So taking full advantage of all tax breaks whenever possible is a MUST.
Now that the short-lived “family tax cut” has been eliminated by the Justin Trudeau government - easy income splitting is off the table again for Canadian families.
The credit allowed families to transfer up to $50,000 of taxable income from one spouse (higher earning) to the other spouse (lower earning) with a limit of $2,000 in order to save on their taxes.
But, even though it won’t be available for 2016, there are still other ways families can save on their taxes.
Basic Tax Tips for Families
1. Canada Child Benefit (CCB)
The Canada Child Benefit is a monthly payment given to families of children under the age of 18 to help with the costs of raising a young family.
The payments are tax-free and everyone who is the primary caregiver of a child within Canada is eligible to receive it.
The more children you have, the more money you can receive.
Family net income determines how much you can receive. You need to file a tax return with your spouse in order for CRA to calculate the benefit and lower income families are eligible to receive more. Any dividend income will reduce your benefits while RRSP contributions will increase it (since RRSP contributions reduce your net income).
If your combined net income is below approximately $30,000 for the year you will be eligible to receive full benefits.
Even if you don’t have any income in the year it is important to file a tax return regardless so that you can take advantage of this tax credit.
It’s important to note that starting July 1, 2016 the Universal Child Care Benefit (UCCB) was replaced by the CCB.
2. Child Care Expenses
Child care expenses are deducted from taxable income, which means they can be used to help you reduce your taxes.
In almost all cases the child care costs for an eligible child are claimed by the spouse with the lower net income. Parents who are separated may claim a portion of the costs.
The child care expenses must be paid to care for an eligible child to allow the parent to earn income as an employee, run a business, or attend post-secondary schooling. Some examples of child care expenses include day care costs, nurseries, day camps, day sports schools, and overnight sports schools.
Starting in 2015 there was an increase in the amount of child care expenses that can be claimed for tax purposes. The amount increased by $1,000.
- For children ages 6 and under (that are not disabled) up to $8,000 can be claimed.
- For children ages 7-16 up to $5,000 can be claimed.
- For disabled children (any age up to 16) $11,000 can be claimed.
There are weekly maximums that apply only to boarding schools and overnight sports schools or camps. All other forms of childcare are not subject to these weekly maximums.
The total annual child care costs cannot exceed 2/3 of earned income (such as employment or business income).
Most tax software programs automatically calculate all maximum amounts once you enter the age information for all dependents.
It’s important to keep all receipts for all child care costs incurred and to only claim the amounts actually paid.
3. Basics of the RESP
Another great way for families to save on taxes is through the Registered Education Savings Plan (RESP).
The RESP is a plan that allows families to save for children’s educational costs in the future. The contributions are not tax deductible but the taxes on the growth within the plan are tax-deferred.
In other words, the income earned in the plan is not taxable until it is withdrawn (like an RRSP).
The big advantage of an RESP is that although the withdrawals are taxable, they are taxable in the hands of the child – which almost certainly has a lower tax rate than his/her parents.
The RESP has a lifetime maximum contribution limit of $50,000 (no annual contribution limit) per child and a maximum life of 35 years.
If you over-contribute, you’d have to pay a 1% (per month) tax on the amount of the overcontribution. This can be reduced by withdrawing funds from the RESP equal to the amount of the overcontribution.
4. Canada Education Savings Grant
The Canada Education Savings Grant is a grant that the federal government pays to each child that sets up an RESP. The amount paid by the government depends on how much is contributed towards the RESP and family net income.
There are two types of amounts paid by the government: a basic amount, which families get regardless of their income, and an additional amount which is based on family net income.
The basic amount is 20% of annual contributions regardless of net income. The annual maximum is $500 and lifetime maximum is $7,200.
The additional amount is based on family net income. The higher the net income, the less the family will receive. For families with a net income lower than approximately $44,000, they’d receive an additional 40% on the first $500 contributed (extra $200) or an additional 30% for families with a net income between $44,000 and approximately $89,000.
It’s important to note that if the child doesn’t pursue a post-secondary education in the future, The CESG grant money may have to be paid back. Make sure you check the specific amounts you’re eligible for as the limits change each year.
The most important thing is to contribute to an RESP – it’s free money from the government designed to help pay for education costs.
5. Family Income Splitting
Even though true income splitting through the family tax cut is now a thing of the past now, there are still some other ways for families to split their income and save on taxes.
If you own an incorporated business, you may want to consider appointing family members as shareholders of the company. This would allow them to receive dividends from the corporation in a tax-effective manner. There are some important limitations to consider in this situation, and you’ll want to speak with a tax accountant to ensure the company is structured in the most advantageous way based on your own situation.
Another aspect of incorporating a business is employing family members to do work for the business. This strategy saves on taxes because it means the wages paid can be deducted within the business as a business expense and the wages (paid to the family member) get taxed at their marginal rate – which may be low. Two things:
- You’ll want to make sure the wages paid are reasonable for the work performed, and
- the work actually has to be performed.
Again, there are some other important tax issues to consider in this case which is why it would be important to seek the advice of your accountant before using this strategy for your business.
Even if you don’t own a business, you still have the opportunity to split income through a Tax Free Savings Account (TFSA). Normally if one family member with a high taxable income gives money to a lower income family member to invest in their name, the investment income earned must be claimed by the higher income person....
With a TFSA, a family member with a high income can give money to a family member with a low income to invest in a TFSA - and investment income can be earned free of all taxes.
Parents and grandparents can also give their adult children money for their own TFSA.
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Avoid The Confusion
Canadian tax law is confusing and hard to navigate so there is absolutely NO shame in getting help.
Paying an accountant just to help you pay an already high tax bill can seem crazy.
And I agree...it is crazy.
But, if an accountant helps you catch one or two big tax savings opportunities you will come out ahead. Even if they don’t, the worst case scenario is you saved a bunch of time doing your taxes that can be spent on more important pursuits.