What is income splitting?

Prime Minister Stephen Harper is expected to announce a new tax break for families that would allow couples to split their incomes to help lessen their tax burden.

It's a proposal that polls have shown is popular with many Canadians, and yet as many as nine out of 10 Canadian families may not be able to benefit from the plan.

Here's why, and what income splitting might mean for you:

What is income splitting?

With income splitting, couples can pool their incomes at tax time to allow a high-earning spouse to redistribute some of their money to the spouse earning less income or none at all. The more of a difference there is between the two spouses' incomes, the more money the family is allowed to split and the greater the potential benefit.

Only families with children under age 18 will be eligible for the proposed plan, however. They would be allowed to transfer up to $50,000 of taxable income to the spouse in a lower income bracket. The amount of the tax relief would be capped at $2,000 per year.

What are the advantages of income-splitting?

Prime Minister Harper stated in 2011 that the problem with the current tax system is that it does not recognize that most families already pool their income when they pay their bills, yet at income tax time, they are treated separately. He's also said that income sharing among seniors has worked well for years.

Advocates of income splitting argue the current tax system also effectively penalizes families with a single, high-income earner.

They note that under the current system two families in Canada can earn the same household income, but if one family has all that income coming in from one spouse, they would pay more tax than a couple in which two spouses were making approximately the same amount.

So who will benefit?

The vast majority of families are not likely to benefit, according to reports from The C.D. Howe Institute and The Broadbent Institute. They found that 85 to 90 per cent of households would see no rebates from this tax break at all.

Those likely to see the biggest benefit would be single-income families, in which one spouse is making at least a six-figure income and the other is making little to no money. According to the Broadbent report, in order to benefit most from the plan, one spouse would need to make at least $100,000 more than the other.

The reason that the majority of families in Canada wouldn't benefit is because so many families have two income earners in the same tax bracket. Single parents also miss out, since they have no one to split their income with. Families with children no longer under the age of 18 do not qualify either.

Why is Ontario against the plan, but Alberta isn't?

Ontario doesn't like the income splitting plan because it believes it will cost the province more than $1 billion a year in lost revenue, according to a study by the Mowat Centre at the University of Toronto.

That's because, under the tax collection agreements the federal government has in place with every province except Quebec, provinces would be forced to mirror the federal initiative.

Alberta, on the other hand, has a flat tax system, meaning lower-earning spouses pay the same tax rate as their higher earning spouses. So when families redistribute incomes, it doesn't affect provincial revenues as much.

As well, compared to other provinces, a higher percentage of families in Alberta fit tinto the family model in which one spouse is working and earning a high income, while the other is at home.

Will it convince more families to keep one parent at home?

Perhaps. But, because the benefit is capped at $2,000, it's unlikely this tax break would play a big role in helping families decide if it is worth having one parent at home.

The C.D. Howe Institute worries that because income splitting can raise the marginal tax rate for a lower-earning spouse -- typically the wife – it gives them less incentive to enter or re-enter the workforce.

"This would make married women more vulnerable by reducing their work experience," it said in 2011.

What other concerns are there?

Critics of the plan have noted that income splitting will cost the federal coffers billions in lost tax revenue next year. The C.D. Howe Institute estimates it would cost Ottawa $2.4 billion in 2015 alone.

Critics worry that the plan will mean that average Canadian families gain nothing from the tax break but would ultimately pay the costs, since the loss in tax revenue could result in the need to cut federal public services or other tax hikes meant to offset those costs.

Are there other ways for families to reduce their tax burden?

CTV News Chief Financial Commentator Pattie Lovett-Reid says there are other methods for families to reduce their tax burdens by shifting their expenses. They include Tax-Free Savings Accounts or TFSAs, in which one family member places money in the TFSA of another family member who is in a lower tax bracket.

Spousal Registered Retirement Savings Plan are another option, and allow the higher income spouse to contribute to an RRSP in their spouse's name while claiming the contribution as a tax deduction on their own tax return.

Higher-income earners can also pay for the majority of charitable tax donations, while lower-income earners can pay for child care expenses to ensure they get the highest rebates.