How the Family Tax Cut works and who benefits from it

WATCH ABOVE: Your guide to the Family Tax Cut

It’s been trumpeted by the federal government and is one of the most talked-about changes to Canada’s tax system this year — and yet, many Canadians don’t quite understand the ins and outs of the Family Tax Cut.

What it is and how it works

The FTC was introduced in October 2014. It’s a non-refundable tax credit for two-parent families with at least one child under 18 living at home. Eligible couples include married and common-law partners who are residents of Canada on Dec. 31 of the tax year.

One common misconception about the FTC is that it is “income-splitting.” It is based on income-splitting, however it’s important to note that income does not actually travel from one partner to the other. Claiming this credit does not affect your actual taxable income.

READ MORE: 5 things you need to know about your 2014 tax return

Under the FTC, one person receives a credit (up to $2,000) based on the tax they would have saved if income had travelled from the higher income earner to the lower (up to a maximum of $50,000).

In order to claim the credit, both you and your partner must file a tax return, however only one person can claim the FTC.

To claim it, complete a Schedule 1-A form, make the required calculations and enter that information on your federal tax return. You must attach a copy of your Schedule 1-A to your tax return.

Who benefits from the FTC

The FTC provides the most benefit to families where one partner earns all the income.

“The best case scenario is when there’s a greater disparity of income,” said Battista.

For example, if one person earned $100,000 and their spouse did not earn an income at all, this couple could ‘transfer’ up to $50,000 to the lower-income earner, “at which point they would both be taxed at $50,000,” explained Battista.

Your credit is calculated by determining the taxes you would have saved by both being taxed at $50,000, keeping in mind the credit caps out at $2,000.

Clear as mud right? If you are still not sure how the FTC works, you wouldn’t be alone. A recent survey showed that many Canadians assume they won’t find any savings through the FTC.

However, the best case scenario described above “is not the only situation that results in tax savings,” said Battista.

In a scenario where one spouse made $100,000 and the other made $75,000, the savings would be an estimated $484. With $50,000 and $40,000, the savings would be $277.

Whether you would benefit from the FTC depends on your tax brackets, said Battista. For instance, a couple earning $80,000 and $50,000, respectively, would not benefit from the FTC because they’re in the same tax bracket.

“Any time you’re shifting income around, you’re trying to get your money into a lower tax bracket,” Battista said.

FTC controversy

Beyond being eligible only to families with young children living at home, the FTC has come under fire as being a tax measure for the rich.

In a recent report, Canada’s Parliamentary Budget Officer said the vast majority of Canadians won’t benefit from this tax change.

“The FTC benefits about 2 million households, or 15 per cent of the Canadian total,” read the PBO report, mostly middle and middle-high income earners.

READ MORE: Family Tax Cut will benefit middle to high-income earners, says PBO

“The largest FTC gains are realized by households in the 80th income decile,” leaving single parents and low-income families with little to no opportunity to benefit.

Another criticism of the FTC is that it will lead to a small drain on the workforce, because it provides incentive for some lower-income earners to stop working (most notably, women, said the PBO).

WATCH: Budget watchdog warns about Family Tax Cut