Liberals’ family cash a boon, provided you don’t benefit from income splitting

This federal election is largely being fought over the support of families with young children. It started last fall, when the NDP and Conservatives each released competing child care plans for Canadians.

This federal election is largely being fought over the support of families with young children.

It started last fall, when the NDP and Conservatives each released competing child care plans for Canadians. The Conservatives promised – and subsequently introduced – the “enhanced” Universal Child Care Benefit (UCCB) and income splitting. The NDP, meanwhile promised a universal daycare program which they claim would cost parents just $15 a day.

Not to be outdone, the Liberals released a plan for what they call the Canada Child Benefit in the spring. At its core, this is much more like the Conservative plan than the NDP’s. It involves direct cash payments to parents who would continue to purchase child care services privately, and, unlike the NDP, does not establish a large new government program.

But that is where the similarities between the Liberal and Conservative plans end.

The Canada Child Benefit purports to provide parents with a tax-free benefit of up to $6,400 for each child under six and $5,400 for each child between the ages of six and 17. Families with household incomes up to $30,000 will receive the full amount of the benefit. If a family’s income is above that, the benefit is gradually clawed back until it is gone completely.

After a previous column in which I critiqued the enhanced Universal Child Care Benefit several readers suggested that ignoring the original $100 UCCB in my analysis was misleading. If anything is misleading it is the practice of trumpeting money that was introduced years ago. Parents don’t want to hear about what they are already receiving. They want to hear about what is new.

So it is important to note that, much like the changes introduced by the Conservatives this spring, the Liberals are planning to take some things away. To help pay for their plan, the Liberals would eliminate income splitting and the UCCB – not just the $60 enhancement but the entire $160 monthly benefit. And they would not restore the Child Tax Credit that the Conservatives eliminated this past spring.

Most importantly, the plan rolls in the existing means-tested Canada Child Tax Benefit and the National Child Benefit Supplement. So ultimately more than half of the total benefit for a low-income family is renamed old money.

But that doesn’t mean that there aren’t important differences between what the Conservatives have done and what the Liberals propose to do.

The way the money is divided up is quite different, and determining which is better for a particular family depends primarily on whether that family benefits from income splitting.

Under the Conservatives’ plan, families may save up to $2,000 on their taxes by shifting their incomes between spouses. Income splitting is a boon for single income, two parent households, and two-parent households with wide disparities between spousal income, while providing nothing to single-income households and two-parent families where the parents had similar incomes. Income splitting is defended on the basis that it is not right that we tax single-income, two-parent families more than their two-income counterparts when the household income is the same.

To illustrate how important income splitting is, let’s look at a hypothetical family making $95,000 a year (a roughly median family income in the Yukon).

Under the Liberal plan, even after factoring in the loss of the existing benefits including the UCCB, but ignoring the effects of income splitting, that family will net somewhere around $1,600 regardless of who earned the income.

But under the Conservative plan, who earned that income makes all the difference. If each parent brought in an equal amount, that family will receive the paltry after-tax benefit of the enhancement to the UCCB – about $158 per year (ignoring changes in territorial credits). A single-parent household does slightly worse, because they would pay more tax on the UCCB.

However, if one parent in a two-parent household earned that $95,000 that family would have received about $2,000 off their 2014 taxes because of income splitting and therefore actually stands to lose a few hundred bucks under the Liberal plan compared to last year.

The same applies at lower income levels, although the benefits of income splitting decline (not to mention the likelihood that you’ll have the luxury of having one stay at home spouse). In short, the Liberal plan is significantly better for families who don’t benefit from income splitting.

It is also noteworthy that the Liberal plan is less generous to high-income families. The proposed Child Care Benefit is clawed back as family income rises. Families with income over $185,000 and one child would receive nothing under the Liberal plan and will lose the full $160 monthly Universal Child Care Benefit – not just the enhancement I panned several week ago.

The Liberal plan is also more generous for larger families, since you get the benefit for each child, while you only get to split your income once. But it is much more expensive, and its critics question whether the Liberals actually have a plan to pay for this new benefit, particularly at a time when our economy seems to be sputtering.

Ultimately the benefit of the Liberal plan is spread much more widely among low and middle income families, while the main beneficiaries of the Conservative plan are a much smaller subset of the public – two-parent families with single or widely disparate incomes, regardless of their wealth.

For this reason I think the Liberal Child Care Benefit is an improvement on what the Conservatives have done. Spending billions to correct an arguable unfairness in the taxation of single-income families and handing over millions to the wealthy in the process is simply not what Canada needs right now. A means-tested benefit is a more appropriate approach.

Of course, supporters of the NDP plan would point out that it is questionable whether throwing more cash into the child care marketplace will actually create new child care spaces, or will simply lead to inflation of prices. But I am out of words for today.

Kyle Carruthers is a born-and-raised Yukoner who lives and practises law in Whitehorse.