Federal budget winners and losers: Canada Child Benefit

[brightcove video_id=”6023924988001″ account_id=”6015698167001″ player_id=”lYro6suIR”]

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%

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%

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
Family Income	One Child	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

About Evelyn Jacks, RWM, MFA, MFA-P, FDFS

Evelyn Jacks is the best-selling tax author of 55 books, an award-winning business leader and the Founder and President of Knowledge Bureau, an online financial education institute.

Linkedin Website