Document Type

Working Paper

Publication Date

2000

Subjects

Taxation; Family law; Sex discrimination

Abstract

In this paper the author analyses the taxation rules that recognise spousal and family relationships. She notes that even though we file income tax returns as individuals, the federal Income Tax Act recognises spousal and familial relationships for many different purposes, thereby undermining the integrity of the principle of the individual as the tax unit. She observes that Parliament has responded over the years to the ever-changing demographics of “family” life in Canada by amending references in the Act to spousal and other family relationships. For example, the meaning of “spouse” has been expanded to become more inclusive. Most recently, with Bill C-23 the Act would be amended to treat lesbian and gay couples in the same manner as heterosexual common-law couples. In spite of the many changes made, however, a fundamental policy question remains to be considered: is it appropriate for income tax laws to be concerned with spousal and other family relationships? The author tackles this question by examining whether any of the rules that are based on spousal or familial relationships could be removed from the Act and whether those that should remain ought to be reconfigured to make them more fair in their application. Her enquiry takes into account the underlying purposes of the tax system and the basic tenets of tax policy enquiry, as well as examining the impact of the respective tax provisions on different taxpayers from an “equality” perspective. The paper tracks the legislative history of some of the key tax rules involving spousal and family relationships. It classifies and critiques each rule by reference to the tax policy rationales behind the rule. Among the rules considered are the attribution rules, which are intended to stop income splitting between spouses and between adults and minor children. The author concludes that more empirical research is needed on the potential consequences of eliminating these rules before a recommendation to retain or repeal them can be made. The author does recommend the repeal of rules based on dependency, including the spousal tax credit and the ability to transfer unused tax credits to a spouse. Provisions based on economic mutuality are also assessed, both those that result in less or more tax payable by the taxpayer. The author finds that some of these rules should be retained because they do serve valid objectives, however others such as the inclusion/deduction system for spousal support payments are indefensible. This paper provides the first comprehensive review of the federal tax rules that take spousal and family relationships into account. Other scholarly analyses of tax rules related to spousal and family relationships have framed the issue in terms of whether spouses should be taxed as individuals or as a joint unit. However, this paper explores the more fundamental question – whether it is appropriate to recognise spousal and family relationships for any purpose in the Act – and the author finds that in many instances, but not all, rules taking these relationships into account cannot be justified and should be removed from the Act.

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