New Baby: Financial Gifts from CRA
by Evelyn Jacks, President and Founder, Knowledge Bureau
Will you be growing your family with the addition of a new baby this year? Families with children can qualify for a series of tax provisions, which can help to increase their cash flow for anticipated expenses for the new addition. These come in the form of refundable and non-refundable tax credits, which are offered by both the federal and provincial governments. There are five important federal tax provisions which can offset the costs of diapers, toys, and trips to the pediatrician, as well as funds for your child’s future education.
The Canada Child Benefit (“CCB”)
The CCB is a completely tax-free monthly payment provided for children under 18. In order to receive it, both parents of the child must individually file a tax return, whether or not there is income to report.
The CCB is based on family net income (Line 236 on the income tax return of each parent), and the number and age of eligible children. In most cases, the CCB is paid to the mother of the children, although it may be split when parents are separated and share joint custody. The CCB is usually applied for when a child is born, or when a family immigrates to Canada.
The amount of the CCB is not shown on the tax return; rather the Canada Revenue Agency (CRA) automatically calculates this amount based on the family net income reported on the parents’ tax returns. The benefit will be reduced if the family income exceeds the government’s income threshold.
How much is the CCB?
Starting with the July 2018 benefit year, the maximum monthly amount is $541.33 or $6,496 per year for children under the age of 6. For children aged 6 to 17, the maximum monthly amount is $456.75 or $5,481 per year. Please note that these amounts may change in July 2019.
The benefit is initially reduced when family net income reaches $30,450, and is reduced again when family net income exceeds $65,975. If the child is disabled, the Child Disability Benefit of $2,771 (2018) is paid, which will be reduced should family net income exceed $65,975. The tax-savvy family will soon notice their family’s CCBs will start to decrease measurably, just as their taxes payable increase and take-home is reduced.
Avoiding High Marginal Tax Rates with RRSPs
With CCB clawback rates as high as 23%, marginal tax rates can exceed 50% when you factor in rising taxable income levels and benefit reductions. An RRSP contribution reduces family net income levels and cuts down the impact of the CCB reductions, while also reducing taxes payable.
RRSP contribution room may be found on the CRA’s Notice of Assessment or Reassessment and contributions can be made throughout the year and within 60 days after the end of the tax year. Remember: the RRSP deduction will decrease the reduction of the monthly CCB benefits in the next “benefit year,” which runs from July 1 to June 30.
Maximize Other Tax Deductions
Another strategy for reducing family net income and overall marginal tax rate is to make sure all available tax deductions are claimed on your income tax return. This includes child care expenses, moving expenses, spousal support payments, carrying charges on your investments and interest costs on certain investment loans.
For children under the age of 7, an annual maximum amount of $8,000 per child can be claimed as child care expenses. The maximum claim is $5,000 for each child over six years and under 16 years of age. For dependants who are disabled and eligible for the Disability Tax Credit, the maximum claimable amount is $11,000.
Under general rules, this child care expense deduction cannot exceed two-thirds of the earned income of the individual who is claiming such deduction or the amounts actually paid to the child care provider.
Normally, the claim must be made by the lower-income spouse, but sometimes it may be made by the higher-income spouse, such as if the lower-income spouse goes to school or is unable to care for the children due to illness. The claim limitations are different in such cases. It is important to keep receipts as supporting documents for these expenses, as the CRA often audits these claims.
Set-up Separate Savings Accounts for Baby’s Education:
Where possible, the CCB benefits and GST/HST credits received for your children may be saved in a separate account in the name of each child. The resulting investment earnings will accumulate and be taxed in the hands of the child, rather than the parent whose income is in a higher income tax bracket, likely reducing the overall family tax bill.
Open Registered Education Savings Plans:
Unlike the RRSP, contributions to an RESP do not generate a tax deduction, but they do attract tax-deferred investment income, which may ultimately be tax-free if the child withdraws the funds to go to school when they have little or no income.
There is actually no annual contribution limit, but lifetime maximum contributions are limited to $50,000 and up to 31 years after the plan was originally opened. The government also provides a grant to the persons who are saving for a child’s post-secondary education. It’s called the Canada Education Savings Grant (CESG) and it pays 20% of annual contributions to all eligible RESPs for each qualifying beneficiary up to a maximum of $500 per year; and up to $600 is paid in the case of lower income earners.
The lifetime CESG is capped at $7,200 and beneficiaries will qualify until the end of the calendar year in which they turn 17. However, one of two scenarios must apply for 16 or 17 year olds: a minimum contribution of $2,000 to the child’s RESP must be made before the end of the year when they turn 15 years of age, or a minimum annual contribution of $100 must have been made to, and not taken out of, the RESP, in at least four of the years before the end of the calendar year when the child turned 15.
A family RESP plan allows parents to name more than one beneficiary. This must be someone related by blood or adoption, and under the age of 21, but this age limit does not apply when funds are transferred from one plan to another.
Clever Financial Moves:
There are three important tax opportunities for families to help save for their children’s future education. First, use available TFSA contribution room for each adult in the family to save even more for the costs of post-secondary education with maximum tax efficiency. Next, invest in available RRSP contribution room to reduce family net income levels, and therefore maximize benefits and credits. Finally, be sure to take advantage of special government funding programs like the RESP, and its added bonuses: the Canada Education Savings Grant (CESG) and the Canada Learning Bond.
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