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Nov 4, 2019

Shining A Light On Canada’s Tax Policy: Families, Singles, And The “Goldilocks Zone”

by Alexandra Macqueen

Alexandra McQueenOver the past few years, changes in Canadian tax policy have created tax policy “winners and losers.”

On the “winning” side, enhanced refundable tax credits such as the Canada Child Benefit, along with other programs available to lone parents—the majority of whom are women—have reduced social assistance rates and are helping people move out of poverty.

On the “losing” side are higher-income incorporated Canadians who are no longer able, by virtue of new Tax On Split Income (TOSI) rules, to “sprinkle” income to a spouse and children and thus reduce the family’s overall tax burden.

In short, the federal government has used the mechanism of the Income Tax Act to create a kind of “Goldilocks zone” for family tax planning: “too much” income shared within the family to reduce taxes paid, and the sharing mechanism is curtailed—and “too little” income, and a refundable tax credit will step in to provide support.

Let’s look at how this plays out in practice.

Too Hot: New Income Sprinkling Rules Limit Tax Benefits Within Families

Income sprinkling, also referred to as income splitting, is a strategy used by high-income owners of private corporations to divert income to family members with lower tax rates.

For the most part, income sprinkling only benefits families with one, high-earning member. Single people, couples without children, families with a modest single income, or couples without a significant difference between incomes can’t reduce their taxes much, if at all, via income sprinkling.

Tax scholars call splitting and sprinkling an “upside-down subsidy”—a tax expenditure that benefits taxpayers more and more as you go up the income scale. Says tax historian Shirley Tillotson, “All taxpayers, happily or grudgingly, subsidize the tax reduction that is enjoyed by those who can use family for this purpose.”1

Too Cold: Enhanced Child Benefits Lift Single Parents Out Of Poverty

On the other side of the ledger, a revamped system of refundable child tax credits has meant that fewer children, and fewer single parents, are living in poverty (using the “market-basket measure” of low income).2

Research completed in 2011 by the Mowat Centre for Policy Innovation showed that the mix of programs available to lone parents, the majority of whom are mothers, is working to help move people out of poverty.3

With enhancements to child tax benefits starting in 2016 (to implement a federal election promise to “Grow the Middle Class”), this trend has accelerated: between 2015 and 2017, the percentage of female lone parents living in poverty dropped by just over 25 percent (from 36.4% to 27.1%, according to Statistics Canada), attributable, in large measure, to the enhanced Canada Child Benefit.4

Left Out: Singles Stuck With Status Quo

The new TOSI rules and the Canada Child Benefit use the tax code to influence the financial fortunes of families—but increasingly, there are fewer and fewer Canadians living in families in the first place. The one-person household is now the most common type of household in Canada, surpassing families with children, couples without children and multigenerational families.5  

Single people, by definition, are not impacted by the income sprinkling rules; but neither can they benefit from income delivered through the family benefits system. These observations are borne out by income data: over the period from 2013 to 2017, poverty among single individuals declined at half the rate of lone female parents, dropping just 12.5% (from 35.8% to 31.3%).

The upshot? In the phrasing of the Mowat Centre, with the advent of child benefits, there is a new and striking “family bias” in the amounts of money paid to low-income people.

Demographer Joseph Chamie suggests that one-person households tend to be more vulnerable “and therefore more costly to society” than people living with a partner or in a multigenerational family. “With a single and often limited source of income, one-person households are more precarious, with lower median household incomes,” and they “also may be more constrained in saving for retirement, meaning they may require more financial assistance in the future.”6

As the demographic makeup of the Canadian population continues to shift over time, public policy will need to shift in response. If the mechanisms for lifting people out of poverty are tied to membership in a family, those outside “families” will increasingly be left behind, even as they chafe at opportunities (such as income sprinkling) that can provide “upside-down” subsidies to those within families.

Today, those most at risk of low income and poverty in Canada are single, working-age adults. As a result, to get tax policy “just right,” future governments will need to find ways to reflect new demographic realities, moving beyond family bias to deliver policy outcomes that address the needs of all Canadians.

Alexandra Macqueen, CFP teaches and writes about finance in Toronto, Ontario. Contact her at alexandra@alexandramacqueen.com.

  1. See Shirley Tillotson, “The Family as Tax Dodge, Again,” ActiveHistory.ca, 21 September 2017, http://activehistory.ca/2017/09/the-family-as-tax-dodge-again/
  2. Based on concepts developed by Human Resources and Skills Development Canada, the Market Basket Measure is a measure of low income based on the cost of a specified basket of goods and services representing a modest, basic standard of living.
  3. Statistics Canada data shows that women represent just over eight out of 10 households headed by a single parent. See John Stapleton with Vas Bednar, “Trading Places: Single adults replace lone parents as the new face of social assistance in Canada,” Mowat Centre EI Task Force, Mowat Centre for Policy Innovation, 2011.
  4. Statistics Canada, “Persons living below Canada’s official poverty line (Market Basket Measure), 2013 to 2017,” modified 26 February 2019, https://www150.statcan.gc.ca/n1/daily-quotidien/190226/t002b-eng.htm
  5. Jackie Tang, Nora Galbraith and Johnny Truong, “Living alone in Canada,” Statistics Canada, 6 March 2019, https://www150.statcan.gc.ca/n1/pub/75-006-x/2019001/article/00003-eng.htm
  6. As cited in Alexandra Macqueen, “Live alone? Four implications for financial planning,” The Globe and Mail, 31 October 2017, https://www.theglobeandmail.com/globe-investor/globe-advisor/live-alone-four-implications-for-financial-planning/article36736961/