Family taxation and income-splitting: A backgrounder

Currently, Canada's income tax system requires each individual to report and pay tax on all of the income he/she earns. Income-splitting would allow couples to transfer income to the lower-earning partner, taxing them as a unit. Recently, there has been speculation that the federal government will modify the family taxation system by introducing income-splitting. If fully implemented, this tax change would affect all married or common-law couples in Canada and would effectively alter how income is redistributed to Canadian families.

Historically, income-splitting was recommended as part of a wide-ranging package designed to make the income tax system fairer in a 1967 Royal Commission headed by accountant Kenneth Carter. The Royal Commission on the Status of Women also recommended income-splitting in 1970. Thirty years later, in 1999, the Standing Committee on Finance of the federal government re-examined the issue of income-splitting in response to a parliamentary motion by the Reform Party. The goal of the examination was to determine if tax policies treat families with dependent children equitably. The Committee recommended maintaining individual taxation (see Committee report for more).

Tax splitting would benefit families where one spouse is a high-income earner and the other does not work outside the home or couples where one spouse earns significantly more than the other. For example, a family where one member earned $100,000 and the other had no earnings would pay the same tax as a family where both partners earned $50,000, or a family where one partner earned $75,000 and the other earned $25,000. In these cases, income -splitting would lower the tax rate paid by the higher earner. (See National Post article for example of tax savings on different family types.)

Critics of income-splitting maintain that altering the fundamental nature of the tax system – making the family, not the individual, the basic taxation unit – would make the tax system less progressive by reducing tax liability for higher earners who are usually male. Others take issue with the fact that this tax measure really serves higher income families best. And finally, critics are concerned that income-splitting could be detrimental to gender equality as it could discourage women's labour force participation, promoting financial dependence on their male partners.

It is hoped that by providing a range of informed arguments, this Issue File will promote discussion about the impact of income-splitting on families and women, on the broader goal of social equity and inclusion, and on the formation of a fair tax policy that plays an important role in a family policy package for all families.

This Issue File has three sections:
- Documents available online
- Documents available in print only
- News articles

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This list in not intended to be an exhaustive examination of this topic; for a more comprehensive list, search the Childcare Resource and Research Unit resource library catalogue Childcare Information Resource Collection (CIRC).