There's been much hype and commotion since the federal government rolled out its revamped Universal Child Care Benefit (UCCB) last month. Dubbed 'Christmas in July', the change distributed nearly $3 billion to Canadian families, regardless of income, with children aged 17 and under.
The most significant aspect of the change is the shift away from tax credit (a fixed amount for any tax paying Canadian), to an increased taxable benefit, (an amount that is now taxed at an individuals marginal tax rate). While the move continues to stir debate over its potential political motives, most Canadian parents are aligned by one question: "how much is the net benefit to me after the taxes are paid?"
To help clear up some of the uncertainty, here is a quick outline describing the change and examples on how it will ultimately impact Canadian families.
Prior to the restructure, the UCCB gave a $100/month taxable benefit to parents for each child under the age of six. The former structure also allowed parents a $2,255 annual non-refundable federal tax credit per household to be claimed for each child under 18.
Under the revamped UCCB, the $2,255 credit has been replaced with two separate taxable benefits. 1) A $160/month taxable benefit for children under six and 2) a new $60/month taxable benefit for children over six. First time payments are retroactive to January 1, 2015 resulting in a one-time top up of $520 for each child under six and $420 for each child aged six to 17 before the new standard monthly rates are issued.
Due to the complexity of Canadian taxes, often what initially looks like a benefit may actually prove itself a tax burden upon the completion of a full tax-cycle. So while most Canadians have reacted positively to the change, it has also stirred up many questions regarding long-term tax implications.
This uncertainty, plus media reporting that continues to illustrate the UCCB's impact in aggregated taxpayer values, has created quite the confusing scenario for families keen to understand the change.
Tax Credits vs. Tax Deductions - Understanding the Difference
One of the main culprits of confusion in the UCCB reshuffle is the shift from a tax credit to a taxable benefit structure.
Essentially, a tax credit is a 15 per cent deduction in taxes owing calculated using the lowest tax bracket values*. A tax deduction on the other hand is a reduction in your taxable income calculated on your marginal tax rate and often provides more value than a credit.
Here's a breakdown of the Canadian federal tax brackets (2014) as a reference:
Under $43,953 = 15 per cent*
Over $43,953 and under $87,907 = 22 per cent
Over $87,907 and under $136,270 = 26 per cent
Over $136,270 = 29 per cent
In addition to this each province has their own set of tax brackets which vary from province to province. If you want to see which federal and provincial tax brackets you are in, you can use our Canadian tax calculator to figure it out. Generally, the lowest tax federal + provincial tax brackets are around 20 per cent and the highest around 45 per cent.
How the Change Affects You
How does the new UCCB change affect you and your specific tax bracket? Let's take a look at three different possible tax scenarios. The lowest marginal tax rate in Canada of 20 per cent, a moderate rate of 35 per cent and a high rate of 45 per cent. We also add in someone earning no income though this won't be very typical.
We can see the average monthly increase in benefits ranges from about $5 to $20 depending on income. Additionally, in the case of someone whose income is low enough to not pay tax they get the full benefit of $60 because they were not able to take advantage the tax credit before. On face value this may seem to benefit couples where one person doesn't work, the new income splitting rules make this scenario unlikely.
An Added Bonus for Single Parents
The UCCB restructure works out very well in the favour of single parents. As a single parent you not only get to keep the old child tax credit, but can also attribute the UCCB income to your child. Essentially, this means you can maximize the credit without having to pay tax on the benefit (assuming your child earns no other income).
Overall the new UCCB are a net benefit to all Canadian parents with children in the applicable age brackets, but the increase, after taxes and the loss of old benefits, is far less than the apparent increase of $60/mo. The actual monthly change in benefits may be as little as $4 but more typically it will be around $10-15 for a middle class family.
Even for couples where one parent remains at home and earns no income the results will be similar. The new income splitting rules mean that even a stay-at-home parent is likely to have a taxable income.
The one major exception, as mentioned, is single parents. Single parents gain from multiple benefits. First, they get to keep the old tax credit. Second, they can assign the taxable income from the new benefit to their child, likely receiving it tax-free. In this scenario they will receive the full added benefit, equal to an additional $60/mo.
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