The birth of a child is a bundle of joy – and likely a bundle of expenses as well.
Indeed, the cost of raising kids in Canada can be significant. A 2011 report by MoneySense.ca conservatively estimates the average cost of raising a child up to age 18 to be $13,000 per year, but nowadays summer camp alone can cost that much. For many families, the total cost represents a significant financial burden – and the taxman understands that too.
So, if you have a new baby (or have one on the way), why not prepare to enjoy some tax savings?
The federal government has several existing tax initiatives to help eligible families that have children under 18 years of age. In fact, it spent a total of $13.1 billion in children’s benefits for the fiscal year ended March 31, 2014 (up from $12.9 billion from 2013). And with recent announcements made for new and existing tax benefits, this government expenditure is expected to be even higher for 2015.
Here are some highlights of the key tax savings:
- The new Family Tax Cut (FTC) is a non-refundable tax credit for parents with a child under age 18 and is effective starting in 2014. It is a notional (not real) income splitting exercise: the FTC allows you to notionally transfer income of up to $50,000 to your (presumably) lower-income spouse or common-law partner, and claim a non-refundable federal tax credit of up to $2,000 based on the amount transferred. Since the transfer is notional, the FTC does not change the net income amounts for you and your spouse or partner.
- The Canada Child Tax Benefit (CCTB) is a tax-free monthly payment made to a large majority of families with children under age 18. The basic benefit is $120 per month (or $1,446 per year) for each child under age 18, but is reduced when your family net income exceeds $43,953. The CCTB is unavailable for families with one or two children if the family income exceeds approximately $116,000, and for families with three or more children if the family income exceeds approximately $155,000.
- The Universal Child Care Benefit (UCCB) is a taxable $100 monthly payment made to all families for each child under age six. Under proposed changes effective January 1, 2015, the UCCB will increase the monthly payment to $160 per month (or $1,920 per year) for each eligible child under age six, and $60 per month (or $720 per year) for children aged 6 through 17. The increased amounts will not be reflected in your monthly payments until July 2015.
- If you or your spouse or partner is a working parent, then the lower-income individual can also claim Child Care Expenses paid of up to $7,000 per child under age 7, and $4,000 per child aged 7 to 16. (Note that the term “lower-income individual” includes those who have no income.) Under proposed changes effective January 1, 2015, the dollar limits will increase to $8,000 per child under age 7, and $5,000 per child aged 7 to 16. Eligible expenses include those paid to day-care centres and day nursery schools, certain individuals (excluding immediate family members) providing childcare services, day camps and day sports schools, private schools and overnight sports camps.
- The Child Fitness Amount allows you to claim a maximum of $1,000 per child (up from $500) on fees paid in 2014 relating to the cost of registration for your child in a prescribed program of physical activity. Infant swimming lessons may qualify as an eligible fitness program.
- The GST/HST credit is a tax-free quarterly payment offsetting some GST/HST paid available to families with low or modest incomes. You are eligible for this credit if you are a Canadian resident who lives with your child. Per recent changes, you no longer have to apply for this credit – when you file your 2014 personal income tax return, the Canada Revenue Agency will make a determination and advise if you are eligible to receive the credit.
- The Child Disability Benefit is a tax-free benefit of up to $2,650 per year available to families that care for an eligible child under age 18. Not all children with disabilities are eligible for the disability benefit. To be eligible, the child must have a “severe” and “prolonged” impairment in physical or mental functions.
- You can start saving for your child’s future with the Registered Education Savings Plan (RESP). An RESP is a contract between you (the subscriber) and a promoter that allows you to make contributions toward the future education of your child (the beneficiary). The lifetime contribution limit per beneficiary is $50,000. Although a child can be a beneficiary of more than one RESP, the lifetime limit still applies to that beneficiary. An RESP is also an opportunity for you to defer taxes dollars, as the funds invested accumulate income on a tax-deferred basis until the beneficiary enrolls in qualifying post-secondary education. Government grants such as the Canada Education Savings Grant (CESG) make payments to the RESP where applicable.
Your little bundle of joy can bring big expenses – whether it is baby formula, diapers or childcare costs. Spending some time to familiarize yourself with potential tax savings can help you manage your financial burden. After all, new parents are sleep deprived already and should not lose any more sleep over finance and tax matters.
Charles Fu is the Senior Tax Manager at Sloan Partners and a proud father of a baby boy. Contact Charles today for an analysis of your family’s tax savings opportunities.