One of the biggest changes facing benefit plans this year is the reform to child-related benefits that the federal government rolled out in midsummer.
The new Canada child benefit (CCB) is expected to put “more money into the pockets of households, when you are looking at the middle class and lower-income families,” says Curtis Davis, director, tax and estate planning, with Toronto-based Mackenzie Financial Corp.
The important thing for financial advisors to know about the CCB is that it’s now entirely “income-sensitive,” but the “benefits are tax-free,” says Wilmot George, vice president, wealth planning, with Toronto-based CI Investments Inc.
The previous system contained two complex components: the Canada child tax benefit (CCTB) and the universal child care benefit (UCCB).
The UCCB component provided a taxable benefit of $160 a month for each child under six years old and $60 a month for each child between the ages of six and 17.
The CCTB, however, was a non-taxable benefit that was paid monthly, based on family net income and the number of children. The CCTB had three parts to it. A national child supplement for low-income families paid $2,308 for the first child, then declined progressively with the number of children. A second component included a benefit for lower- and middle-income families that offered $1,490 for the first and second child, then slightly more for the third and subsequent kids. The third part included a disability benefit that paid up to $2,730.
The CCB consolidates all of those parts and provides a maximum benefit of $6,400 for each child under the age of six and $5,400 for each child between the ages of six and 17.
The amount of the new benefit declines as household income rises, George says. Nonetheless, he adds, “The government has indicated that the CCB will be more generous for eligible families, with nine out of 10 families receiving more in child benefits under the new system.”
The general rule, George says, is that “where family income is less than $150,000 a year, benefits under the new system will be greater; where family income is over $150,000, benefits will be less.”
The new program has been “well received because of the tax-free nature of the benefit,” Davis adds.
However, some of your clients may need to do some tax planning because the CCB is entirely income-tested. For example, Davis notes, self-employed clients have “more flexibility” in determining their “bottom-line income.”
Families don’t have to apply for the new benefit if they were already receiving funds under the old system, George says: “The new benefit will automatically be paid.
“To be eligible, families must reside in Canada and parents must file a tax return annually to continue to receive the benefit,” he adds. “In the case of two-parent families, both parents must file a tax return even if one or both parents did not have income in the year.”
As well, George points out, clients who are in provinces with similar programs will see those benefits combined with the CCB into a single monthly payment. (Ottawa has added a benefits calculator to the Canada Revenue Agency [CRA] website.)
CCB payouts begin to be phased out at a net family income threshold of $30,000, then decline based on a sliding percentage scale. So, for families with income between $30,000 and $65,000, the benefit will be phased out at the rate of 7% for one child, 13.5% for two children and 19% for three children, according to CRA figures. When net family income exceeds $65,000, the phase-out rate starts at 3.2% for one child and 5.7% for two children.
So, what should you suggest your clients do with these funds? That depends on whether they “need it to fund day-to-day expenses,” says George. If not, “investing the money for the future is a great idea.”
He suggests using the benefits to fund a registered education savings plan (RESP), which can attract matching funds from the federal government in the form of the Canada education savings grant. That grant provides 20¢ on every dollar of the first $2,500 saved in an RESP.
Meanwhile, given the federal government’s plan to scrap tax credits for children’s fitness and art courses, some clients might want to put the money toward kids’ programming or summer camp opportunities because clients “won’t be getting the same amount of tax credit,” says Davis.
As well, he suspects, many families will use the money to help fund child-care and daycare expenses: “That tends to be a very large cost, especially here in Ontario.”
But for clients who can afford to put the money away, it’s a good learning opportunity for kids, says George: “Investing the money consistently for the benefit of a child can go a long way in encouraging and modelling good savings habits.”
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