such an income loss might not be problematic. However if it were, what amount it does cut in could be recouped by an increase in corporate tax which have been going down.































































2006 MP Garth Turner has tallied that permitting income splitting would cost about $3 billion per year. He says that a more modest adjustment, permitting pension splitting would cost onetenth of that, or $300 million.































































2004 Every year the federal government publishes a study of how much tax revenue it foregoes, what amounts it forgives in essence, in order to stimulate the economy. These are not technically losses; to the state since they are considered investments and forgiveable costs people have for living which it is not fair to tax them on. Tax Expenditures and Evaluations of Department of Finance estimates that the federal personal income tax expenditures not counting transfers to provinces were close to $90 billion. If one includes the expenditures due to corporate tax and the GST the total of expenditures is $120 billion.































































25. There is already a mechanism for income splitting and it is enough to meet the needs of those who share income. The married deduction, the ability to transfer unused credits, the spousal RRSP already permit income splitting adequately.































































The married deduction has never been as large as the basic pesonsl exemption. This deduction or spousal credit is in amounts indexed for inflation in 2000 dollars.































In real amounts in 1988 it was $850 when basic personal was $1020































In 1999 it was $6055 when basic personal was $7131































It is about 86% of the deduction of any single adult. In the 1950s it was about 33% of an average salary but now is less than the minimum wage which is $12,480 and about 1/7 of an average wage.































































The C. D. Howe Institute found in 2002 that some family arrangements have more options for income splitting than do others. The self employed and those with a family business can pay other family members to perform business related services but most taxpayers are not in that position.































































Jonathan Chevreau of the National Post has noted August 20 2005 that some professionals such as doctors and dentists can incorporate and can confer tax deferral and capital gains advantages to family members. Sandy Cardy of MacKenzie Financial Corp has found that some professionals net over $300,000 a year and income splitting for them saves them tens of thousands of dollars in tax. In addition some wealthy taxpayer are eligible to create a family trust so that each family member is a shareholder in a corporation or a beneficiary. A doctor whose wife is at home with children can get $30,000 tax fee from the family trust and each child age 18 or over, in postsecondary can get over $40,00 tax fee per year. Most families however are not eligible for that family trust option. In Ontario nonprofessionals are even excluded from that option by law.































































Patricia LovettReid of TD Waterhouse Canada has found that some people hesitate to pay for a spousal RSP because they fear that if the marriage ends thee will be a financial loss. Gerald Sadvari, lawyer has noted that a spousal RRSP is treated like any other asset and is part of the equalization between partners on separation or divorce. However currently married partners are unable to assume an equalization of the benefits.































































The amounts needed to provide for ones senior years by RRSP are considerably higher than most people have. Patricia LovettReid of TD Waterhouse has found Jan 2005 that for many people the senior years last 3040 years. IF a woman who retires at age 65 has invested RRSPs at 6% interest, and plans to withdraw $3,000 a month and there is no inflation, she will still need to have saved $375,425 to last till she turns 80. If she lives to age 100, she will need to have saved $543,160.































































Jamie Golombek of AIM Trimark Investments has noted Nov 2003 that some couples can have the higher income earner oan money to the lower earner at interest such as 3%, , and the receiver of the loan pays him only interest but can invest the loaned money at a high yield such as corporate bonds yielding 5.5% interest. The person who gave the loan has to declare the interest as income but has effectively reduced his or her tax rate while the receiver of the loan can deduct the interest payment and is taxed on income in a lower tax bracket. This option also only is useful to the wealthy.































































In fact most benefits are not ones the lower income sector can claim. The benefits mainly affect the wealthy.































































campaignmanager@campaign.com

26. Income splitting is unfair because the rich would benefit too much.



Income splitting or joint taxation has some aspects of a single rate tax. There is no advantage to reassigning income to a lower income spouse, and less advantage to creating family trusts or other perks open only to the wealthy. Currently the wealthy have many tax benefits unavailable to the poor and in most industrialized societies there is a sentiment that the wealthy deserve some recognition for their hard work. Permitting income splitting would not create an advantage the wealthy do not currently have – it would actually remove one.



In Denmark, Sweden and Switzerland, which do have income splitting, there is a wealth tax for the very wealthy. This is a solution that may be considered. In France, the UK and the US, where income splitting is permitted, there is an estate tax. These are separate issues but the point is that taxation permitting income splitting need not be seen as a windfall to the rich. It is actually designed to help those with lower income have a fairer tax rate.





