Income splitting: Does history prove windfalls quickly turn rotten?

Vice President , The Regional Group of Companies Inc
  • Mar. 12, 2014

John ClarkOn the surface, paying less income tax appears to be a good thing for stretched Canadian families. But if history has taught us anything, it’s that a supposed windfall quickly becomes a shovel with which to dig a deeper hole.

The federal Conservatives have once again trotted out their campaign promise to introduce income-splitting for spouses. At its simplest, income splitting is a way to reduce the income tax owing by a single income earner, but allowing that person to split their income with a spouse who earns little or no income. Instead of a single large income that would be taxed at a higher rate, there are two smaller pools of income that would each be taxed at a lower rate.

The total income tax owing for the two smaller pools would be less than the total tax owing on the single higher income. The result is the household ends up with more disposable income from the same gross earnings.

Income splitting seems like a good idea, at least, on the surface. It has been entertained by various industrialized nations as a way to counter declining birth rates, by making it easier for a couple to have more kids and to budget for one parent to stay at home to avoid stiff daycare costs.

Jason Kenney, the Federal Minister of Employment and an outspoken proponent of income splitting recently described it as a boon for stable family units and made it clear the Conservatives consider stable family units key to producing more productive and successful citizens.

The shine quickly wears off

It cannot be denied that the introduction of income splitting will provide a boost to the pocketbook for qualifying families the first year it is introduced. The question is what Canadians will do with that money. They have three choices: give it away (not likely), save it (maybe), or spend it (probably.)

By the time the next tax year rolls around, the decreased income tax burden will have already become old hat. Having that additional disposable income will now be status quo and, quite likely, taken for granted by most. Whatever gain was first enjoyed will be lost with increased household spending.

If my take on human nature seems cynical and gloomy, consider that we have in this country a record level of consumer debt, driven by a need to acquire material things. The key measure of debt to disposable income recently reached a record 163.7 per cent.

Critics have asked how income splitting will benefit single-parent families, or families with spouses who are already struggling with subsistence level earnings. The C.D. Howe Institute says income splitting would benefit only 15 per cent of Canadian families.

Inflating housing costs

But my issues arise with the secondary affects of giving wealthier Canadians a tax break that does little for the majority.

Every time the government makes it easier to buy housing, housing gets more expensive.

Canadians with the means to do so regularly lever their income and debt to buy better digs. With interest rates still at historic lows, the temptation remains to buy as much house as possible.

Look at the historical record. Whenever The Powers That Be made it easier to purchase a home, demand rose and so too did market prices. This occurred when two incomes could be combined to qualify for a mortgage, when the minimum down payment was reduced, when amortization periods were lengthened, and of course, whenever mortgage rates dropped.

Initially in these scenarios, those of modest means found themselves for the first time able to own a home. But market forces soon led average asking prices to climb.

My predecessor once worked for the Canada Mortgage and Housing Corporation, and he often said that policies intended to make housing more affordable and accessible typically backfired, and just made housing more expensive.

The boost to disposable income afforded by income splitting would allow history to repeat itself. But this time, it would only be wealthier Canadians who can take advantage, driving up market prices so that those who have trouble owning a home are even more disadvantaged than before. Single-parent and low-income households will be trying to compete in a market dominated by the lucky few who suddenly have more money.

The root of the problem

I don’t deny Canadians need help to get a handle on their debt, or that families need a break when it comes to the costs of raising a family. But what you earn is often less important than how much you spend. Without a change in our spending habits, giving us more money to play with is equivalent to handing us a bigger shovel.

To discuss this or any other valuation topic in the context of your property, please contact me at jclark@regionalgroup.com. I am also interested in your feedback and suggestions for future articles



John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

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John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

Read more




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