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Income splitting is where a high-income spouse transfers some of his or her income to a lower- or zero-income partner, thereby reducing their combined income-tax bill. (shutter_m/Getty Images/iStockphoto)
Income splitting is where a high-income spouse transfers some of his or her income to a lower- or zero-income partner, thereby reducing their combined income-tax bill. (shutter_m/Getty Images/iStockphoto)

Rob Carrick

The truth about income splitting: We take what we can get Add to ...

The federal government is making families with young kids richer by an average of $1,140 a year.

A difference-maker for parents juggling mortgage and car payments, daycare costs and sundry other daily living expenses? Not a chance, particularly for the low-income families that are stretched the tightest in today’s economy.

And you might as well stop reading if you don’t have young kids.

“The measures affect families with kids under the age of 18, period,” said Jamie Golombek, managing director of tax and estate planning with Canadian Imperial Bank of Commerce. “Obviously, these are not broad-based tax cuts.”

But in today’s world of slow economic growth and is-that-all-there-is pay increases, we take what we can get. In that light, the tax savings the government has introduced are not to be dismissed.

Let’s first look at income-splitting for families, a measure the federal Conservatives promised to introduce in the last election campaign.

Anyone hoping for a tax-savings windfall from income-splitting may be disappointed with the Family Tax Cut announced by the government on Thursday. The measure caps a family’s tax savings at $2,000 a year, starting in the 2014 tax year.

Income splitting is where a high-income spouse transfers some of his or her income to a lower- or zero-income partner, thereby reducing their combined income-tax bill.

It’s a niche benefit that discriminates against single parents, favours families with one big earner and applies to no more than 15 per cent of households, according to estimates from various think tanks.

To address these criticisms, the government broadened its tax relief by enhancing the Universal Child Care Benefit and increasing the Child Care Expense Deduction. The government’s own numbers say families with young children will receive an average of $1,140 in tax relief and benefits a year.

This amount seems to fade into insignificance in the context of the expenses that families are up against these days. The monthly mortgage payment on the average-priced home bought with the minimum down payment today would be about $1,865, and daycare costs for toddlers can be as high as $900 or so monthly. Car loan payments average more than $500 a month.

The impact of the three tax-savings measures looks even more modest in light of how they’ll be delivered. Only the higher Universal Child Care Benefit, which is paid to families every month, will have an impact on an ongoing basis. The Family Tax Cut and enhanced Child Care Expense Deduction would be claimed on a parent’s income tax return and thus either generate a bigger tax refund or reduce tax owing.

Can we afford to dismiss the savings? Not at a time when household debt levels are butting up against all-time highs and the national savings rate is uninspiring, to say the least. Canada’s family finances are just rickety enough to make the equivalent of an extra $100 or so a month a welcome development.

Tip to families: Don’t muff this opportunity to do something positive for your finances. First, add up the tax relief you get in total and use it to reduce your credit card and line-of-credit debt. Then, start contributing to either your children’s Registered Education Savings Plan or your Registered Retirement Savings Plan. You say you can’t save? The government has just given you a hand in making a modest start.

Under the Family Tax Cut, a higher-income spouse would be able to transfer up to $50,000 of taxable income to a spouse in a lower tax bracket. Changes to the Universal Child Care Benefit will provide $160 per month for each child under six, up from $100 today, and a new benefit of $60 will be available for children aged 6 to 17. The new amounts kick in on Jan. 1, 2015, but parents won’t see the money until a catch-up payment is sent in July. That could well be just ahead of the expected federal election next year.

A nuance that parents using the child care benefit should be aware of is that it replaces the Child Tax Credit. The Finance Department says all families will be better off with the change.

Finally, there’s the already-announced improvement to the Children’s Fitness Tax Credit to consider. The credit, which covers expenses from eligible fitness programs for children under 16, or under 18 if they qualify for the disability amount, will be doubled to $1,000 for the 2014 tax year; for 2015, it becomes refundable and thus can be used even by people who don’t make enough money to pay taxes.

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EDITOR'S NOTE: An earlier version of this column misnamed the benefit that will provide $160 per month for each child under six, up from $100 today. It is the Universal Child Care Benefit, not the Child Care Expense Deduction.

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Follow on Twitter: @rcarrick

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