The Family Tax Cut could disappear

The federal government is planning to make the Family Tax Cut permanent, but a busy parliamentary agenda could scuttle it.

This new income splitting allows parents with children younger than 18 to attribute up to $50,000 of the higher earner’s income to the lower earner, saving eligible families up to $2,000 on their 2014 taxes.

Read: Details on Ottawa’s new income-splitting breaks

Family income splitting became a reality last fall — after years of Conservative campaign promises — because of an obscure piece of parliamentary procedure. But unless legislation is passed before the federal election, expected this October, your clients may have to pay back the Family Tax Cut part of their refunds.

Here’s why.

Last fall, Prime Minister Stephen Harper announced family income splitting and other changes to the Income Tax Act. The next day, the House of Commons passed a Ways and Means motion on those changes.

By passing that motion, the House was ordering the government to create follow-up legislation – it hadn’t created a law. But traditionally, as soon as the government announces a tax measure in a budget or a Ways and Means motion, CRA implements it. So even though it hasn’t become law yet, families can income-split on their 2014 taxes.

“This is done in order to avoid public confusion and improve administrative efficiency,” says CRA spokesperson Philippe Brideau.

Read: Cap the TFSA, says alternative federal budget

Another reason CRA immediately implements changes is so we don’t game the system: people could take advantage of the time between a tax announcement and its implementation, explains parliamentary expert Gary Levy.

For example, if a government were to announce a cigarette tax that would start in two months, people would stockpile cigarettes today to avoid higher prices down the line. Instead, Levy says the government starts collecting the tax the day of the announcement, even though the law hasn’t passed.

By this principle, CRA has gone ahead with income splitting for families.

Another item from the motion—a larger Universal Child Care Benefit—will have to wait until the government passes legislation, because it dispenses money. CRA says there’s still time for a law to pass by June 2015, which is the beginning of the benefit year. The motion also calls for scrapping the Amount for Children (line 367) and expanding the Child Care Expense Deduction. Those items are slated for this year.

Since elections wipe the parliamentary agenda clean, the tax changes in the motion, and any un-passed tax legislation, will disappear, says Levy.

Read: Childcare benefits won’t help some families

What could happen?

On March 27, Finance Minister Joe Oliver introduced a bill that would put income splitting on steadier ground, but the bill’s still in its early stages. Depending on when an election is called, Parliament has as few as nine weeks to pass it, though the process can take years.

Still, it’s rare for a provisionally implemented tax change not to be passed. In 1979, then-prime minister Joe Clark raised the gas tax. As soon as the tax was announced, pump prices rose. Clark’s minority government was defeated four days later—and the law hadn’t passed. The tax rate reverted to its pre-budget level and the government had to reimburse the people who’d already paid it, says another Parliamentary expert. It decided to lower the gas tax for the same length of time that it had been raised.

Under that logic, families who benefitted from family income splitting in 2014 could have to pay back their tax savings, says the expert. CRA didn’t confirm whether that would be the case.

Until there’s a law to back it up, family income splitting exists in a grey zone. In fact, CRA is delaying tax reassessments for anyone who neglected to apply income splitting to their 2014 return.

“It is CRA’s longstanding practice to wait until proposed legislation has received royal assent before processing adjustment requests,” says Brideau. Once that happens, he says, any adjustment requests will get priority processing.