The winners and losers of the Canada Child Benefit

Our tax expert crunches the numbers

  9

by

Online only.

  9

Budget 2016 banner V2

The federal budget made some important tax changes for families.  The good news is that the much rumoured increase to the capital gains inclusions rate did not come to fruition in this budget,  and the anticipated changes to stock option benefits have been deferred for now. But if you’ve invested in corporate class mutual funds, you’ll want to do any switching between funds on a tax-free basis now until September as that special tax-free treatment will disappear.

Charities will also wince at the cancellation of a provision expected to begin in 2017, introduced in the last budget. That is, the donation of sales proceeds from a qualifying private corporate or real estate dispositions will no longer qualify for a capital gains exemption if proceeds are donated to charity.

Live chat: Have questions? Tune in to our live chat and our experts will answer

Tool: Finance Canada has a nifty calculator that determines your benefits

Families will be happy with the introduction of the Canada Child Benefit (CCB), which is a refundable credit based on family net income. Specifically, the new CCB provides a maximum benefit of $6400 per child under age of six and $5400 per child age six to 17.

How much you get is based on 2015 family net income, which is determined on the tax return (2015) currently being filed.  So be sure to dig for every deduction that reduces your net income on Line 236.  Also, a tip for the future:  RRSP planning for families is extremely important as clawback zones can bring marginal tax rates well over 50% in some cases:

Current Clawback Rules
Income MTR(tax) MTR with clawbacks
$30,000 20.05% 20.05%
$40,000 20.05% 40.10%
$50,000 29.65% 51.15%
$60,000 29.65% 51.15%
$70,000 29.65% 51.15%
$80,000 31.48% 72.48%
$90,000 37.91% 58.41%
$100,000 43.41% 63.91%
$110,000 43.41% 63.91%
$120,000 43.41% 43.41%
$130,000 43.41% 43.41%
$140,000 43.41% 43.41%
$150,000 46.41% 46.41%
$160,000 47.97% 47.97%
$170,000 47.97% 47.97%
$180,000 47.97% 47.97%
$190,000 47.97% 47.97%
$200,000 47.97% 47.97%
$210,000 51.97% 51.97%
$220,000 51.97% 51.97%
$220,000+ 53.53% 53.53%

Do refugees get the benefits?  Foreign-born individuals who are Indians and not Canadian citizens and permanent residents under the Immigration and Refugee Protection Act may legally reside in Canada and receive the CCB. A new limitation is being introduced with regard to eligibility for retroactive payments. Currently individuals may apply for CCTB and Universal Child Care Benefit (UCCB) as far back as the introduction of the programs. Income-tax based credits, however, are limited to a 10-year limitation. Retroactive application of UCCB and CTB will align after 2016, to the 10-year limitation.

Unfortunately, there is no non-refundable tax credit for minor children for those who do not qualify for the income-tested benefits. This was removed when the previous government introduced the UCCB enhancements and the Family Tax Cut.

Other non-refundable tax credits will be removed as well:  the education/textbook amounts will disappear, as will the refundable children’s fitness credit.

Read: Is the Canada Child Benefit fair?

The Canada Child Benefit: See how it affects you

The changes the Liberal government has introduced for families has varying result, depending on family net income, how many children the family has, and whether they are under six or six to 17. We did some calculations at Knowledge Bureau to see how families fare in 2016.

The key learnings are that while middle-income families are generously rewarded with the combination of tax rate reductions and enhanced refundable tax credits, but their marginal tax rates increase significantly as incomes rise to an upper middle class range:  50% for income levels between $70,000 and $80,000 and over 67% for income levels between $90,000 and $120,000. This makes RRSP planning a must for those families in order to reduce family net income below the $70,000 threshold.

Let’s look now at the effects of the changes on a low-income family. In this case, net family income is $30,000 and there are three little children in the family – each under six:

Scenario: Ontario family has three children under 6 and family net income of $30,000

Both work ($15K each) One Works ($30K)
Old Rules New Rules Difference Old Rules New Rules Difference
Earned Income $30,000 $30,000 $0 $30,000 $30,000 $0
– Federal Tax 1,318 454 +864 1,466 602 +864
– Provincial Tax 0 0 0 0 0 0
= Net After Tax $28,682 $29,546 +$864 $28,534 $29,398 +$864
+ UCCB 5,760 0 -5,760 5,760 0 -5,760
+ CTB 9,656 19,200 +9,544 9,656 19,200 +9,544
+ GSTC 987 987 0 987 987 0
+ Prov CTB 3,324 3,324 0 3,324 3,324 0
= Total Income $48,409 $53,057 +$4,648 $48,261 $52,909 +$4,648
Monthly Income $4,034 $4,421 +$387 $4,022 $4,409 +$387

Source: Knowledge Bureau, Inc.

