The Canadian Income Tax System: Treatment of Children

Overview of the Canadian Tax System

The Canadian government is one of the states that impose taxes, especially income tax on its citizens. The tax system is one of the leading sources of national revenue for the country, and it has been showed to increase with time, especially those from personal income. In Canada, there are tax agreements that allow the federal government to collect all the taxes on behalf of all the provinces, with an exception of Quebec and Alberta. The Canada Revenue Agency (CRA) is responsible for levying and collection of the taxes. Both personal and corporate income taxes for the federal government are levied under the provisions of the Income Tax Act, while other territorial and provincial income taxes are subject to various provincial statutes.

Historically, the Canadian government avoided charging income taxes during the periods preceding the First World War. This was used as a way to attract immigrants due to the low tax regime, but which was revised after the war as a way of paying up the expenses incurred. Since this system depends on personal submissions, a citizen would be required to make calculations of the total income, including deductions such as child care expenses, Registered Retirement Savings Plans, business investment losses, and union and professional dues. Basically, the rate of taxing levying was dependent on the number of children an individual had. Additionally, families with children, especially those that were deemed to be poor, were given a tax-free monthly payment to cater for their child-raising expenses. The CCTB, as it is commonly known, was first enacted in November 1989, by the Canadian parliament in response to a commitment they had earlier made to eliminate poverty in the state by the year 2000 (Garcia, 2002).

The very first attempt by the Canadian Government to provide financial assistance to families with dependent children was in 1945 when the Family Allowance Act was enacted. Benefits covered children of up to age 16, and parents could get from $60 to $96 per year depending on the number of children, and the level of annual income (Garcia, 2002). Later, this package was revised to cover children up to the age of 18, but later in 1979, the benefits were reduced by approximately $5.68 per month with an introduction of a refundable Child Tax Credit. This program was designed to offer additional assistance to families with regards to child-raising, and for each child, a parent could get up to $200 per year (Atya & Morley, 1995). Later in 1988, a flat-rate non-refundable credit was introduced for all taxpayers with children. The Canadian Child Tax Benefit program of 1993 is one of the most recent developments in the tax reform and from time to time new provisions have been made to make it more considerate.

Use of Dependent Children in Defining an Income Tax System

According to Haig-Simons, income is the sum total of consumption plus change in net worth (LeBreux, 1999). Consumption refers to the acquisition or purchase of goods and services, but does not include capital expenditures. Based on this definition, expenses such as contributions made to health insurance may be taxed, unless there is a reflection of an appropriate adjustment in measuring ability to pay. The main question is: are dependent children included in this category of definition as part of factors to be considered while calculating the taxable income? The Canadian tax system, since 1989 have incorporated dependent children in the mix of tax calculations. For instance, one an individual has a child that is below the age of 16 years, or is physically impaired; one could enjoy tax exemptions based on the relative expenses of childcare (LeBreux, 1999). Fees paid for baby-sitting, day-care centers, and nursery schools were counted as part of the childcare tax exemptions. Additionally, day sports schools and day camps as well as boarding school fees could be considered as part of the mix. Harper’s government is held highly as having brought back the tax breaks for families with dependent children. Some of the areas covered were child fitness and art credits and Universal Childcare Benefit (LeBreux, 1999). This essay argues that the inclusion of dependent children in tax calculations is paramount for achievement of both vertical and horizontal equity.

In a state like Canada, where obvious disparity in economic classes exist, it is important to put in place measure to ensure that this gap does not worsen and become unbearable. Having a few people controlling the economy is dangerous not only to individual citizens, but also to the national economy as it is likely to be unstable and biased. The inclusion of dependent children in calculation of income tax is just one of the ways of closing this gap, as it ensures that the establishment of both horizontal and vertical equity. Though these two parameters cannot be totally met in a practical economy, measures that curb their negative aspect are encouraged. Socially, it has been established that the poor usually have more children than the rich, who use modern methods in family control. This fact, though not empirically supported, can be used as a measure of the income of a given household. This system has been shown to significantly contribute to the reduction in the poverty levels of low income families.

However, it is desirable that the use of dependent children be limited to low-income families only. In the spirit of achieving horizontal and vertical equity, awarding of similar favors and exemptions to all classes of people would not bring out the desired outcome. Basically, the rich would still become richer, as the poor become poorer. The tax reform in 1993 would have been the best at targeting such economic and social changes, but the Harper-initiated changes made the efforts to significantly retrogress. Some new changes that have since been enacted include being more responsive to family circumstances; simplifying the 1993 system; supplementing the earnings of families with low incomes, but with dependent children; and being more considerate with low and moderate income families to achieve economic equity (Garcia, 2002).

There have been several arguments supporting the use of dependent children in defining the tax system, as well as rebuttals emanating from political personalities. For instance, proponents have maintained that for the state to accomplish equity, low-income families must be helped to raise their children, so that the line of poverty is not continued into the next generations. They posit that through proper determination of family incomes, and implementing the Child Tax Benefit relative to the family incomes would be a primary step in stemming inequality issues (Jenkins, 2002). It is even proposed, according to the aforementioned provisions, that the system be made more relaxed and considerate towards the low and moderate income families.

On the other hand, opponents of this reform have come up with several rebuttals claiming that child expenses are just like any other forms of family consumption that should be included in the net income. According to the definition of income by Haig-Simons, acquisition or purchase of goods of any kind, whether it was meant for a child of for an adult should be grouped as consumption, which is taxable (Jenkins, 2002). The implementation of this tax program does not only encourage laziness, but also creates huge budget deficits for the federal government. According to the opponents view, this reform program would see families giving birth to many children, since it is viewed as an investment, or a way of extorting money from the government. They offer a rebuttal that dependent children should not be entirely used in defining the tax system, since it holds a myriad of imparities and negative economic impacts.

Conclusion

From the arguments presented herein, it is obvious that the question about inclusion of dependent children in defining the tax system is widely debatable. However, it emerges that for a state to establish horizontal and vertical equity, the tax system must favor the low and moderate income earners. Using the Child Tax Benefits is one efficient way of addressing this disparity, but which must be properly controlled lest no net change would be realized. While the politics of the Canadian Government has seen constant revision of the tax system especially the segment about the significance of children, it is agreeable that the current system is more considerate to the low and moderate income earners it predecessors. Dependent children cannot be simply eliminated from the definition of a sound tax system.

References

Atya, P., Morley E. (1995). “Fifty Years of Canadian Commodity Taxation: Key Events and Lessons for the Future”. Canadian Tax Journal (Canadian Tax Foundation) 43 (5): 1096–1119

Garcia, M. R. S., (2002). Targeting child poverty in Canada, Wilfrid Laurier University.

Jenkins, R. W. (2002). “How Campaigns Matter in Canada: Priming and Learning as Explanations for the Reform Party’s 1993 Campaign Success.” Canadian Journal of Political Science 35(2): 383-408.

LeBreux P. (1999). “Eurig Estate: Another Day, Another Tax”. Canadian Tax Journal (Canadian Tax Foundation) 47 (5): 1126–1163.

Number of words: 1,415 (excluding references)