In this week’s Fall Economic Statement, Finance Minister Bill Morneau announced an increase to the Canada Child Benefit (CCB) payments, indexing them to inflation as of July 2018. This comes a couple of years ahead of plan as indexation wasn’t slated to begin until July 2020, but, as the government stated, “a growing economy and improved fiscal track means the Government can deliver on this commitment two years sooner.”
You’ll recall that the new CCB system replaced the old system of the Canada Child Tax Benefit (CCTB) and the Universal Child Care Benefit (UCCB), which were combined as of July 2016.
The CCB is a non-taxable benefit that is paid monthly and is based on adjusted family net income and the number of children in your family. While the old CCTB was also tax-free and income-tested, the UCCB, while taxable, was not income-tested.
The government says that under the new CCB system, which is targeted at low- and middle-income families, 9 out of 10 families are receiving more than they did under the previous benefit system and received, on average, almost $2,300 more in benefits, tax-free. Nearly two thirds of families receiving the maximum CCB amounts are single parents, of whom 90 per cent are single mothers. Those with the highest incomes, however, are now receiving less than under the old system.
The current maximum amount of CCB per child under age six is $6,400, which is scheduled to increase to $6,496 for 2018/2019 (based on a 1.5% inflation adjustment) and a projected $6,626 maximum for 2019/2010 (based on a projected 2% inflation rate). The maximum amount for older children, aged 6 through 17, is currently $5,400, rising to $5,481 (2018) and $5,591 (2019). These amounts are reduced based on family income. On average, families benefitting from the CCB receive about $6,800 in CCB payments annually.
While many parents will certainly use the majority of the CCB payments to help pay for kids’ daily living expenses, the CCB can also be used strategically for long-term savings, taking advantage of government grants and a special exception to the income attribution rules.
TOP UP KIDS’ RESPS
If you’re not already maximizing contributions to your child’s Registered Education Savings Plan, using the CCB payments to do so can effectively provide a guaranteed rate of return of 20 per cent (up to an annual maximum of $500 per child) because the contributions will be eligible for the Canada Education Savings Grant (CESG). If you took just over $200 each month from your CCB payment and directed it to an RESP, you would collect the full $500 in CESGs for 2017 (i.e. 12 X $200 X 20 per cent). And, if you haven’t previously maxed out on prior years’ CESGs, you can contribute even more of your monthly CCB payment and catch up on the CESGs retroactively, up to an annual limit of $1,000 of CESGs per child, depending on their age.
Even parents who have contributed the $2,500 diligently each year to their child’s RESP and are fully caught up with the child’s lifetime CESGs can consider extra contributions beyond these amounts provided the total lifetime RESP contributions, per child, doesn’t exceed $50,000. This would allow you to grow the funds on a tax-deferred basis and, in most cases, avoid any tax at all on the withdrawals since the contributions come out tax-free and the growth and CESGs are taxable to the child who can likely use her basic personal amount and tuition credits to shelter all (or most) of the money withdrawn.
CONTRIBUTE TO AN RDSP
If your child or other family member has special needs and qualifies for the disability tax credit due to a severe and prolonged disability, consider opening a Registered Disability Savings Plan. The RDSP is a tax-deferred registered savings plan available to Canadians age 59 and under who are eligible for the disability tax credit. Just like RESPs, your RDSP contributions are not tax deductible but all earnings and growth accrue on a tax-deferred basis.
Using just $125 of your CCB payment each month ($1,500 annually) to contribute to an RDSP could result in up to $3,500 of matching Canada Disability Savings Grants and $1,000 of Canada Disability Savings Bonds, depending on your family income.
INVEST IN CHILD’S NAME
Finally, if you are able to set aside some extra funds from the CCB for your child’s future, but want to do so outside an RESP or RDSP, you can consider investing the funds in a child’s bank or investment account.
Normally, this would be problematic since if you gift money to your minor child, any income or dividends (but not capital gains) are attributed back to you, the gifting parent, and are taxable in your hands at your marginal rate.
But the tax rules provide a specific exception for funds invested in the child’s name that originated from CCB payments. If your child has little or, in most cases, no other income, then all the income earned from investing the CCB payments in the child’s name can be effectively earned tax-free, as the child can use their basic personal amount to shelter up to $11,635 (federally) of income, free of tax.