Conclusions:

  • Under the new rules a low-income family with three children will be better off by almost $400 per month.
  • This family has after-tax income of $4,409 per month.
  • Whether single-earner or two working spouses makes little difference.
  • The tax system added 75% to earned income under the new rules with one earner.

Higher Income Earners

Now let’s take a look at the amount of Canada Child Benefit receivable and resulting marginal tax rates at higher income levels. The scenario is the following: Ontario family has three children under 6 and various family net income levels below.  But in this case one spouse is working. First let’s take a look at the old rules:

Table 1: Old Rules

Income Income Tax UCCB CTB GSTC After Tax Effective Tax Rate
$30,000 $1,466 $5,760 $9,656 $987 $44,937 -50%
$40,000 3,406 5,760 6,140 652 $49,146 -23%
$50,000 6,101 5,760 4,385 152 $54,196 -8%
$60,000 9,165 5,760 3,985 0 $60,580 -1%
$70,000 12,280 5,760 3,585 0 $67,065 +4%
$80,000 15,549 5,760 3,185 0 $73,396 +8%
$90,000 19,014 5,760 2,785 0 $79,531 +12%
$100,000 23,268 5,760 2,385 0 $84,877 +15%
$110,000 27,609 5,760 1,985 0 $90,136 +18%
$120,000 31,949 5,760 1,585 0 $95,396 +21%
$130,000 36,291 5,760 1,185 0 $100,654 +23%
$140,000 40,632 5,760 785 0 $105,913 +24%
$150,000 45,261 5,760 385 0 $110,884 +26%
$160,000 50,058 5,760 0 0 $115,702 +28%

©2016 Knowledge Bureau, Inc.  All Rights Reserved.

Note that negative figures represent an excess of benefits received over taxes payable. Below, we take a look at what happens under the new rules with our three-child family. We note taxes payable are netted out with eligible refundable tax credits, and compare the results to the old rules.

Table 2: New Rules

Income Income Tax UCCB CCB GSTC Net Tax Effective Tax Rate Difference % Diff MTR
$30,000 $602 $0 $19,200 $987 $49,585 -65% $4,648 15% 15%
$40,000 3,406 0 $17,300 652 $54,546 -36% $5,400 14% 43.15%
$50,000 6,030 0 $15,400 152 $59,522 -19% $5,326 11% 48.65%
$60,000 8,944 0 $13,500 0 $64,556 -8% $3,976 7% 48.65%
$70,000 11,909 0 $12,150 0 $70,241 0% $3,176 5% 37.15%
$80,000 15,028 0 $11,350 0 $76,322 5% $2,926 4% 39.48%
$90,000 18,343 0 $10,550 0 $82,207 9% $2,676 3% 45.91%
$100,000 22,588 0 $9,750 0 $87,162 13% $2,285 2% 51.41%
$110,000 26,929 0 $8,950 0 $92,021 16% $1,885 2% 51.41%
$120,000 31,370 0 $8,150 0 $96,780 19% $1,384 1% 51.41%
$130,000 35,611 0 $7,350 0 $101,739 22% $1,085 1% 51.41%
$140,000 39,952 0 $6,550 0 $106,598 24% $685 0% 51.41%
$150,000 44,582 0 $5,750 0 $111,168 26% $284 0% 55.97%
$160,000 49,379 0 $4,950 0 $115,571 28% -$131 0% 55.97%

©2016 Knowledge Bureau, Inc.  All Rights Reserved.

