Parents across the country received a gift from the government in the form of $420 to $520 for every child in their family last month, thanks to the recent changes in the government’s Universal Child Care Benefit (UCCB) program. Prior to the July announcement that the government was increasing its monthly UCCB payments, families were receiving $100 every month from the government for every child under age six. Under the new system, parents now receive $160 per month for every child under age six, plus $60 per month for every child aged six to 17.
Since these new payouts were made retroactive, dating back to January 1, 2015, parents received $520 for every child under six, and $420 for every child between six and 17 last month. The retroactive nature of these payments means that many families with multiple children received lump sum payments in the thousand-dollar plus range last month. For example, I have four children aged seven and under, and I received just under $2,000 in UCCB payments in July.
This is a generous sum to receive all at once, but how much will the changes to the UCCB benefit your children's’ future? The answer depends on how you plan to use the payments. So in order to help you make the most of this newfound monthly income, here are a few tips to guide you in how best to manage the money you receive from the UCCB program.
The retroactive nature of these payments means that many families with multiple children received lump sum payments in the thousand-dollar plus range last month.
First, Make Sure You’re Registered
It sounds obvious, but it’s worth pointing out anyway: simply put, if you aren’t registered, will not receive the money. The Finance Department has reported that, while there are now two million parents receiving the UCCB, there are still up to 200,000 families missing out on the benefit simply because they haven’t registered.
Registration is easy: simply visit the Canada Revenue Agency UCCB information website, click on Apply Now, and follow the instructions.
Use RESPs or TFSAs to Make the Most of Every Dollar
Since there are no rules saying how you can and can’t spend your UCCB payments, parents have the opportunity to profit further by investing the money in Registered Education Savings Plans (RESPs) or Tax Free Savings Accounts (TFSAs).
By setting your monthly UCCB payments aside in an RESP, you’ll not only be saving for your child’s education, you’ll also get access to the Canada Education Savings Grant – a matching government savings grant which could pay up to 40% on every dollar you put into your child’s RESP.
Or, if you’d like to set the money aside and let it grow, but want more flexibility than what an RESP offers, consider putting your monthly payments into a TFSA. That way, you’ll earn tax-free investment dollars, and you’ll be able to use the money however you want. This means you won’t have to wait until your children attend a post-secondary institution to get access to your savings.
By setting your monthly UCCB payments aside in an RESP, you’ll not only be saving for your child’s education, you’ll also get access to the Canada Education Savings Grant.
Plan Ahead for Tax Time
Since UCCB payments qualify as income, and therefore are taxed just like any other type of income (both federally and provincially), parents wanting to make the most of the payments should make sure to plan for tax time to ensure they won’t end up spending more than they get to keep.
The amount of these payments that qualifies as taxable income depends on your income level and where you live. For example, a family living in Alberta, earning $89,000 per year will be taxed at a combined, marginal rate of 32% in 2015 (including both federal and provincial taxes). If this family has two children under the age of six, they’ll earn a total of $3,840 from the new UCCB payment structure this year before taxes (this includes the previous amount of $100 per month per child, plus the additional $60 per month per child offered under the new payment structure). After taxes, that family will earn $2,611.20 annually for both children.
Compare that to a family earning the same amount in Ontario. At a marginal tax rate of 39.41%, this family would be left with $2,326.66 overall. This gap will widen as annual incomes increase; families earning $220,000 in Ontario will be taxed at a rate of 49.53% this year, while a family earning $220,000 in Alberta will be taxed at a rate of 40%.
To find out how much of your UCCB payments are taxable, determine your marginal tax rate for 2015 based on your annual income, and subtract the taxable amount from the initial payment.
If Possible, Consider Which Parent Receives the UCCB Payments
Whether your family has one parent or two, UCCB payments are set up to go to only one parent in each household. In two-parent families, the payments will typically go to by default whichever parent is identified as the primary caregiver. It’s worth considering, however, which income bracket this parent falls into. For example, if the parent currently identified as the primary caregiver makes over $44,701, and the other parent makes less than $44,701, switching the payments to the parent in the lower income bracket will mean that you pay 25% tax on your UCCB payments, rather than 32% (if your family lives in Alberta).
It’s also worth noting that, in some cases, changing which parent receives the payments can work against you from a tax perspective. For example, if you transfer the payment to the lower-earning parent, but that parent’s annual earnings jump up to a higher tax bracket because of the UCCB payments, that person would end up being taxed at a higher rate on all of their income. In addition, there may be cases where UCCB payments will push a person’s income above the threshold level for receiving other types of child care subsidies, so make sure to watch out for that as well if you rely on these subsidies and don’t wish to become ineligible.
For more information on government benefits for families, check out the income tax cheat sheet we posted on our blog back in April, where we discuss the Family Tax Cut and the Children’s Fitness Tax Credit. We also offer a full range of financial planning services to help families make the most of their budgets and secure their financial future. More information specific to the UCCB is available at http://www.cra-arc.gc.ca/uccb/.