The new family tax cut is a new non-refundable tax credit beginning in 2014.
This credit will provide families with up to $2,000 per year of tax relief depending on some conditions and restrictions. The credit is located in section 119.1 of the Income Tax Act.
This credit was created to offset some of the unfairness in Canada’s tax rate structure because a couple with a combined $80,000 taxable income would pay more or less tax depending on how the income was split.
For example, a couple whose income was $60,000 and $20,000 would pay more tax than a couple who were both making $40,000.
Non-refundable means that if you don’t use the credit in the current year, then it doesn’t carry over to the next, nor can you apply it back to prior years.
So, who qualifies for this credit? In order to qualify for the credit, you must be a resident of Canada at the end of the year, must have a spouse who has not claimed the credit at the end of the year, have at least one child under the age of 18 at the end of the year living at home and have not been in prison or some other institution during the year.
Both spouses must file a tax return in order to qualify for the credit even if one of the spouses has no income.
The credit allows for the transfer of up to $50,000 to the other spouse and is fixed at half the difference between the spouses’ taxable incomes.
The transfer is based on a notional rather than an actual transfer, so the net income and the taxable income of the individuals remain the same so credits such as the GST/HST based on these amounts will not change. Only one spouse can claim the credit as it can’t be split.
If there is a joint custody arrangement, both ex-spouses may be able to claim the credit if they are both in another marital or common-law relationship.
The application for the credit is calculated on a new Schedule 1-A and the result is on line 423 of your tax return. Situations where the credit will not apply is covered under section 119.1(3) of the Income Tax Act and covers situations such as if the couple already splits pension income or if you were separated and living apart at the end of the year and for a period of 90 days that began sometime during the year.
For events such as death, adoption, emigration, marriage, or starting a common-law relationship during the year, the credit will be pro-rated.