When a bird in the hand isn't necessarily worth two in the bush
Being a good tax pro means helping my clients prepare for unexpected surprises come tax time. In July of 2015, a lot of families across Canada were eagerly awaiting the arrival of cheques in the mail from the Enhanced Universal Child Care Benefit (UCCB). I didn't want to be the one to break the bad news back then -- although I tried -- and I certainly don't want to be the one to do it now. But, here goes.
Only a few weeks into tax season, nearly a quarter of my clients who have children are facing the unwelcome surprise that the Enhanced UCCB, combined with the disappearance of the child amount, is actually putting them in a position where they may owe some tax this year.
So what's causing this?
First, the amount for children on the Schedule 1 form, the standard tax filing form every Canadian must fill out, disappeared. This was a non-refundable tax credit of $2,255 per child. But for the 2015 tax filing year, filers will no longer see it as a credit that can be claimed.
The second issue has to do with the Enhanced UCCB. It's certainly all well and good that the government wants to help families with the costs of raising children. Believe me, as the mother of a teenager who likes to dance, it was a welcome bonus last year. But what tends to catch families off guard is that the UCCB is a taxable benefit. When the new payment for children aged 6 - 17 was introduced, and the payments for children under six years old increased, families started to receive more taxable income. And when that happens, families need to account for these enhancements and be prepared to pay the tax on these amounts.
Taking these two issues together it means that, at the same time as taxable income is increasing, a credit to help reduce what a person potentially would owe is being taken away. And that's what's causing some people to receive a lesser refund than they had anticipated. Or in some cases if their refund has been based on the amount for children they could potentially owe this year.
To help add some context, let's take a look at the situation of a two parent family with one teenager. The lower income spouse needs to claim the UCCB so let's say that person is earning $45,000. In 2015, they would have received $720 in Enhanced UCCB payments ($60 X 12 months). They should expect to pay $158 in federal tax on that income ($720 X 22 per cent) plus provincial tax. Provincial taxes vary but here in B.C., they would owe an additional $55.
The amount for children on the Schedule 1 form would have given them a credit of $335 off of taxes due.
In essence, the UCCB which started at $720 for the year, becomes $172 once they take into account the tax implications. ($720 - $158 - $55 - $335).
Although they are still coming out ahead $172 it won't necessarily feel that good at tax time, when their refund is diminished or potentially gone completely. And just imagine if this family had four children. Their taxes due would increase by approximately $2,192 when they start looking at the numbers for 2015.
What I have been telling clients is to prepare for this by saving at least half of those Enhanced UCCB payments. By this time of year, however, I know a lot of people will have spent this money and not necessarily saved any, but it's never too early to start being aware that this is coming down the pike.
Without sounding like a broken record, effective tax preparation and planning are year round activities. It means understanding when changes are happening so that people aren't caught off guard when it comes time to file. In instances like this, a little preparation will go a long way towards ensuring that people will have the best experience they can come tax time.
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