Family Tax Planning Series – Part I: The Early Years
Our series of Family Tax Planning articles will provide a high-level overview of some common considerations. You should work with your advisors directly to find the best solution for you.
Benefits:
There are multiple benefits designed to help parents with one or more children under the age of 18. You may have heard of a few of these already.
Canada Child Benefit (CCB) is a tax-free monthly payment from the federal government if you are raising a child under the age of 18. The amount received is based on your family income as reported on your personal tax returns. As your family income gets higher, the benefit received gets lower.
You can register for CCB when your child is born, a child starts to live with you or there is a change in custody of your child.
Each province also has their own benefits for families that have children under the age of 18.
The Canada Dental Benefit is another tax-free amount intended to help low to middle income families with the cost of dental care for children under 12 years old and who do not have access to a private insurance plan.
https://www.canada.ca/en/revenue-agency/services/child-family-benefits/dental-benefit.html
Similar to the above, the Child Disability Benefit (CDB) is an additional tax-free monthly payment for families who care for a child under the age of 18 with a severe or prolonged impairment. CRA has a very broad definition of severe and prolonged impairment. A medical practitioner such as a doctor or nurse practitioner should have the knowledge to determine a child’s eligibility and assist with the necessary forms to register them. To be eligible for the CDB, you must be eligible for the CCB and your child must be eligible for the Disability Tax Credit (DTC).
https://www.canada.ca/en/revenue-agency/services/child-family-benefits/child-disability-benefit.html
When your child turns 19, they themselves can receive the DTC which can be used to reduce their own taxes payable. If they do not have enough income to use their own DTC it can be transferred to a spouse/common law partner or parent to help reduce their taxes.
The GST Credit is a federal program that provides quarterly payments to assist individuals and families with either modest or lower incomes with the goal of offsetting the GST/ HST paid on purchases. Parents qualify to receive the GST credit for each of their children until they turn 19 years old. If you have shared custody of a child you would receive half of your child’s GST credit.
Once your child turns 19, they should file their own tax return in order to receive their own GST credit. In addition to this your child can receive their own Climate Action Incentive payments and begin generating some TFSA room!
Registered Education Savings Plan (RESP):
An RESP account is a savings plan that can help fund your child’s post secondary education. You can contribute up to a lifetime limit of $50,000 per child. Anyone who wants can also contribute to your child’s RESP such as grandparents, aunts, uncles and family friends as long as the lifetime limit has not been exceeded but you may want to be strategic in how this is done due to annual government contribution limits. You are able to contribute to an RESP for up to 30 years and the account can remain open for up to 35 years.
There are some government grants that can be used to help fund your child’s RESP. Such as the Canadian Education Savings Grant which is a federal program that will contribute 20%, up to $500 per year to a child’s RESP account, regardless of your family income level.
Depending on the province you live in there can also be some provincial grants that you may also be eligible for.
Unlike a Registered Retirement Savings Program (RRSP) the contributions to a RESP are not deductible on your personal tax return. Parts of the RESP are taxed upon withdrawal in the hands of the beneficiary. The initial amounts contributed into the account and the government grants are not taxable upon withdrawal, but the investment income earned over time is taxable.
https://www.canada.ca/en/services/benefits/education/education-savings.html
Childcare costs:
You or your spouse/partner can deduct childcare expenses on your personal tax return if you earn employment income or carry on an unincorporated business. Expenses are claimed by the lower income partner. In the event you share custody of a child you would be able to claim the expenses that you incurred for childcare.
Some common childcare expenses include:
Day care expenses
Full time or part time non-arms length individuals, such as a nanny (no, this doesn’t include grandma or grandpa’s “services”)
Day camps or overnight camps
Portion of private school tuition (but this is not always available)
Noon supervision costs paid to a school board
Based on the age of your children there are limits on the total amount of expenses you are able to deduct. If your child is 6 years old or less at the end of the year, the maximum deduction for that child is $8,000. If your child is aged 7-16 at the end of the year, the maximum deduction for that child is $5,000.
Unfortunately, if you are paying child support due to a written agreement or court order, these amounts are not considered to be childcare costs and are not deductible on your personal tax return.
Other considerations:
Addition of new children as beneficiaries of your family trust:
When you have additional children, you also have the ability to add them to your family trust as beneficiaries. Please see our Trust series for more information in this.
Life insurance on young children:
It may be odd to think about purchasing life insurance for your child but there are a few advantages to this. Premiums could be lower compared to purchasing it later in life due to their younger age. Additionally, this would guarantee the insurability of your child if they develop a health condition later in life or they have a dangerous hobby.
In the second part of our Family Tax Planning series we discuss the post secondary years. Click here for Part II: Post-Secondary.