Canada Child Benefit and Tax Tip 101 for Parents
Considering the upcoming Federal Elections, this week we are looking back at changes made to the Canada Child Benefit. See the original Financial Post article discussed below here: https://business.financialpost.com/personal-finance/taxes/understanding-the-new-canada-child-benefit-and-other-tax-tips-for-parents.
What is the Canada Child Benefit?
The Canada Child Benefit (CCB) was developed in July 2016 after combining the Canada Child Tax Benefit (CCTB) and the Universal Child Care Benefit (UBBC) to streamline the tax benefits given to families with children. The CCB is a non-taxable benefit that is paid monthly based on your household income and the number of children in your family.
What has changed?
Previously, the Finance Minister of Canada announced that the Canada Child Benefit payments would be increasing in accordance with inflation as of July 2018. This change was not supposed to occur until July 2020, but according to the Federal Government “a growing economy and improved fiscal track means the Government can deliver on this commitment two years sooner.”
How did this affect my family?
The new CCB system is targeted at low to middle-income families. Under this new system, 9 out of 10 families are receiving more benefits than they did under the old system. On average, families are earning $2,300 more per month. The majority of families benefiting from this program are single parents, with 90% of these beneficiaries being single mothers. Parents earning higher incomes, however, have seen a decrease in the amount of CCB payments they are receiving.
These CCB payments are broken into two age brackets: payments for children under the age of 6 and payments for children aged 6 to 17. The maximum CCB for a child under 6 is $6,400 annually, which is scheduled to increase to $6,459 (1.5%) in 2018/2019, and to $6,626 (2.0%) in 2019/2020. The maximum payment for children ages 6 to 17 is $5,400 annually and is slated to increase to $5,461 in 2018 and $5,591 in 2019. The exact amount of an individual family’s CCB payments will vary based on their average household income. An average household will receive $6,800 annually from CCB payments.
How do I get the most benefit out of the CCB payments?
Many families use these payments to cover the daily living expenses of their children. However, it’s possible to use CCB funds to invest in your child’s future and to do so in a way which maximizes the possible benefits of your CCB. These benefits arise from certain tax exemption rules and government grants specific to certain registered savings programs.
- Registered Education Savings Plans (RESP)
If you have not already maximized your annual contributions to your child’s RESPs, using the CCB payments to top up your child’s RESPs can effectively provide you a guaranteed return rate of 20% (up to $500 per child). This is because these contributions are eligible for the Canada Education Savings Grant (CESG). Here is how it would break down:
- If you contributed $200 per month from your CCB, you would collect the full $500 in CESGs for the year;
- If you have not previously taken full advantage of your child’s RESP benefits in the years prior, you are able to place more of your CCB into your child’s RESP and retroactively claim up to an annual limit of $1000 in CESGs per child; and
- Even if you have contributed the full amount to your child’s RESP, you are still able to contribute more of your CCB as long as the lifetime contributions do not exceed $50,000. Once the child is ready to use these funds, they will be able to shield most if not all withdrawals under their name.
- Registered Disabilities Savings Program (RDSP)
If your child suffers from a disability, parents can place funds into a tax-deferred (not tax deductible) RDSP. If you were to put $125 of your CCB payment into a RDSP each month this could result in up to $3,500 of matching Canada Disability Savings Grants and $1,000 of Canada Disability Savings Bonds, depending on your family income.
- Investments Made in your Child’s Name
There are certain rules governing the gifting of money to a child. Normally, interest or dividends arising from funds gifted to the child is taxable to the parent who gifted the funds. However, these rules change if the money being invested in the child’s name originated from the CCB. As long as your child does not have another source of income, most, if not all of the interest income can be earned tax-free because the child can shelter it under their basic personal amount tax credit.
Keep your eye on discussions relating to tax credits and benefits being proposed during this election season as they can have a huge impact on your finances! If you have more questions about the CCB and whether you can claim it, call us at 587 - 390 - 3070 or leave us a message on our website!
The above information provides an overview of the CBB as outlined by the Financial Post. The above information does not constitute legal advice. EBL Family is not liable for any reliance on the above information.