Family Tax Cut

For people who follow tax updates this is old news, but I wanted to share something important for the 99% of you who are going to be scrambling to file your taxes in the weeks to follow.

Families with one wage earner have been clamouring for income splitting for years now, and the Canadian government has (kinda) listened. Starting with the 2014 tax returns, we can now take advantage of the “Family Tax Cut”. Here’s the link to the CRA’s page about the new tax break.

Family Tax Cut - CRA

I’ve done a couple returns so far that have taken advantage of this tax credit. It’ does seem to have a positive impact on single earner family returns, but it is a bit strange looking. Well, at least compared to what I imagined income splitting would look like.

The form on your return (Schedule 1-A) does the heavy lifting for you. At least on the software I used, once you have your income, your spouse’s income, and the details about your dependants the family tax cut gets calculated automatically.

If you open Schedule 1-A, it will show the details of how much of the wage earner’s income is transferred to their spouse. If you’re familiar with a Schedule 1 (where the actual income tax is calculated) it looks like a side-by-side summary of both spouses. At the bottom you get totals for how much federal tax is owing from both of them. But, instead of seeing those details on both spouse’s tax returns, there is just a single line (line 423) that shows the tax credit (up to $2,000). The spouse with no income still shows a blank return. I have to admit I went through both returns a couple times just to make sure the credit was indeed applied. It just seemed so strange having effectively split the income between both people yet still having a blank return staring back at me.

Personally I think this is a great step forward. It never made any sense that we didn’t have something like this in place. It just seems logical that if a family makes $80,000 per year, the taxes should be the same if 2 of them each made $40,000 or one made all $80,000.

So, when you’re filing your return this year and this scenario applies to your family, make sure you see a nice break on line 423 before you send it in.