Clients with children may find themselves on the receiving end of several extra child-based tax provisions this tax season. But your clients should be aware: some of these programs and revisions aren’t exactly obvious. It will require some real effort to determine what is applicable in what circumstances.

“I feel sorry for the average person who wants to do his or her own taxes,” says Michelle O’Brien-Moran, partner of taxation services at Meyers Norris Penny LLP in Calgary. “So many things have become so much more complex.”

Here’s a rundown of the child-friendly tax provisions — which build nicely on the family-friendly incentives introduced in 2006 — for 2007 and 2008:

> Registered Disability Savings Plan. The RDSP addresses the concerns of parents with disabled children, including adult children, says Karen Yull, tax specialist and principle at Grant Thornton LLP in Toronto. It will work much like the popular RESP.

RDSPs are slated to be launched in 2008, but the government has not yet introduced legislation so the rules governing the plans are vague. What is known is RDSPs will be available to all disabled Canadians under age 60 who qualify for a disability tax credit (children must receive a child disability benefit). As with RESPs, RDSP contributions will not be tax-deductible. However, income generated by the plan is not taxed until it is paid out in benefits to beneficiaries. Withdrawals can occur anytime before the beneficiary turns 60. There will be a lifetime contribution limit of $200,000 per beneficiary.

The number of children in Canada receiving the disability tax credit may rise as people learn about this program, says Walter Benzinger, chartered accountant and partner at Deloitte & Touche LLP in Windsor, Ont.: “There are a lot of people who are eligible for the disability tax credit, children or not, who don’t get it.”

A doctor needs to fill out the application form for the disability tax credit. High-income earners may not have bothered applying before, but the program was changed last year to include higher-income earners. (See child disability benefit, below.)

As with RESPs, RDSPs will have grant and bond components. Grants will range from 100% to 300% of RDSP contributions, up to a maximum of $3,500 a year, depending on the net income of the beneficiary’s family. Canada Disability Saving Bonds, up to $1,000 annually, will also augment the plans of low- and modest-income Canadians.

The formula will be somewhat complicated, Benzinger says, but contributions can quickly add up. A contributor in the lowest tax bracket, for example, would receive a 300% match on the first $500 he or she puts into the plan each year. That annual contribution alone, at 5.6% interest, could grow to $130,000 over 25 years, he says.

For higher-income earners (earning $80,000 or more annually), the government will contribute 100% of contributions, up to $1,000 a year. So, a contribution of $1,500 a year by a higher-income family would grow to $170,000 in that same period, he says, assuming the plan earns 5.6% interest.

A number of clients have already shown interest in this program, says Murray Pituley, senior tax and retirement planner at Investors Group Inc. in Winnipeg. “It satisfies the estate planning concern I’ve heard from so many clients.”

Although the grants and bonds paid into the RDSPs make them a particularly attractive option for families, not all will choose this slow but steady strategy, he adds, even if it means missing out on some available grant money.

There is no annual contribution limit. So, it may be worthwhile for contributors to put as much as they can into a plan early, he says: “They may only get a minimal amount of grant monies. But because the income will be tax-sheltered, they may consider this a better way of providing [for the beneficiary].”

What isn’t known, Yull says, is how this plan will integrate with provincial social assistance programs. It is hoped the provinces will amend their legislation so money taken from an RDSP doesn’t affect a beneficiary’s eligibility for income-tested programs. But this hasn’t been determined.

> Child Tax Credit. Starting this year, parents can take advantage of a universal, non-refundable tax credit for each child under the age of 18. The credit is based on an indexed amount of $2,000 and calculated using the lowest tax rate. Federally, that’s 15.5%, which translates into a credit of $310 a child. If a child lives with both parents throughout the year, either parent can claim the credit; any unused portion can be transferred to that parent’s spouse or common-law partner.

@page_break@> Children’s Fitness Tax Credit. Introduced in the 2006 budget, this much-discussed credit is designed to encourage parents to enroll children in eligible fitness programs. It covers $500 in registration fees a child (more for disabled children).

Ottawa has issued guidelines to help determine what programs are eligible.

There must be a cardiovascular component, along with strength, balance or endurance, and the program must be regular and supervised. But there is still plenty of room for interpretation, O’Brien-Moran says. Where, for instance, does bowling fit in?

“We find that with the CRA, wherever there’s room for interpretation, that’s where the confusion starts,” she says.

It’s not so much that parents try to push the envelope — although that may happen — but program providers themselves may not be clear about what qualifies and will issue receipts for tax purposes that, after an audit, will be rejected.

Advisors should encourage clients to confirm with organizers that a fitness program qualifies for the credit and make sure they keep all receipts. Receipts don’t have to be filed with tax returns but they should be available if the CRA asks for them.

And, if your clients find the process frustrating, they are not alone. “I’m not crazy about creating bureaucracy and work for taxpayers,” says Benzinger.

> RESPS. Ottawa has eliminated the $4,000 annual limit and increased the lifetime limit to $50,000 from $42,000 on 2007 contributions to RESPs. It also increased the annual contribution eligible for the 20% Canada education savings grant to $2,500 from $2,000. That means most families can receive up to $500 in grant money each year. Lower-income families have enhanced CESGs, which can add in an extra $50 or $100 a year, depending on income.

The carry-forward provision allowing contributors to collect on grants missed in previous years remains $5,000, double the annual amount eligible for the grant.

The maximum annual grant of $7,200 per beneficiary hasn’t changed, says Yull: “It’s just a matter of how quickly you get it in there.”

> Single-Support Deductions. The government is continuing its strategy of allowing single parents to deduct the same amount for their dependent children as what’s available for spousal deductions, says O’Brien-Moran.

“Normally, if you have a husband and wife and one spouse isn’t working, the spouse who is [working] can receive a credit for the non-working spouse,” she says.

“If you have a single-parent family, the single parent can claim the spousal amount for one of the children.”

For 2007, that deduction is $8,929, up from the $7,581.

> Public Transit Pass Credit. The strict rules for the public transit pass credit, introduced in July 2006, have been loosened for this tax year, Pituley notes. When it was first introduced, the non-refundable tax credit, which has no limit, required a monthly pass on any bus, streetcar, commuter train or ferry. This was limiting, especially for lower-income Canadians who may not have the cash to pay for a full month at once, she says.

This tax year, the credit will accommodate weekly passes (as long as they are for four consecutive weeks, although it may be for only five days a week) and electronic payment cards used for at least 32 one-way trips in any given month.

> Scholarship Income Exemptions. In July 2006, Ottawa introduced a provision that allowed the entire amount of a scholarship, bursary or fellowship to be tax-free for post-secondary students rather than just the first $3,000, as was formerly the case. This year, the program includes high-school and elementary-school students. However, not many Canadians will be affected by this change, O’Brien-Moran says.

> Universal Child-Care Benefit. As of July 1, 2006, a Canadian resident living with and caring for a child aged six and under receives a $100 a month in UCCB. The benefit is not tied to income, but only those who already qualify for the child tax benefit automatically receive it. Advisors should tell higher-income earners with children that they must apply to get it.

> Textbook Tax Credit. Both part-time and full-time post-secondary students can claim this credit, which is unchanged from its introduction in July 2006. Full-time students get $65 for every month they qualify and part-time students receive $20. No receipts or forms are needed, as the program piggybacks on the tuition tax credit.

> Child Disability Benefit. The rate of clawback for higher-income earners was substantially reduced to 2% for families with one disabled child and to 4% for those with two or more. Before the reduction in July 2006, families earning more than $55,000 didn’t receive a CDB. Now, families with one disabled child have to make $150,000 or more to have their CDB reduced to zero. IE