Without a doubt, the loudest change for 2014 tax prep is the new Family Tax Cut, affectionately being referred to as “income splitting” by some. This is a non-refundable $2,000 maximum tax credit for eligible couples with a minor child under 18 at the end of 2014.
To be an eligible couple, you and your spouse must not have been separated the first 90 days of 2014, nor separated on December 31, 2014. As well, you and your spouse must have been resident in Canada on December 31, and the minor child must have ordinarily resided with you.
On this point, in the case of a separated couple having joint custody where the child ordinarily resides with both separated parents, if the separated parents now each have new partners, both parents may claim the full amount of the new credit with their respective new partner, subject to the standard conditions to make the claim. In effect then, the credit can be double dipped.
The Family Tax Cut is a paper transfer of up to $50,000 of earned income from one spouse to the other spouse when each spouse is in a different marginal tax bracket – obviously the greater the differential in tax rates the better use of this credit, zero income for one spouse being the most advantageous scenario.
Having said this – and this is a contentious issue regarding the value of this credit – if one spouse has no income and the working spouse earns $40,000 or less, the credit doesn’t kick in. The argument being that a family with this level of income is able to use other tax credits that higher income earners can’t.
Being a virtual transfer of taxable income from one spouse to the other for the purpose of this credit, the net income and taxable income for each spouse remains just as it would be without the transfer so that other tax benefits and credits are not adversely affected, such as the Child Tax Benefit and GST Credit.
To claim the credit, there cannot be a pension income transfer between spouses. Both spouses must file a T1 personal tax return even if one spouse would not normally have to file, and they have to be prepared together to establish the transfer. Being a non-refundable credit, only that portion of the credit required to reduce tax liability to zero is used, with any balance not paid to the taxpayer.
For specific detail on this new credit, talk to a tax professional or visit the Canada Revenue Agency (CRA). Stay tuned for more exciting new tax information in future columns.