Tax-Free Income for Families: Maximizing Your Canada Child Benefit

In this episode, I explore the Canada Child Benefit (CCB), a tax-free financial support for families. l lead off discussing  who qualifies and how much you can receive before going over how household income affects your CCB.  Finally, I'll provide some strategies to  increase your payments, including the impact of RRSP contributions.

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Transcript

Speaker 1: 0:08

Hello and welcome back to the Canadian Money Roadmap Podcast. I'm your host, evan Newfeld, on this week's episode. It is the first episode of 2024. I thought I'd talk about something I've never talked about once on the podcast before. We're talking about all this free money that you can get from the government tax-free money from the Canada Child Benefit. So if you have kids, if you're planning on having kids, I'd like to dig into this program a little bit more so you understand how much tax-free money you can get from the Canada Child Benefit. Welcome back to another year here on the podcast. I'm going to start off this year with a little short episode here, but getting into the weeds a little bit I'm going to be talking about. A couple of you listening like to get into the technicalities of a lot of these different programs. I've never talked about this one before and, truth be told, I need to learn about it a little bit more myself because now that I've got a couple of kids at home, I thought it would be valuable time well spent to dig into the Canada Child Benefit to better understand this program and how it would work for people of all financial situations and family situations as well. So the Canada Child Benefit has been in place, I believe, since 2016,. It replaced a previous program of tax credits and things like that. It's a simplified program, but now it is a monthly tax-free payment made to eligible families just to help with the cost of raising kids, and kids is defined, or children is defined by someone in your care under the age of 18. There's a large definition there for things like foster kids or, if you're not a parent, maybe you're a grandparent taking care of kids there's lots of opportunities to be able to claim this benefit if you're a caregiver of children no, this isn't like a daycare caregiver of children, but the primary caregiver for that child. So in this episode, I'm going to talk a little bit about how much you can get I'll start there, because that's probably the most interesting thing and two, how to keep your payments going and what are some of the factors that will determine how much you can get. And finally, stick around to the end for a little wrinkle on how to use deductions and specifically RSP contributions, to be able to increase your Canada child benefit. So, for those of you that are curious, the way that the Canada child benefit works is there's two different thresholds for payments that you can receive, based on having kids either under six years old or over six years old. Now these payments are adjusted with inflation, so if you're listening to this later on, after it's been released, these are current as of the beginning of 2024 here. So for each child that you have under the age of six, the maximum you can receive from this program is $7,437 per year per child. So that's about 620 bucks per month. There's a lot of really specific dollar amounts in this episode and so I'm going to try to use round numbers. Even so, bear with me if it's not exactly that amount. I just because this is an audio podcast, I just want to make sure that it's easy enough to understand but specific enough to be relevant. Okay, so about 620 bucks per month for every child under the age of six. Now, for children between the ages of six and 17, it reduces to about $520 per month, $522.91 per month for a total just shy of $6,300 per year. So this is real money, like. It's quite a bit. And the best part about this is that it is tax free. So sometimes when you get government benefits, so even think about like CPP or old age security later on in retirement those are actually taxable sources of income, whereas the Canada child benefit is tax free. So, for example, if you happen to have three kids under the age of six, currently you would receive about $22,000 a year tax free from the Canada child benefit program. Now here comes the wrinkles. So that's kind of the maximum that you can get for, depending on the number of kids that you have. But this amount starts to reduce based on the amount of household income that you have. Again, this is where the really specific dollar amounts come in. So I'm going to just use round numbers here. It's really close. It's not exactly those, it's just. If you're really curious and you want to get to the specific dollars and cents, you can look it up online. If you just Google Canada child benefit, there's a great website from the CRA that goes through all of it. But the main thresholds are income below $35,000. Then there's another Breakdown between 35 and 75 and then over 75,000. So if you have household income under $35,000, you would get the maximum amount Easy enough. So these are the amounts I've talked about before. So kids under six about $7,400. Kids between six and 17 about $6,300 per child. You would get the maximum and that gets paid out to you every month on approximately the 20th of every month, depending if it falls on a weekend or not. But once you have income above that $35,000 threshold it starts to reduce. So between 35 and 75, that amount gets reduced by 7%. I'll be more specific with that reduction there. So if you have income of $40,000, the way that they do the calculation is that they take your total income, so 40, and then they subtract the $35,000 bracket. There is in this case $5,000, and then the 7% reduction is on that amount over 35,000. So in my hypothetical example here, that's $5,000. So your total benefit would be reduced by $350 for one child. If you have two kids, the reduction is 13 and a half percent, 19%, and then 23% For families of four kids. I won't go beyond there because I think we're getting into very niche territory Potentially there, but you can look this up for any details that I'm not talking about specifically today. So that's for incomes between 35 and 75, there's a reduction factor based on the amount over $35,000. Now this is where it gets a little bit complicated. If