I. General Comment
In 1966, the Carter Commission recommended that the income tax system should consider the family (spouse and minor children) as the basic unit for determining tax liability. Canada did not accept the recommendation for various political reasons. As a result, the general rule in Canadian income tax law is that each individual member of the family is a separate taxpayer, has an independent status, and is liable for tax on his or her personal income. This has contributed to much of the complexity in the personal income tax system.
The question: "whose income is it?" actually has two answers. For commercial purposes, income belongs to the person who owns it as a matter of personal property law. Under the Constitution, this is determined according to provincial law. For federal tax purposes, however, an individual may be taxable on income that he or she does not own in a commercial sense but to whom the income is "attributed".
The individual income tax structure is "progressive", which refers to the individual tax rates in section 117, rather than the quality of the tax system. For example, the basic federal rate structure for 2019 is as follows:
|Tax Brackets||% Rates|
|Up to $47,630||15.00|
|$210,372 and over||33.00|
Section 117.1 indexes the rates annually to account for inflation. Provincial taxes apply on top of the federal rates. Hence, the combined federal-provincial rates in the top bracket can exceed 50%. In Ontario, for example, the top marginal rate on income in excess of $220,000 is 53.53% (2019). They are slightly lower in British Colombia (49.80%) and Alberta (48%), and higher in Nova Scotia (54%).
This means that income taxed to only one member of a family will pay higher taxes than another family with an identical amount of income split between spouses. In 2019, for example, an individual in Ontario with $250,000 taxable income would pay $96,010 tax. In contrast, a family of two, each with $125,000 of taxable income, would pay combined taxes of $70,130, for net savings of $25,880.
The progressive tax structure is an incentive for high-income taxpayers to reduce their taxes by shifting income to members of their family in lower tax brackets. The more income that one can sprinkle amongst family members, the lower the overall taxes of the family. Thus, two gross incomes of $100,000 to each of two individuals are much more valuable in after-tax terms than gross income of $200,000 to only one individual.
Hence, where the members of a family have differential marginal tax rates, there is an economic incentive for higher rate taxpayers to shift their income to lower rate family members to achieve an overall tax saving for the family as a whole. Conversely, lower rate members may wish to shift their losses to higher marginal rate taxpayers in the family. There are several targeted anti-avoidance rules (TAARs) [known as the "attribution rules"] to prevent blatant income shifting between spouses1 and controlled corporations. These rules can attribute income from property from the transferee of the property to the transferor.
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1 The Act uses a broad concept of spouse to include common-law partners and same-sex married relationships – see: para. 248(1) "common law partner".
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