Summary by Frank Stokes

In the current tit-for tat import tariff war between Canada and the U.S. there is a factor which has not been touched on by the media, and that is the simple fact that Canadian spouses are more likely to be economically harmed in job loss situations than are American spouses.

American spouses are allowed to share their household income on their annual Federal income tax returns, under the joint filing option in the U.S., but the Canada Revenue Agency does not universally allow that for working people, only for pension income.

Many jobs are being lost on both sides due to the tariffs, as industries lose the economic benefits of free trade.

The income tax effect of this on American couples who had two incomes but lost one, like due to the tariffs, can share that one income between them by filing jointly, which keeps them both out of a higher tax bracket.

But Canadian couples in that unemployment situation are not allowed to share (“split” as we call it) their income for income tax purposes.

The rational behind income splitting is based on the tax principle of “horizontal equity”, which says that people living in the same economic circumstances should be taxed the same.

If we look at two households each having two income earners, and the total household incomes are equal, one would think that both households would be taxed the same, because after all, all four individuals enjoy the same standard of living.

This assumes that both individuals in each household eat from the same refrigerator and larder, take vacations together, etc. etc. But the way Canada’s income tax system works, if one of those households has two very different incomes in it, the extreme case being one single income, that household will be taxed more heavily than the household with two incomes in the same tax bracket.

This happens because in the unequal income household the higher income will fall into a higher tax bracket where the percentage of tax is higher. Because all four individuals live at the same standard of living, that is contrary to the principle of horizontal equity.

The solution is to tax jointly couples jointly, which is done for pensioners, who each declare on their tax returns that they want to do that, and the formula used by the CRA takes that into account. Even for moderate incomes this results in two or three thousand dollars less income tax for the household.

The idea of income splitting has a long history in Canada and it was allowed for a brief period under one government but not others.

This current unprecedented challenge to employment security behooves all political parties to lay aside their differences over income splitting, for the greater good of alleviating employment risks for working people.