you have household income over 75,000, okay, it's specifically 75,537, okay. And so now if we're dealing with, say, just one child. The way that the reduction ends up working is that they take a flat rate Reduction and then a percentage of the amount over 75,000. Let's deal with one specific example. Okay, so say you have household income of a hundred thousand dollars. The way that it works for families with one child is that there's a flat rate reduction of $2,847 and then a percentage reduction of 3.2 percent. So let me walk you through the calculation here. So if you have a hundred thousand dollars, you would say a hundred thousand dollars minus 75,000, or 75,537 specifically, that will give you the amount that your income is above the threshold. Okay, so then you move to the percentage Reduction. So again, this is just for one child. So you take that income that you have over 75,000 multiplied by 3.2 percent to get your partial reduction, and then you add that to the flat rate reduction of $2,847 to get your total reduction. Well, if you're still with me here, this is how it would work for a family with a hundred thousand dollars. So if you make a hundred thousand dollars, you would end up getting $3,800 per year, so about 300 bucks a month for one child under the age of six. So a hundred thousand dollars essentially cuts your benefit in half pretty close, but you still get about 300 bucks a month tax-free. That's pretty cool. So obviously there's different thresholds based on the number of children that you have. I won't go into all of those, but I wanted to talk about it just in general for a few different circumstances so you could kind of understand it a little bit. But then once you have income above a certain amount, then the benefit just disappears, based on running the formula. Again, these numbers are ish. But if you have one child and you have family income of about $220,000, that's where you will not receive a benefit anymore. Two kids, it's about 240,000, 260,000 for three kids and about 290,000 ish for four kids or more. And that makes sense, right. So this is a program that's designed to help parents pay for the cost of living and the government rightfully says well, if you have this level of income, you probably don't need as much support from us to do this, so you won't get this benefit here. But for people with more modest incomes this can be really beneficial. So, for example, if you have household income right around that upper threshold of $75,000 so it's a single parent home with 75,000. You'd have to work about 170 hours to get the same amount after tax as the Canada child benefit, because, again, the Canada child benefit is an after tax benefit. So in most provinces 75,000 dollars gross ends up pretty close to about 60,000 after tax, which means it's about five grand a month. So if you're just a hair over that 75,000 dollar threshold you end up with pretty darn close to five grand a month. It'll be a little bit less than that, closer to about 4,600. So if you have income right over that threshold that's called 76,000 dollars your benefit from this program ends up being pretty close to 5,000 dollars a year. So it's almost a month worth of work that gets paid to you throughout the year, again tax-free. So everybody's going to get a completely different amount based on the number of kids you have and the amount of income that you have, and it's a kind of a complicated program just based on when the amounts change. So the way that it works is that you have to file your taxes so that they know how much income you have as a household, how many kids you have, and then in July the payments get adjusted. Okay, so everything in our tax system usually works on a calendar year system. However, the benefit is only assessed after your taxes have been filed, and so it's on a July to June cycle. So if you've had a big change in income and things like that, you won't necessarily see a change in your Canada child benefit until you've filed your taxes and then July rolls around. So in some cases if you make a lot of money, you might have your Canada child benefit disappear. Maybe if you've had a year off or your spouse was on a mat leave and your income was reduced for that year, you might actually get more for that period of time. And so it's assessed based on your previous year's taxes and then applied in July to June of the following year. So the amounts that you get and the thresholds and everything like that will adjust with inflation, which definitely helps, especially in periods of time, like we've seen recently, where inflation is far higher than the last decade averages or so. And the way that the program starts is that here in Saskatchewan at least, I've had a couple of kids in the last few years and we actually get paperwork in the hospital to fill it out and you can apply for your social insurance number and you can apply for the Canada child benefit right at the same time. And so before we even left the hospital, we've applied for it and a couple of months later you become eligible for it based on your previous year's income, and that all gets done automatically. It's pretty slick. But if you have not filed your taxes before, you do not qualify for this program because they don't know how much money you make. So a big, big, big factor here is actually filing your taxes. If you do not file your taxes, you will not receive your payment, and so even if you're expecting to get a refund or you didn't have any income, you still need to file your taxes to tell them that, so that you can actually qualify for this benefit. So people that are low income that would be the demographic of our country that would be least likely to file taxes. That doesn't mean they don't pay taxes, because it's taken off of employment income directly, but they'd be least likely to file taxes on an annual basis, but they'd be the most likely to benefit from this program. And so if you know anybody that might fall under this category of people that would be, say, low income or even temporarily low income please remind them to file their taxes every year to make sure that they qualify for benefits like this and the HST rebates or GST rebates depending on your province all sorts of things that's going to be the topic of another podcast come tax time. But to be able to qualify for it, you have to apply first. Oftentimes you'll apply without even knowing