Tax Alert - The Family Tax Cut and Other Federal Tax Changes Announced October 30, 2014

October 30, 2014

Prime Minister Stephen Harper today announced “the Family Tax Cut” — a change in the tax rules to allow a form of income splitting between spouses (including common-law partners). The possibility of such a change was announced as part of the 2011 federal election campaign, to be introduced when the federal deficit was eliminated. The Prime Minister also announced changes to the Child Care Expense Deduction and the Universal Child Care Benefit.

The Family Tax Cut

The Family Tax Cut is a new federal non-refundable tax credit of up to $2,000 for couples with children under the age of 18, effective for the 2014 and subsequent taxation years. The proposed credit would allow the higher-income spouse to, in effect, transfer up to $50,000 of taxable income to a spouse in a lower income tax bracket for federal tax purposes, up to a maximum tax saving benefit of $2,000. The tax saving is calculated on the basis of the difference in tax before and after the effective transfer of income. Since the Family Tax Cut is designed as a federal non-refundable tax credit, it would have no effect on provincial revenues.

The government has estimated that this will reduce federal tax revenues by about $2.4 billion in 2014-15 and $1.9 billion in 2015-16. They also have estimated that more than 1.7 million families are expected to benefit from the new Family Tax Cut.

The government has listened to the critics that claimed that the highest income taxpayers would benefit the most by this measure by capping the credit at $2,000. Without such a cap, the most benefit would go to those taxpayers who have one spouse with taxable income of more than $186,270 and where the other spouse has no income. In such a situation, the federal tax benefit of shifting $50,000 of income to the lower-income spouse would have yielded a benefit of about $6,500 in federal tax reduction.

The credit, which can be claimed by either spouse, will generally be calculated as the difference between:

(a) the combined taxes payable (after non-refundable tax credits are claimed) by
the individual taxpayer and their spouse or common-law partner, and
(b) the combined taxes that would be payable (after non-refundable tax credits are claimed) by them if the higher-income individual could have notionally transferred taxable income (up to $50,000) to the lower-income individual. 

The difference, i.e. the Family Tax Cut credit, will be restricted to $2,000.

To benefit from the credit, some conditions must be met, including:

  • Each spouse must file a tax return.
  • The couple must not be benefiting from pension income splitting.
  • The couple must have at least one child who is under the age of 18 at the end of the year and who ordinarily resided with the taxpayer or their spouse or common-law partner throughout the taxation year.
  • The couple cannot have been separated for more than 90 days as of the end of the year.
  • Both spouses or common-law partners must be resident of Canada at the end of the year.

Other Changes

In addition to the new Family Tax Cut, the government announced changes to the Child Care Expense Deduction and the Universal Child Care Benefit, as follows:

  • The maximum deduction under the Child Care Expense Deduction will increase by $1,000 effective for the 2015 and subsequent taxation years. This means that the maximum amount would increase to $8,000 from $7,000 per child under age 7, to $5,000 from $4,000 for each child aged 7 through 16 (and infirm dependent children over age 16), and to $11,000 from $10,000 for children who are eligible for the Disability Tax Credit.
  • The Universal Child Care Benefit (UCCB) will be enhanced. This enhancement will provide an increased benefit of $160 per month for children under the age of 6 (up from $100 per month), and a new benefit of $60 per month for children aged 6 through 17. This change will be effective January 1, 2015. The enhanced UCCB will replace the existing Child Tax Credit for the 2015 and subsequent taxation years.

The government also reminded Canadians that it will double the maximum amount of expenses that may be claimed under the Children’s Fitness Tax Credit to $1,000 and make it refundable. The new $1,000 maximum limit will apply to 2014 taxation year and the credit will become refundable for the 2015 and subsequent taxation years.

For more information on how these tax changes will affect you, please contact your BDO advisor.

The information in this publication is current as of October 30, 2014.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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