Conclusions:

  • Family net income can be as high as $70,000 before any net tax is paid (that is, taxes payable less refundable credits received)
  • When this family’s income reaches $160,000 it is evident that the UCCB provided more money. In addition the family’s marginal tax rate is quite high, when the clawback of the CCB is taken into account
  • However, while high income earners received more benefits under the UCCB regime, the Canada Child Benefit delivers at least some dollars to a broader number of high income families, as illustrated with the high income cut off chart below. In fact, marginal tax rates are over 50% for income levels exceed $100,000 when we take the clawbacks into account. That makes RRSP planning important for families. The deduction of the contribution will help to reduce family net income levels. Child care expense deductions and carry charges on investments are examples of two other deductions that reduce family net income

High Income Cut Offs for Canada Child Benefit

The following table shows the income level at which the CCB will be eliminated for various families. The full benefit is only received up to family net income of $30,000 but the benefit is available over a surprisingly large income range.

Ages of Children Income Cut-Off
1 child under 6 $188,437
1 child over 6 $157,187
2 children, both under 6 $206,667
2 children, one under 6 $189,123
2 children, both over 5 $171,579
3 children all under 6 $221,875
3 children, two under 6 $209,375
3 children, one under 6 $196,875
3 children, all over 5 $184,375
4 children, all under 6 $249,737
4 children, three under 6 $239,211
4 children, two under 6 $228,684
4 children, one under 6 $218,158
4 children, all over 5 $207,631

Single Child Families

In the following scenarios, we take a look at the results under old and new rules that focus on the removal of the UCCB in favour of the CCB and the net results for families at $30,000, $60,000 and $120,000.  In this case, there is only one child.

Family

Income

One

Child

Old Rules New Rules  
Income Tax CTB UCCB Net Income Tax CCB UCCB Net Difference
$30,000 <6 $1,466 $3,354 $1,920 $33,808 $602 $6,400 $   – $35,798 $1,990
$30,000 >5 $1,466 $3,354 $720 $32,608 $602 $5,400 $   – $34,798 $2,190
$60,000 <6 $9,506 $1,195 $1,920 $53,609 $     8,944 $   4,300 $     – $   55,356 $1,747
$60,000 >5 $9,273 $1,195 $720 $52,409 $     8,944 $   3,300 $     – $ 54,356 $1,947
$120,000 <6 $32,322 $0 $1,920 $89,598 $ 31,270 $ 2,190 $     – $   90,920 $1,322
$120,000 >5 $32,058 $0 $720 $88,398 $ 31,270 $   1,190 $     – $   89,920 $1,522

Of note is the fact that single-child families are better off with one child under the new rules at either age and across large income ranges. And that’s certainly good news!

Calculate how much you’ll receive under the new plan

9 comments on “The winners and losers of the Canada Child Benefit

  1. Will the new child care benefit be paid out retroactively from January 1, 2016?

    Reply

  2. Nobody is winning on this piece of sheet, as a single taxpayer I pay “$330” less tax but in fact I am $1000 more in debt, as we all are – plus all the hidden taxes will eat that up.

    Reply

  3. And what did seniors and singles get from it? … The bill.

    Reply

  4. This is not helping low income families at all. As a matter of fact, any low income parent I have spoken to, will now be receiving between $600-$1200 LESS per year in comparison to what they are currently receiving. So in other words, the poor parents of this country are taking a loss for the middle class.

    I have been playing around with the Canada Child Benefit calculator and someone with 2 kids over 6, earning $10,000 per year, will receive $900, while someone with kids in the same age bracket, earning THREE times the amount will get $850 per month.

    There is something SERIOUSLY wrong with this program. Unfortunately, its too soon for many low income parents to realize how screwed they will be come July 2016.

    Reply

  5. Two questions:
    1) Does the CCB consider whether someone is a single parent? (my guess is no as income would presumably be lower plus there is a tax credit for single parents from what I understand)
    2) Does the CCB “earned income” amount consider dividend income? If so, doe the gross up skew the income upwards similar to how it does so for the OAS clawback?
    Thanks!

    Reply

    • Christine,
      Answer #1: If you notice the calculator provides a space for your income and your spouse’s income (if you’re not a single parent or a single-income family). That’s because there are differences in marginal tax rates depending on who earns what and CCB calculations are based on marginal tax rates. I encourage you to use the calculator to examine what I’m saying.
      Answer #2: Yes. Earned income would need to take into consideration all income, including investment income, and would be impacted by gross-ups. I do know that a number of our readers have needed to seek out advice from tax experts because of the new income tax thresholds and how these are impacted re: dividend income and clawbacks.
      Hope that helps.
      Romana

      Reply

      • Thank you Romana!

        Reply

Leave a comment

Your email address will not be published. Required fields are marked *