it, and if you're doing the paperwork, like we do here in Saskatchewan, before you leave the hospital, and the money starts showing up soon after, but as long as you are filing your taxes, so it's a pretty great program. But so far in this episode I've pretty much just regurgitated facts and there's nothing really actionable here, necessarily. But one thing that I wanted to put you on is the idea of increasing this benefit based on your net income, and net income is not after tax income, it's after deductions income. Okay, so you get your gross income is your top line, the most money that you make and then there are deductions that happen after that, which reduces the amount of income that you end up paying tax on, and so the big one that you listening to this podcast would probably be familiar with would be an RSP deduction. So when you make a contribution to an RSP, you get a deduction on your income and it reduces the amount of taxes that you have to pay on your income. For many people that have already paid taxes on their income through their employer directly, that means you get a refund, but people who are self-employed, they will have to just pay less taxes every year. However, if you are someone who would qualify to receive the Canada Child Benefit someone like myself we've got a couple of kids at home making an RSP contribution now does two things it reduces the amount of tax that you pay and will increase the amount of Canada Child Benefit that you get. Whoa, this is pretty crazy. So the actual net benefit of making RSP contributions while you have children at home, especially children under the age of six, is quite a bit more than just the pure tax savings that you would get from making that RSP contribution. Let me walk you through a rough calculation here. Okay, my hypothetical scenario. We've got a couple living in Ontario. We have one stay-at-home parent and the other parent earns $150,000 a year. This might not be relevant to your situation. You might make more, you might make less. Just hear me out on the example here. So $150,000 for one person in Ontario. This person decides to do a $10,000 RSP contribution, perhaps that's throughout the year. Whatever, $10,000 goes into the RSP, effectively reducing their income from $150,000 to $140,000. Okay, so the tax savings that comes along with that RSP contribution in their case is $4,341. Again, $4,300. It's not bad. That's a lot of money, because that marginal tax rate in Ontario is 43.41%. Okay now, adding on to that, if you have $150,000 of income and two kids under the age of six again this is just a hypothetical two kids under the age of six that family would expect to get $5,138 from the Canada Child Benefit Program. However, if you had $140,000 of income meaning if this person did a $10,000 RSP contribution and reduced their income by $10,000, they would increase their Canada Child Benefit for the following year to $5,708. So an increase of $570 per year, again tax-free. So the benefit in total goes all the way up to $4,911. It's pretty significant when you start looping this in. Okay, so if you have more kids, it gets better. Yet in terms of absolute dollars, in this same example, nothing else changes except now they have three kids under the age of six. Say a prayer for this hypothetical family. That sounds like a busy household. But if you have three kids under the age of six, income at $150,000, make an RSP contribution of $10,000, the Canada Child Benefit actually goes up by $800, on top of the $4,300 of tax benefits that you receive from making the RSP contribution. This is pretty meaningful, and so I'm not saying this to anybody to use as a blanket statement for doing RSP contributions over other forms of investing or things like that, because, as you can tell, everything here depends on your income level and your family situation cash on hand, tax situation, all sorts of different things. This is highly personal, but in my hypothetical here and maybe this is relevant to you if you're a relatively high income earner but you still qualify for the Canada Child Benefit meaning someone under 220 of income for one child, under 240 of income for two kids, and so on the value of an RSP contribution actually goes up meaningfully when you factor in the additional benefits from the Canada Child Benefit program that come to you as tax-free income in the following year. This is something that I'm looping into my financial planning as well, because we now have two kids under the age of six. For the time being, my wife is a stay-at-home parent, and so my personal income is the one that we have to be more considerate of, and so the value of RSP contributions is meaningful just on a tax basis, but also now that we qualify for the Canada Child Benefit for two kids, it is really something that is worth considering doing over, say, a TFSA. In my specific situation, your province of residence also matters too, because the tax rates are different and things like that. So RSP deductions aren't the only thing that will reduce your net income. There's. Childcare expenses also would count as a very common deduction, especially those of you that have kids. Obviously, this one is relevant for you. So, anyways, that was just one thing that I wanted to loop in here as something that's actionable or something that you could take a look at for planning your investing strategy for the rest of the year. If you're a person that has kids at home under the age of 18, take a look and see how much of a benefit an RSP contribution would have, not only in terms of the tax benefits, but also in terms of the Canada Child Benefit increase that you would receive as a result. Anyways, lots of really specific data in here and numbers and things like that. So I appreciate you staying with me so far If you're still here. Thank you so much for listening. I'm excited to get into a lot more topics like this throughout the rest of this year, but appreciate you listening to the Canadian Money Roadmap. If you haven't subscribed, consider doing that so you can get a new episode like this one every Wednesday. Take care, and we'll see you next week. Thanks for listening to this episode of the Canadian Money Roadmap Podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors before making changes to your financial plan. Evan Neufeld is a certified financial planner and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.