That's my money; not hers!

One thing that surfaces in my wandering mind occasionally is: why can’t there be a better system for determining the income tax payable by couples? If you are single, you pay tax calculated on the basis that you are an individual. If you are married or living common law, the rules change and now you pay taxes based on your combined income. The idea behind it is left over from the earliest days of income tax (federal income tax was introduced “temporarily” in 1917 in Canada, by the Conservatives) when a spouse, by definition, was a married woman who stayed home and looked after the running of the household. Thus, basic living expenses were higher for a married man than for a single man who did not have a wife to support. Taxes were adjusted on that basis; if they were not then it would make better economic sense for people not to marry, something that the clergy-ruled ruling classes could not allow. So, the spousal deduction was created.

These days what that means is that if someone has less reportable income than the basic personal deduction (about $11,000 currently), then his partner can deduct the difference from her taxable income. In the case of a single parent, one can treat a child in the same manner, and, as young children are not likely to have much, if anything, in the way of income, it amounts to a, roughly, $11,000 tax deduction. (And, no this “equivalent-to-spouse deduction” did not come about because politicians realized that there are a lot of single parents who can use a break; it came about because a widowed male would have to hire nannies and housekeepers to take the place of the deceased wife. Widowed women were not a concern of the income tax people because they had no income to begin with.)

In any case, the disenfranchised classes, who represent a significant proportion of single-family homes, can spot the flaw here. There is a significant financial gain to be realized if one can forget to mention that there is an adult partner in the household. In the absence of a state-recorded marriage license, who’s to say otherwise? What this translates to in reality is that a woman comes in to prepare her taxes accompanied by a male;  they explain that they are simply good friends and can we please overlook that the fact that the two-year old is crawling on the male’s lap and calling him “Daddy?” Tax preparers cannot knowingly file a tax return with incorrect information; but, on the other hand, cannot ask clients for proof of their marital status or call them liars. All we can do is point out the techniques that the Canada Revenue Agency sometimes employs to catch non-declared couples. Just saying, you know. Invariably, the male who did not have his return prepared—and who is just a friend of the family—reaches for the refund cheque.

I made it a habit to keep the refund cheque firmly in hand while the final documents were signed and then I would give the cheque to the woman. If a male partner objected I’d smile and say, “Women know what their family needs; men just know what they want.” That often got a laugh, sometimes a rueful one from the woman. I did this even with people who were preparing returns as a couple—and for the same reason. It was rare that a man raised a serious objection, but, it did happen. In that case, I’d shrug. By that time the woman already had the cheque and, if she was smart, had stuck it in her purse—or bra.

One unexpected situation I ran into though was when pension income splitting was introduced. This was a god-send for older couples living on a single pension, or a lop-sided situation where the man had a much larger pension than the wife. What pension splitting meant was that a couple could treat a retirement pension as if it were payable to both of them. They could combine the amount and then divvy it up for reporting purposes in whatever way was most beneficial for them. For many couples this meant a tax refund of between two and three thousand dollars, assuming they had taxes deducted at source at the standard rate. I could hardly believe it when pensioner after pensioner refused to let me treat their taxes in this way. I’d show them the benefits—and how much of a refund they’d receive—and they’d shake their heads stubbornly. “That’s my money, not hers.” I’d try to convince them that I was not giving their money to their spouse—it was only a paper transaction that did not mean that the pension company would now start making out the cheques to their wives. In some cases that made it worse because they started to suspect that I was trying to pull some sort of accounting trick that the government was sure to catch on to and they would be the ones to pay the price for my deception. Eventually, though, a few years after its introduction most pensioners had dropped their objections. Their friends were getting multi-thousand dollar refunds and had not gone to jail and the wives were just as financially dependent as they always had been. Given that fewer companies these days are paying into pension plans for their employees, this will eventually become a moot point—with the possible exception of government employees.

But, it is interesting that so many males apparently have the attitude that a marriage (or common-law arrangement) is for their sole benefit and have trouble getting the idea that it is supposed to be a partnership through their heads. I had my fair share of older female clients whose husbands had up and died on them who had no clue what financial situation they were in. Many had no idea what Old Age Security is—that was something they left up to the husband to look after. Many did not know that they were entitled to collect on the Canada Pension Plan and, even if they had not worked outside the home, they were still entitled to a survivor benefit. To be fair, I had a few recently-widowed males who were in a similar situation. But, I rarely saw the kinds of outright self-centred displays that I saw in many males being displayed by women. Yes, there was the occasional one who was of the opinion that her income tax refund was so she could buy a new I-Pod even though her children were wearing rags, but those were exceptional.

Now, back to my opening remarks. I sometimes wonder if there can’t be a better way to give families a tax break, yet not get tangled up in situations that encourage people to lie or to grasp avariciously at what they see as belonging to them and not to the partnership. Maybe a system where every member of a household is entitled to a tax credit that can be transferred to any other member of the household would work. So, a household with two adults and three children would have five tax credits to divvy up between those with income. Or, what about a household with three adults and two children? Or, how, when you get down to it, would you define a household? It’s one thing to include the maiden aunt, but what about the roomer who shares meals with you? Or the exchange student? I’m sure there are answers that would work, but, no one is likely to listen to me when it comes to changing basic tax law.