Review of benefits, deductible expense, and tax credits related to families with children
In order to assists parents with the costs of raising children, the federal and provincial governments offer a series of benefits, tax deductions, and tax credits for specific expenses. Some of these benefits such as the Universal Child Care Benefit are provided to families regardless of their income; others are targeted for low and middle income families.
Canada Child Tax Benefit and Universal Child Care Benefit
The Canada Child Tax Benefit is a non-taxable allowance paid to low and middle income families for each child under the age of 18 with whom the parent(s) live and for whom they provide care. The amount is calculated based on the parents’ income for the preceding year.
The federal government also provides an allowance of $160 ($100 prior to 2015) per month for each child under the age of six and $60 per month for children between six and seventeen which once received constitute a taxable benefit (considered income) and are taxed on the lower-income parent’s hands. Separated parents who share custody of a child may elect to receive half of the UCCB. For new born children or for children under six for whom you have not applied for UCCB, you must complete an application in order to start receiving the benefits. For more information please visithttp://www.cra-arc.gc.ca/bnfts/cctb/fq_qlfyng-eng.html.
One of the parents of children under 18 also receives a non-refundable tax credit for each child under 18. You can reduce your family’s total tax bill by depositing the UCC and CTB amounts in your children’s bank accounts. By doing so, the benefits will be taxed on the children’s hands who in most case are in a lower tax bracket.
Child care expenses
Expenses paid for child care such as day-care, boarding school, or a day camp for children under 16 are tax deductible if their purpose is to enable you or your spouse to work, go to school, or perform research. These expenses include babysitting costs if performed by someone unrelated to you; you must however ask for a receipt and the baby sitter’s Social Insurance Number in case you are audited. The maximum deductible expense is the lowest of $ 7000, 2/3 of your earned income, and the actual child-care expenses incurred in any year. The $ 7000 limit is reduced to $4000 for children above the age of six and increased to $10,000 for disabled children. Typically the deduction is claimed by the lower-income spouse.
Some of the adoption, travel, translation fees, and living expenses incurred will receive a tax credit up to $ 15000 Federally and $ 11,797 in Ontario.
Child and Spousal Support Payments
If the child support payments were ordered by a court or are in accordance to a written agreement after April 30, 1997 they are not tax deductible for the payer and are not included in the recipient’s income (not taxable). If the payments are not in accordance with a court order or a written agreement, they are deductible for the payer and taxable for the recipient.
On the other hand, court ordered spousal support payments (after April 30, 1997) are deductible for the payer and taxable for the recipient.
Since child support payments are not generally deductible and spousal support payments are, you should negotiate the separation agreement so that it differentiates between the spousal and child payments; in the absence of such arrangements, all payments will be considered child support and not deductible.
Registered Education savings plan:
Parents can contribute to a trustee plan in order to fund their own or their children’s post-secondary education. The contributions, unlike RRSPs, are not deductible expenses; however the income generated inside the plan is tax-free until it is paid to the student. Unlike RRSP there is no contribution limit but contributions are capped at $ 50,000. Another benefit of such a plan is the Canada Education Savings Grant which is paid by the federal government to each child who is a beneficiary of an RESP. The grant amount is $500 or 20% of the first $2,500 contributed annually from the day the child is born until their 17th birthday up to a cumulative maximum of $ 7,200. Low and middle-income families may be eligible for additional grants. For more information, please visit: http://www.hrsdc.gc.ca/eng/jobs/student/savings/index.shtml.
Home related expenses:
I’m planning to buy a home:
Home buyers and first-time home buyers are eligible for certain tax credits and other benefits. You are considered a first-time home buyer if you or your spouse did not own and occupy another dwelling during the year or the preceding four years in which you purchased a home. In such a case you are entitled to 15% credit of the first $5000 of your costs ($750).
Add RRSP piece. Principal residence. Higher earners should pay themselves a salary that maximizes their RRSP contributions. The maximum RRSP contribution in 2014 is $24,270 which based on the 18% contribution room calculation requires an annual salary of $ 134833 in 2013 to take full advantage of. Remember that unless you file a tax return, your contribution room will not grow as the CRA has no way of determining your income and calculating your contribution room.
The amounts contributed to an RRSP within 90 days of a Home Buyers Plan withdrawal will be subject to some restrictions. In order to avoid these restrictions you should wait at least 90 days from your last contribution to your RRSP prior to withdrawing any funds to buy a home.
Tax Free Savings Account
This program, initiated in 2009, allows individuals 18 years and older to contribute up to $ 5,500 ($ 5000 for years 2009-2013) annually to a Tax Free Savings account. Unlike RRSPs TSFA contributions are not deductible for tax purposes; however withdrawals of the capital and accumulated income are tax-free. You may re-contribute amounts withdrawn from a TSFA in the following year(s) without any tax consequences. You may contribute to your spouse’s TSFA if your spouse does not have sufficient funds to do so. This will not be penalized by the CRA.
You may deduct medical expenses (such as dentist or nurse visits) paid for yourself, your spouse, or dependants if they exceeds $ 2,171 or 3% of your income (whichever is lower). Generally it is advisable that the lower-income spouse claim medical expenses for the family since they have a lower 3% income threshold.
For a complete list of eligible expenses please visit http://www.cra-arc.gc.ca/E/pub/tg/rc4064/rc4064-e.
Taxpayers may claim tax credits (non-refundable) for charitable donations made during a tax year. The annual limit is 75% of net income and the credits may be carried forward for 5 years. If your and your spouses combined donations for a year exceed $200, it may be beneficial to use the carry forward feature and claim several years’ tax credits in one year since a higher rate credit (29% vs. 15% federally) applies to donations in excess of $200. Also donations made by one spouse can be claimed by the other.
Political contributions receive tax credits both federally and provincially; however you will receive a provincial credit only if you contribute to a provincial political party. Federally contribution of $400 or less will receive a 75% credit; the credit percentages decreases as the contributions exceed $400. Unlike the case with charitable donations in which it may be beneficial or carry forward and claim a bigger amount in one year rather than claiming them in the year they were paid, it may be beneficial to spread your political contributions over two or more years since you receive a lower credit for contributions over $400.
Individuals who move in order to take on a new job can deduct their moving expenses if their new resident is at least 40 km closer to the new workplace. You can only claim expenses up to your annual income from the new job; however you may carry forward any overages. Deductible expenses include moving expenses, meals and lodging for you and your family, maintenance costs of your former resident if left unoccupied (includes mortgage interest, insurance premiums, taxes, and utilities up to $5000). There are special and simplified rules that apply to these costs. Consult a tax professional to take full advantage of these deductions. You can find the details on CRA’s website: http://www.cra-arc.gc.ca/travelcosts/.