Mr. Speaker, I am particularly pleased to rise and to speak to this motion this evening. It addresses an issue of importance to our nation and it is of importance to families, whether together or apart, and that is taking responsible action to ensure that our children are well provided for.
Having said that, I believe that the Income Tax Act should be revenue neutral when considering taxable income for families that remain intact and for those that separate. Presently it is not revenue neutral.
I want to make it crystal clear from the outset that I support this motion in principle. However, it does not go far enough. It is because of the manner by which it does not fulfil the principle that ultimately I cannot support it.
I will explain how the motion goes right and how it goes awry. In keeping with the practice established by my Reform colleagues in this House, I will propose constructive suggestions for making this motion more acceptable.
I commend my hon. colleague, the member for Nepean, for having identified a piece of legislation that is in absolute and desperate need of reform. She pointed out that the legislation was enacted during a time when women seldom worked outside of the home. The year was 1942 and for those post war times the legislation was developed in good faith.
However, the relevant section of the Income Tax Act has become severely outdated. It no longer properly reflects the contemporary reality of divorce. In particular, it fails to address the reality of the millions of Canadian women who work outside the home. Let me share a little of today's reality for those women whose spouses have left and who are raising children on their own.
Statistics Canada has indicated that a large and growing number of single parents, particularly women, suffer a decline in their standard of living in income relative to the parent who no longer lives with his or her children. We have heard that argument numerous times in this debate.
The Income Tax act provides for deductibility of child support payments by the payer and their inclusion into income by the recipient. If the payer had remained in the family unit, his or her ability to deduct child raising expenses would in most cases be reduced.
For example in 1993, the main income earner in a typical husband, wife and one child family would have received a child tax credit of $1,002 for a dependent child. That is if they lived in Alberta and the child was between seven and eleven years of age. If the family income was above a threshold level, then no child tax credit would be paid and the cost of raising the child would provide few, if any, tax deductions. If the parents separated in 1993 and the highest income earner supported the child only through fully tax deductible payments, $500 a month for example, he or she would obtain this significant tax deduction.
It is estimated that by allowing the deduction for the non-custodial parent and taxing the payment received by the custodial parent, generally the one with the lower income, it cost the government $235 million in tax revenue in 1992. With tougher laws enforcing more parents to pay child support it is expected this amount will grow. One can call that a moral hazard, if you will.
I agree with my colleague across the House that the Income Tax Act seems to treat the parent who leaves a relationship and who has fewer responsibilities for raising the children better than the parent, usually a woman, who remains with the children. Let me give an example of how this is the case. This example does not just come out of thin air. It reflects a number of real Canadian situations and actually comes out of my riding of Calgary Southeast.
This is the case of a married man and woman. He made $85,000 a year and she was a homemaker who received no income. This couple divorced and the woman received custody of the children. He continues to earn $85,000 a year and she now has a job that pays $17,000 a year. As part of the settlement he agreed to pay his former spouse $6,000 a year in support payments for his children.
What we need to look at is the $6,000 given as maintenance support. Under the present tax system, the recipient of the $6,000 pays income tax on this amount and the payer, the former husband in my example, receives a $6,000 tax credit. This system provides tax incentives for spouses who leave marriages and who do not raise the children.
A person who divorces, thanks to the existing legislation, receives a windfall for leaving the marriage. Certainly it is not the intent of the legislation to financially benefit a person for leaving family responsibilities behind.
The Income Tax Act as it now exists for reasons I have just mentioned contributes to a perception that there is little legislative support for families torn apart by divorce. This situation is intolerable. Ultimately it hurts the children.
The present system as I see it is flawed for two reasons. The first is allowing the ex-husband to claim a tax credit for his maintenance payments and the second is taxing the ex-wife for the amount she receives. Both of these problems show a failure of the government to encourage or recognize the importance of stabilizing the family unit and responding to the ongoing responsibilities of caring for the children involved.
The motion my colleague has proposed recognizes this inequity to be sure and attempts to redress it. However, I am concerned that her motion fails to be equitable. The pendulum may have been too far on the side of inequity, but the answer is not to swing it all the way in the other direction.
What is needed is some real compromise that will ensure ultimately an effective standard of financial support for the children who are affected and that will treat all affected parties fairly.
The motion allows the recipient, regardless of his or her income, to not have to claim the maintenance he or she receives. It is the lack of recognition of the income component received that is inequitable.
There should be a means test applied to the recipient in order to determine when and if he or she should pay any tax on the maintenance payment. This could be done quite simply. I suggest a recipient should pay no tax on maintenance payments up to $1,000 a month. Any maintenance payments over $1,000 a month should be included as taxable income by the recipient parent.
The changes I would like to see to this motion would in effect see no tax being paid on the amount that is paid in child support up to an acceptable limit by either the custodial parent or by the spouse providing the support. My suggestion is that the child support payment not be taxed as part of the income of the custodial parent unless that amount exceeds $1,000 a month. For example, if it was $1,200 a month, the $200 per month would be added to the income of the recipient and that portion would be taxed.
This may not result in loss of government revenue over all, but it is really too early to tell what the net effect may be. It is unclear at this point if there would indeed be a net tax loss through such an approach. In fact, in the long term it may ensure greater financial support for the children.
I spent quite a bit of time over the break developing this particular thesis. Perhaps it is not quite the same approach my colleagues on this side of the House have taken to this point. However I felt it was also very important to express my views on behalf of those constituents who have approached me for a very long time on this matter.
In conclusion given that the motion refers to changes in the Income Tax Act, I must mention the following. My colleague wishes to make the Income Tax Act more fair for all parties. A good place to begin is with a flat tax system. It could be the case that if such a flat tax were implemented then we would not have to be looking at yet more complicated changes to an already complicated tax system.