Tax system rewards divorce, cohabitation
Another tax season has come and gone. There is no other time of the year where I reveal my number-crunching-nerd-self to the world more than during tax-time. My goal as the stay-at-home wife is to read up on taxes and file them to maximize our benefits as a family. Unfortunately for my finances (although not for my family), the thing stopping my husband and I from really maximizing on the deductions and rebates is the fact that we are married and live (happily) together.
Imagine two couples: Mark and Mary; David and Donna. Both couples have a single income earner who reports $100,000 in income. Both put aside $18,000 in RRSPs. Both have three small children.
Mark and Mary keep $68,505, or close to 70 per cent of their earned income. David and Donna are divorced. They are able to split their income for tax purposes with alimony (spousal support). They also increase their Canadian Child Tax Benefit (CCTB) three times because they are divorced. After the taxman is satisfied, they keep $79,623 of the 100K, or almost 80 per cent.
We could imagine that if Mark and Mary were very rational economic beings, they would divorce one another and recognize a gain of $11,000 per year. If all things were equal, Mark and Mary are effectively paying the government $30 per day to be married.
Of course, not all things are equal. The pain of divorce, the problems it causes for children, the cost of the legal process are all reasons that divorced couples should be supported in our society, especially in cases of abuse and adultery.
But taxes, less or more, provide cold comfort to the divorced. Although the government and the Canada Revenue Agency shouldn’t seek additional taxes from the divorced, they should always remember that it is taxpayers and their children–likely future taxpayers–who fund everything. Just like we learn the language our parents speak, we learn their values and work-ethic too.
Taxpayers (and not benefit receivers) are the machine that keeps–and will keep–our country going. Too many people on the receiving side can collapse an economy (like it has in Greece).
Like parents of one child who is very good-natured and one who is more of a handful, it is easy to over-send resources to the more difficult child. It may be easier to coast with the “good child,” but that doesn’t make it okay. That good child might suddenly get fed up and realize there is no benefit to being good. My parents tried such a strategy with one of my younger brothers by offering him a Sony Discman (exciting at the time) for better marks in Grade 6. I was in Grade 12 at the time and thought, “Man, it really pays to make them sweat.”
On one level, taxpayers don’t want to be left holding the bill when everyone else decides to do a dine-and-dash. But I believe there is a general understanding among taxpayers that we need to pay our dues to live in a country like Canada. However, the government should consider at least a couple of small reforms to recognize the “good child.”
The first, which has been said before, is income-splitting. This would benefit any family where income is uneven: between a husband and wife who both work but earn different amounts, or families supported on a single income. Having “couple income” (and “couple tax returns”) would at least even out the cost of giving up a second income. Currently, families with two employed spouses pay less income tax than families in which one spouse earns all or most of the money; that penalty needs to stop.
But why end with income-splitting between couples? Why not create a true family income where income can be split between the couple and all of their minor children? The self-employed, including doctors, lawyers and many well-paid professionals, already know what a taxsavings this can be. There are many creative ways to spin out income to family members–especially a non-working spouse–by paying them to clean the home office or paying them generously to do paperwork. Instead of making this only available to those in the know (and those who do not receive a T4), make it available to everyone.
For an employee, a child’s tax worth is $2,131 in credit, or $319 off your tax bill (provincial is more). But if the child was making an income, he or she can earn up to $10,527 tax-free. Why the difference? Each person in a six-member family could earn $10,000 in tax-free income–or $60,000. In the same family, a single-income earner receives less than $30,000 in tax-free income for supporting the same number of people.
So let’s have families pool their credits like they pool their resources. The government needs to stop ignoring taxpaying families, especially those with multiple children. The government is forgetting that the children of hard-working tax-payers are the economic future of our country.
Lena Schuck, a former mathematician, is a homemaker in Regina, Sask., with her four pre-school aged children.