27. Income splitting forces some married couples to pay a higher tax rate than they would if they filed separately.



In the US a household earning $29,000 and $29,000 total $58,000 if taxed as individuals pays $8180 in tax and if taxed as sharing income pays $8180 so there is no advantage to income sharing.



However for households with disparate incomes, there is usually an advantage.

For those with incomes of $10,000 and $60,000, if taxed as individuals they pay $10,300 in tax but if taxed as sharing income they pay only $8204 in tax.



The US has tried to anticipate all household situations and establish a tax rate for various arrangements. You can declare as an individual, as a married couple filing jointly, or as a household with an adult head and supporting others.



Depending on the income level, there are a few instances in which it is true that a given couple may pay more tax if they share income, though in most situations this is not the case. To correct for that, since about 1997 there has been a fourth rate permitting couples in that rare instance to declare as a married couple filing separately. In other words, the US system wants and intends that a person will find the tax rate that permits them to pay the lowest tax and it permits but does not force income splitting.





28. There are few international precedents where income splitting is working well. Some nations are moving from income splitting back to individual based tax.



Many nations are grappling with this same tax dilemma.

Jack Mintz of the J.L. Rotman School of Management has noted that in France families are permitted to pool income and divide the total by a divisor reflecting the number of family members. There is still a progressive rate structure assigned to each per capita income to figure out tax for each family member but the weighting is figured in of how many people live off that income. The US has also been cited as a way of managing income splitting that works very well.



29. Income splitting is not on the radar screen for any political party.



In fact the Conservative Party of Canada in its official party policy document on tax fairness has several endorsements of income splitting.

In a Feb 4, 2004 publication Areas of Agreement it said

A Conservative government will restore public confidence in the fairness in the Canadian tax system by moving towards a simpler tax system



In documents of Feb 4, 2004 Areas of Agreement and September 8, 2004 Policy Statement and March 19 2005 Policy Document it said

A Conservative government will create tax fairness for families by eliminating inequities between single and dual income families and introducing a deduction for dependent children.



In its Policy Document of March 29 2005 it said

A Conservative Government will amend the Income Tax Act to eliminate all tax disadvantages to families including those who care for children at home and to recognize the economic value of stay at home parents by introducing tax fairness measures such as income splitting.



30. Families which have a partner at home have lower costs. They have a differentenjoyment of income’ because they get a lot of the housework and childrearing, cooking and cleaning done free. The dual income family has to use its leisure to do these tasks or hire out to do them while the single income home has more leisure. Therefore it is fair to tax the single earner home more heavily.



This argument assumes that the person doing the unpaid tasks at home has no costs and that this work is done for free In fact there is huge cost to this work not only direct costs of buying food and clothing, and toys for kids but in providing all that a daycare provides of heating, lighting, outings. These costs are borne out of a lower income than the dual income family has. Then there is the salary sacrifice of the earner who would have been elsewhere and earning. So the household has two shocks the loss of income of one partner, plus the increased costs of care of children.



The dual income home where both parents are absent from the building for a time each day actually also has the advantage of having toys and amusements provided by a 3rd party daycare, so they do not have to purchase these. The house gets less messy because the child was not there for 8 hours so there is less cleaning to do.



Rather than make this an argument of pettiness of who works harder, the mother at home or the mother whose paid work is outside the home, it seems logical to just recognize that a 12 hour day is a 12 hour day, wherever you do the work. Some women earn for 8 hours and come home to do household tasks and childrearing for another 4.. Others do the household tasks and childrearing straight through for 12 hours. They both work however they divide it. So income splitting would recognize this fact and would end a condescending view that only earning is laudable.



In terms of leisure, it is true that the double shift of the earning mother is often at night and that the shopping errands have to be worked in weekends. However obviously the mother at home also has to accomplish those tasks but does so on a different timetable, getting some grocery shopping done for instance midweek.

When there is downtime or a desire for it, one must notice that currently the dual income family has not only the salary but the tax advantage to be able to afford much more variety of leisure and in fact more time away from the children were they to prefer it. It is the dual income family that can afford the trips to resorts, ski adventures, restaurant meals and holidays by airplane, with or without the children. It is the dual income family with subsidized daycare that can have the leisurely business lunch, the paid coffee break, and that can afford to pay a sitter so they can go out with friends to a movie. These are therefore leisure differences for sure but it could easily be argued that the one with the advantage of leisure is the dual income family. However it is important again to not make this simply mommy wars since people deserve lifestyles they choose and prefer. What needs to be adjusted is a state preferring one lifestyle over another, which it currently does.



To permit income splitting gives to all households more options of care of children, more options about where to earn, and more options about having leisure time or affording a few pleasures during it..





















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