Trudeau-style tax planning: Why donating your child care benefit might be a smart move
Justin Trudeau's decision to donate all of his enhanced universal child care benefits to charity could end up being a smart move, tax-wise, that you may wish to consider for yourself.
On Wednesday, Trudeau, who has three young kids, one under the age of six, announced that he would be donating all of his estimated $3,400 of enhanced UCCB to La Maison Bleue, a charitable group in his Montreal riding devoted to helping vulnerable women during pregnancy and the early days of motherhood.
But when it comes to the donation decision, it will likely be his wife, Sophie Grégoire, who will have the final say, since she will be the one collecting the UCCB payments. Under the rules, to collect the UCCB you must be the person who is "primarily responsible" for the children's care and upbringing. According to the CRA, "primarily responsible" means that you are responsible for such things as supervising the child's daily activities and needs, making sure the child's medical needs are met, and arranging for child care when necessary. If there is a female parent who lives with the child, the CRA usually considers her to be this person.
The UCCB payments, which began in 2006 at $100 per month per child under age six were enhanced this year, with the government increasing the monthly amount for kids under six to $160 and expanding the program to include a new benefit of $60 per month for children aged six through 17. The first enhanced payment was issued on Monday and included a retroactive payment for the period covering January to June 2015.
The UCCB payments replace the child tax credit, which was worth $338 per child, and are considered to be taxable income.
So, how much tax will Ms. Grégoire pay on $3,400 of UCCB payments?
Quebec taxpayers in the lowest tax bracket pay a combined federal and provincial tax rate of about 30 per cent on the first $42,000 of income (above the basic personal amounts) and the top combined federal/Quebec tax rate hits 50 per cent once taxable income is over about $138,000. So Ms. Grégoire's tax bill would be between $1,000 and $1,700 on $3,400 of UCCB payments, giving her an after-tax benefit of between $2,400 and $1,700.
If the full pre-tax payment is donated to charity, and assuming the Trudeau family already donates $200 annually to other charities, a combined federal/Quebec donation credit would be worth 48.22 per cent on the $3,400 of donated UCCB, resulting in a tax deduction of $1,640.
But unless Grégoire is in the highest tax bracket, the $1,640 of donation credits will exceed the amount of tax payable on the UCCB collected and thus can be used to shelter tax on any other source of income. For example, if she paid $1,000 of tax on $3,400 of UCCB, she would be able to reduce her tax on other income by an additional $640.
Of course this isn't unique to the Trudeau family or even to Quebec. In fact, once you donate more than $200 in a given year, you get a federal and provincial credit at the top rate (or near-top rate in some provinces), regardless of whether you are, in fact, actually in the top bracket. This makes donating your UCCB to charity an attractive tax strategy, assuming you actually want to make the donation.
If Trudeau really wants to make a public, political statement about opposing the UCCB for high-income families, he and his wife could agree to not claim the federal and provincial donation credits on their returns, just as Trudeau reportedly did when he promised that he and his wife wouldn't take advantage of the Conservatives' income splitting for parents with kids, giving up $2,000 in potential federal tax savings.
For everyone else, though, using the UCCB to fund charitable donations, activities that will generate arts and or fitness tax credits for your kids or even contributions to an RESP to generate Canada Education Savings Grants are some smart ways to make the most of your UCCB.