Raising one or more children? Get every penny you’re entitled to when filing your 2014 tax return this April by understanding the new tax measures for families recently introduced by the federal Conservatives.
Remember, some of these provisions could wither for the 2015 year if the current government does not regain its mandate at the next election and a new government overturns them.
Q: What’s the new “Family Tax Cut” all about and how do I claim it?
A: The “Family Tax Cut” essentially allows for income splitting whereby a higher earning spouse can transfer up to $50,000 of income to their lower earning spouse. However the tax benefits are calculated by way of an adjusted non-refundable tax credit on the income that may be claimed by you or an “eligible relation.” This is a Canadian resident spouse or common-law partner with whom you have a child under the age of 18. That child must reside with one or both of you.
The calculation of the credit, which provides tax relief to a maximum of $2,000 in 2014 and future tax years, is calculated as the difference between the combined taxes payable (after all credits are claimed) and the combined taxes that would be payable if the higher earner notionally transferred a specified portion of his or her income, to a maximum of $50,000, to the spouse.
The transferor will still calculate provisions leading to net and taxable income–like RRSP deductions and capital losses–in the normal manner. To receive any benefit the two spouses must be in different tax brackets, regardless of income levels – which means that family taxable income must exceed $43,561. Where one spouse has no income, the maximum benefit occurs when the other spouse’s income is about $56,000.
The primary benefactors then are middle income families where there is a significant disparity between the two incomes. Beyond that, whenever the Tax Cut is capped by the $2000 maximum benefit, you will want to consider deploying additional income splitting strategies.
The Family Tax Cut is a great hybrid between income splitting and tax averaging – thank goodness for tax software! It doesn’t help families where both spouses have income in the same tax bracket, families that don’t pay taxes or single parents, so for these reasons enhancements have been made to the Universal Child Care Benefit (UCCB).
Q: I’m a single parent. Will I get the new Universal Child Care Benefit?
A: Starting in 2015, all families–regardless of income level–will receive the enhanced Universal Child Care Benefit. But don’t look for a payment until July–when you’ll receive a lump sum just in time for summer vacation. Since 2006 the federal government has paid $100 for each child under the age of 6–regardless of the income level of the family. This will be increased to $160 per month for each child under the age of 6 and expanded to include children aged 6 to 17 at an amount of $60 per month. As mentioned, this is a provision that will help single families as well as two-parent families.
Q: Can I still claim the Child Tax Credit on my tax return?
A: Not after this year. Starting in 2015, the Child Tax Credit (CTC) has been eliminated, in part to finance the UCCB mentioned above. The CTC was introduced in 2007 and features a fixed amount per child under the age of 18 years, which is $2,255 in 2014, roughly equal to tax relief of just under $340 per child. Further, this change also begets another one: with the elimination of the CTC, the Family Caregiver Tax Credit, which is linked to the CTC and supplements the costs of raising an infirm child, would technically disappear. Amendments to the Income Tax Act will be made, however, to ensure that a Family Caregiver Tax Credit for infirm minor children will continue to be available. It all adds up to a few more lines on the tax return for taxpayers and their advisers to carefully consider and understand to ensure they get the right results.
Don’t confuse this with the Canada Child Tax Benefit, however, which is a refundable tax credit lower income families receive monthly, based on combined family net income. That benefit has not been eliminated.
Q: Can I claim babysitting expenses? How?
A: Yes, parents who claim babysitting expenses will be happy with the new enhancements to the Child Care Expense Deduction, effective the 2015 tax year. The maximum dollar amounts that can be claimed will increase by $1,000. Therefore, for children under the age of 7, the maximum amount will increase from $7,000 to $8,000, for those aged 7 to 16 and/or infirm, the maximum will increase from $4,000 to $5,000 and for those who are severely disabled and eligible for the Disability Tax Credit the maximum will increase from $10,000 to $11,000. Child Care Expenses can be deducted from the income of the lower-income spouse when the expenses are incurred to earn employment or business income, perform research or pursue an education. The maximum amount that can be claimed each year is limited to two-thirds of that earned income, the total actual amount spent on eligible child care costs and the total new maximum dollar limits. Check out eligible amounts and eligible sitters on Form T778, where the claim is made.
Q: How much money does the government offer to help offset the cost of children’s athletic activities?
A: The government earlier pledged to double the Children’s Fitness Tax Credit to $1,000 and make it refundable by 2015. In 2014, however, it’s still a non-refundable credit, which means you need to pay tax to get a benefit.
Confused? There’s no such thing as a stupid tax question, I always say and that’s especially true for families now. This is a great opportunity to fatten your after-tax returns but will you do the right thing and invest for your child’s future in an RESP or other non-refundable account? Perhaps you’ll park the money in a TFSA and withdraw it tax free for education purposes later? Don’t know? Ask a tax and financial adviser to plan the new possibilities for you.