Who will benefit from new family tax regime?

For most wealthy families, the elimination of the Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB) means a loss of government benefits.

The Liberals have introduced the Canada Child Benefit (CCB) as a replacement, effective July 1, 2016. But this new system favours low- and middle-income families.

Read: Federal budget 2016: Testing promises

The CCB is a simpler system that’s tax-free and targeted toward such families (while one element of the old system, the UCCB, was taxable and given to all families), says the budget (scroll down to see “Old versus new benefits” ).

The maximum CCB benefit is $6,400 per child under age six and up to $5,400 per child aged six through 17. The benefit will be awarded based on families’ net incomes, and the budget says that the average annual increase in child benefits for targeted families will be $2,300 for the 2016 to 2017 year.

Curtis Davis, director of tax and estate planning at Mackenzie Investments, says families who receive CCB payments won’t have to include it as income on future tax returns, given the benefit is entirely non-taxable.

Read: Are wealthy clients affected by further changes to top tax rate?

Debbie Pearl-Weinberg, executive director of tax and estate planning for CIBC Wealth Strategies Group, points out another positive of the non-taxable aspect. “Unlike UCCB payments, the new CCB won’t reduce GST and HST credits and won’t be included in income to determine other amounts, such as GIS under the OAS program. It also won’t affect families who have RESPs and RDSPs, since it won’t impact the grants and bonds in those.”

Read: What happens when an RESP subscriber dies?

The winners and losers

Take a typical Ontario family with three children under age six. If this family makes $30,000 per year in gross income ($29,546 after tax), they will receive $315 more in government support per month, reports MoneySense (based on calculations by Evelyn Jacks, contributing editor, and founder of Knowledge Bureau).

Read: Essential reads on the federal budget

For higher-income families, the benefit of the new tax system is mixed. For example, if a family with three children under age six makes $70,000 per year in gross income ($58,091 after tax), that family would get $233.75 more in government benefits per month, calculates MoneySense.

In comparison, if a family with three children under age six makes $160,000 per year ($110,621 after tax), the new benefit isn’t as useful. This family will receive $810 less per year, or $68 less per month, than they would’ve with the UCCB. “This family’s marginal tax rate is quite high when the claw back of the CCB is taken into account,” reports MoneySense.

The upside, however, is more high-income families will receive benefits under the new CCB regime. For example, families with one child under age six will receive benefits as long as they make less than $188,437 per year in net income, notes MoneySense (for the CCTB, the cutoff was $118,251). And, a family with three children under age six can make as much as $221,875 before being cut off (formerly $157,601 for the CCTB).

Under the old rules, there’s no cutoff for the UCCB.

Read: Client letter: What the 2016 budget means for you

For a full analysis of the impact of the new benefit, and for a look at how new tax brackets come into play, click here.

And, click here to find out how much the CCB will help your family using a calculator that compares old and new benefits.

Tips for clients

New CCB benefits for the 2016 to 2017 year will be based on families’ net incomes for the 2015 year. So families should maximize their deductions on their 2015 returns.

And, for future years, Pearl-Weinberg suggests the following strategies:

• deducting any child care expenses incurred;
• maximizing RRSP contributions (Read: TFSA or RRSP? The GIS may change the answer);
• considering whether investments could be held within a TFSA, “since the income earned within TFSAs is not included in net income. And, TFSA withdrawals won’t impact net income and entitlement to the CCB;”
• claiming eligible carrying charges and interest paid to earn income from investments; and
• where there’s an opportunity to control when income is received, such as when families receive dividends from a private company, “deferring such dividends to subsequent year[s] could increase CCB entitlement in a current year.”

Read: Budget could sting biz owners, zap advisor AUM

Families could also look at how to deal with investment income earned outside a registered plan. “For instance, Canadian dividend income is taxed at a more favourable rate than interest. [But], because of the dividend gross-up mechanism, [this income] will result in a higher net income for the purposes of calculating entitlement to the CCB—overall, [a family’s] tax rate will drop due to the dividend tax credit but that doesn’t impact net income. [Also], a family could defer the realization of a capital gain to a future year if that could increase entitlement to the CCB.”

Read:

• Liberals decide fate of capital gains tax
• Are share buybacks good for your client’s portfolio?

Clients should also know they’ll still be able to request retroactive payments of both the CCTB and UCCB as far back as 2006 if they would’ve been eligible.

Other family tax changes

The budget included plans to eliminate both the children’s fitness tax credit and arts credit, effective as of 2017, says Pearl-Weinberg.

Currently, the children’s fitness and arts credits are worth up to $150 and $75, respectively, per child on up to $1,000 and $500, respectively, in eligible expenses. So, regardless of income levels, “All parents will have to keep in mind the elimination of [these] credits, and look at all of the tax cuts in conjunction,” she adds. “The fitness credit was refundable. That meant that even if your tax rate was [low], you still received a refund.”

Davis says cutting the two children’s credits will have a small impact, but notes you should remind clients to make claims for 2015 and 2016. “The credits will be cut in half in 2016, but they’ll still be available.”

Old versus new benefits

Clients have until June 30, 2016 to take advantage of the UCCB and CCTB.

UCCB The UCCB will provide a $160 monthly taxable benefit to all families for each child younger than six, and $60 per month for each child between the ages of six and 17.

CCTB This benefit will be paid monthly and is made up of three components. These are:

• a base benefit that’s available to low- and middle-income families, which provides up to $1,490 each for the first and second child, and $1,594 for the third and each subsequent child;

• the national child benefit supplement that’s available to low-income families, and which provides up to $2,308 each for the first child, $2,042 for the second child and $1,943 for each subsequent child; and

• the child disability benefit that’s available to families caring for children who are under age 18 and eligible for the disability tax credit.

As of July 1, 2016, the new CCB will replace the CCTB and UCCB.

CCB It will be paid monthly, won’t be taxable, and will provide families with up to $6,400 a year per child under the age of six, and $5,400 per child aged six to 17.

Families will only receive the full benefit amount if they make less than $30,000 in net income. For those making between $30,000 and $65,000 in net income, the benefit will be reduced at a rate of 7% for a one-child family, 13.5% for a two-child family, 19% for a three-child family and 23% for larger families.

And for families whose net income is above $65,000, they’ll see their benefits reduced even more for the portion of their income above that threshold. The rate of the clawback for that portion of the benefit will be 3.2% for a one-child family, 5.7% for a two-child family, 8% for a three-child family, and 9.5% for larger families.

Families with disabled minors will continue to receive extra support each month, along with CCB payments. These families will receive up to $2,730 more per child that’s eligible for the disability tax credit. The government says the phase-out rates for this amount will generally align with the rates proposed for the CCB. For example, effective July 1, 2016, the maximum amount will be reduced by 3.2% for families with one disabled child and by 5.7% for families with more than one disabled child, on the portion of net income that exceeds $65,000.

Source: Federal Budget 2016, Tax Measures: Supplementary Information