New Tax Break for Pharmacists with Families

Tax time is no fun, but it may help to know that some pharmacists have a new trick this year that can cut their tax bill by as much as $2,000. The “Family Tax Cut Credit” unfortunately doesn’t apply to everyone. However, the new rule appears to provide a favorable tax break to many pharmacists with young families.

The new tax measure (called the “Family Tax Cut Credit”) was introduced by the Canadian federal government in the fall of 2014. The rule allows a young family with a high-income earner to transfer some of their taxable income to a spouse in a lower tax bracket. The tax benefit is capped at $2,000 per family for the 2014 tax year.

The tax break was originally criticized because the final version was watered-down from the plan promised by the Conservative party during the 2011 election (the original campaign promise did not include a cap). Probably the biggest criticism, however, came from the C.D. Howe Institute, an independent think tank, who estimated that 85% of all Canadian households, including single parents, would gain nothing.

A great tax break for pharmacists with young families

Although it’s disappointing the tax break doesn’t apply to everyone, the new tax rule is structured in a way that appears to disproportionately benefit a large number of pharmacists with young families. That’s because the tax break favors families with one big income earner, a characteristic that is common with many pharmacists with young families.

Taxes are by far the biggest expense for most pharmacists, so a good financial plan should focus on taking advantage of all available tax deductions and credits. Here are some details on the new tax credit:

Who is eligible for the Family Tax Cut Credit?

The new Family Tax Cut credit applies to married or common-law couples who have children under age 18. It’s a federal non-refundable credit worth up to $2,000 per family for the 2014 tax year.

How does the “Family Tax Cut Credit” work?

This concept is also known as “income splitting.” The actual tax credit is based on the tax savings a couple could realize on the notional transfer of up to $50,000 of income from one spouse to the other. Assuming both parents are in different tax brackets, the credit will ultimately lower the family’s tax bill, up to $2,000 in 2014.

Eligible couples will need to complete the “Schedule 1-A” and attach it to their federal tax return. Basically, the schedule compares the combined tax bill of the couple before and after the notional transfer of income. The difference in taxes payable will be treated as a tax credit that can be claimed by either spouse.

The size of the tax credit will ultimately depend on the gap between the incomes and tax rates that apply to each spouse. Table 1 provides some scenarios and savings that could result from using the new tax credit.