CIBC’s Jamie Golombek offers tips to help CanadiansWith a number of child-related tax saving options available to parents, Canadian families should be taking full advantage of these to minimize their tax bill, says CIBC’s tax and estate planning expert, Jamie Golombek in the second of a series of tax tips this month.
“Being a parent can be a costly venture,” notes Mr. Golombek who is the father of three children. “Whether you’re paying for child care, sports activities, summer camps or tuition, there are a number of ways to reduce your tax costs.”
Mr. Golombek’s report, called “Use your kids to your tax advantage” identifies several options Canadian parents should consider when preparing their taxes this year: tax benefits, deductions and credits, in addition to outlining strategies such as when it may be beneficial to file a tax return for your children or leverage income splitting with your children.
Universal Child Care Benefit (line 117)
The Universal Child Care Benefit (UCCB) is equal to $100 per month and available to all parents with children under the age of six, regardless of income level. If you’ve been receiving the Canada Child Tax Benefit, you should automatically receive the UCCB.
Mr. Golombek notes, however, that “higher income Canadian families, who are not eligible to receive the Child Tax Benefit, must apply for the UCCB by downloading the application form from the Canada Revenue Agency’s website.” He emphasizes that, “UCCB is considered to be taxable income and must be reported by the lower-income spouse or partner, regardless of which spouse or partner actually receives the payments.”
Child care deduction (line 214)
The “child care expense” deduction is designed to provide some tax relief for parents who incur child care expenses which enable them to work outside the home or pursue an education and can include payments to babysitters, nannies, nursery schools and daycare facilities, as well as day camps or summer residential camps.
The child care deduction allows parents to deduct up to $7,000 annually for each child who was 6 or under in 2010, and up to $4,000 per year for each child between the ages of 7 to 15. If the child is eligible for the disability tax credit, you can claim up to $10,000 of childcare fees. Generally speaking, any childcare expenses must be claimed by the lower-income parent.
“Many parents may simply be missing potential deductions, such as day camps and summer camps, which would qualify under the child care deduction.” says Mr. Golombek. Many summer camps include elements of child care thereby making them tax deductible. “The determining factor,” notes Mr. Golombek “is the degree of child care.”
The Canada Revenue Agency (CRA) outlines the following factors to consider: age of the participating children, instructors’ qualifications, time devoted to the program, duration of the program, training and educational facilities used and the extent to which progress is measured.
For example, since day camps for young children are generally for a limited period (a week or two) and provide a sufficient degree of child care, such fees are usually fully eligible for the childcare deduction. On the other hand, older children who participate in a sports program for lengthier periods of time with more sophisticated training methods, facilities and instructors are classified as “education and training” and hence would generally not qualify as a deductible child care expense.
Tuition, education and textbook amounts transferred from a child (Line 324)
Parents should be aware that students who don’t use all of their tuition, education and textbook tax credits can transfer unused credits of up to $5,000 to a spouse, partner, parent or grandparent, regardless of whether they contributed financially towards the student’s education.
With both federal and provincial credits available, a $5,000 transfer could be worth over $1,250 (25 per cent) to a parent, depending on the province of residence. Alternatively, students can save unused credits which they can apply to their own taxes payable in a future year rather than transferring them to a parent.
Mr. Golombek recommends, “At the very least, it is worth a discussion with your child as to who should claim any additional credits, especially if you’ve been providing them with financial support.”
Children’s fitness amount (Line 365)
This federal non-refundable credit is applicable for up to $500 in eligible fees paid for the enrolment of a child under 16 in an “eligible program of physical activity.” The credit is worth 15 per cent of the amount spent for a maximum benefit of $75 per child.
Normally, programs are only eligible for the tax credit if they are at least eight weeks long with a minimum of one session per week. “Again, children’s camps can also qualify as a fitness credit if they are at least five consecutive days and half the program time is devoted to physical activity,” says Mr. Golombek.
Since summer camp fees may qualify for both the children’s fitness amount and the child care deduction (discussed above), it’s generally advisable for a parent, who is in a federal tax bracket higher than 15 per cent, to claim the child care deduction first (if the family has not taken advantage of the full deductible child care expense limit) since it will be worth more than the non-refundable fitness credit which is set at 15 per cent.
Mr. Golombek’s report also outlines additional strategies for parents, including situations when it might be advisable to file a return for a child and when income splitting may make sense.
For instance, when a child has income from part-time, casual or summer employment, filing a tax return provides the advantage of generating RRSP contribution room equal to 18 per cent of the amount earned, which can then be carried forward indefinitely.
Mr. Golombek provides the following advice for parents, “Children don’t generally think too much about their financial future, but parents can point out the advantages of creating RRSP contribution room that comes from filing a tax return in their early earning years.”
Concludes Mr. Golombek, “there are definitely tax advantages for those who have children. Given that raising children can be costly, parents should ensure they capture all the various tax benefits, credits and deductions entitled to them.”
Parents can review the full report by Mr. Golombek by visiting cibc.com.
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