Archived - Backgrounder: Helping Families Prosper
The Government’s proposed new measures consist of the following:
- The Family Tax Cut, a new federal non-refundable credit of up to $2,000 for couples with children under 18, effective as of the 2014 taxation year.
- An enhancement of the Universal Child Care Benefit that would provide an increased benefit of $160 per month for children under the age of 6 – up from $100 per month, and a new benefit of $60 per month for children aged 6 through 17, effective January 1, 2015. The enhanced Universal Child Care Benefit would replace the existing Child Tax Credit for the 2015 and subsequent taxation years.
- A $1,000 increase in the maximum dollar amounts that can be claimed under the Child Care Expense Deduction, effective for the 2015 taxation year. This means that the maximum amount would increase to $8,000 from $7,000 per child under age 7, to $5,000 from $4,000 for each child aged 7 through 16 (and infirm dependent children over age 16), and to $11,000 from $10,000 for children who are eligible for the Disability Tax Credit.
As previously announced on October 9, 2014, the Government proposes to double the Children’s Fitness Tax Credit from its current limit to $1,000 for the 2014 and subsequent tax years, and make the credit refundable for the 2015 and subsequent tax years.
Under Canada’s personal income tax system, a one-earner couple, or a two-earner couple in which one spouse earns significantly more than the other, often pays more federal personal income tax than a two-earner couple that has the same combined income, but where the spouses have equal earnings.
Federal personal income tax rates increase with the level of taxable income of individual tax filers. For 2014, the first $43,953 of taxable income is taxed at a rate of 15 per cent; taxable income over $43,953 up to $87,907 is taxed at 22 per cent; taxable income over $87,907 up to $136,270 is taxed at 26 per cent; and taxable income above $136,270 is taxed at 29 per cent.
As a result of Canada’s tax rate structure, a couple with two children in which spouses report a taxable income of $60,000 and $20,000, respectively, would pay about $1,210 more in federal income taxes in 2014 than a couple with two children in which both spouses report a taxable income of $40,000, even though their combined household income is the same at $80,000.
The proposed Family Tax Cut would allow the higher-income spouse to, in effect, transfer up to $50,000 of taxable income to a spouse in a lower income tax bracket for federal tax purposes, up to a maximum benefit of $2,000. Tax relief is calculated on the basis of the difference in tax before and after the effective transfer of income.
Pat and Chris are a two-earner couple with two children. Pat earns $60,000 of taxable income and Chris earns $12,000, for a combined taxable income of $72,000.
Pat faces a marginal federal tax rate of 22 per cent. Chris is in the first tax bracket, where income is taxed at 15 per cent. Since the value of his non-refundable tax credits is greater than the tax on taxable income, Chris does not pay federal tax.
For federal tax purposes, under the proposed Family Tax Cut, Pat would be able to, in effect, transfer $24,000 of taxable income to Chris. This would bring their taxable incomes for the purposes of calculating the credit to $36,000 each, which puts both of them in the 15-per-cent tax bracket. In addition, Chris would be able to use up his unused non-refundable tax credits with the notional transfer of income. As one person in the couple may claim the Family Tax Cut, they decide that Pat would do so. The Family Tax Cut would reduce Pat’s tax payable by about $1,260 in 2014, taking into account both the reduced tax on their taxable incomes, and the additional value of the non-refundable credits that Chris is able to use.
The new Family Tax Cut would apply for the 2014 and subsequent taxation years. Couples would be able to claim the credit when they file their 2014 tax returns. To benefit from the credit, each spouse must file a tax return. Either spouse may claim the credit.
This measure is estimated to reduce federal tax revenues by about $2.4 billion in 2014-15 and $1.9 billion in 2015-16. More than 1.7 million families are expected to benefit from the new Family Tax Cut. Since the Family Tax Cut is designed as a federal non-refundable credit, it would have no effect on provincial revenues.
Qualifying Individual
To be eligible for the credit for a taxation year, in general an individual must:
- be a Canadian resident at the end of the taxation year;
- have an eligible relation for the year;
- have a child under the age of 18 at the end of the year who ordinarily resides throughout the taxation year with the individual or the individual’s eligible relation; and
- not be confined to a prison or similar institution for 90 days or more in the year.
Eligible Relation
An eligible relation of a particular individual would be an individual who is resident in Canada at the end of a taxation year and who is the spouse or common-law partner of the particular individual (and not, due to a breakdown in the marriage or common-law partnership, living separate and apart from the particular individual at the end of year and for a period of at least 90 days commencing the year).
When the Credit would be Claimable
The credit would not be available for a year that a qualifying individual or the individual’s eligible relation:
- does not file an income tax return;
- elects to split pension income; or
- becomes bankrupt.
The credit would be available in the year of birth, adoption or death of a child, and in the year of death of the individual or their eligible relation.
Where a child under the age of 18 resides with the child’s parents throughout the year, either of those parents may claim the credit, but not both. If the parents of a child are divorced or separated, and have remarried or entered into new common-law partnerships to form two new couples, one spouse in each new couple may claim a credit of up to $2,000. However, a child must ordinarily reside with each couple through the year. In cases of joint or shared custody, there may be circumstances where it is the same child who ordinarily resides with each couple.
Calculation of the Credit
The value of the credit would generally be determined as the difference between
- the combined taxes payable (after non-refundable tax credits are claimed) by the qualifying individual and that individual’s eligible relation, and
- the combined taxes that would be payable (after non-refundable tax credits are claimed) by them if the higher-income individual could have notionally transferred taxable income (up to $50,000) to the lower-income individual.
However, if this difference exceeds $2,000, the credit would be limited to this amount.
In Budget 2006, the Government introduced the Universal Child Care Benefit, which provides all families with $100 per month for each child under the age of 6. The Universal Child Care Benefit currently provides direct federal support to approximately 1.7 million families with young children.
The Government is enhancing the Universal Child Care Benefit by providing $160 per month for each child under the age of 6 – up from $100 per month, and introducing a new benefit of $60 per month for children aged 6 through 17. Over the course of a full year, parents will receive up to $1,920 for each child under the age of 6 and up to $720 for each child aged 6 through 17.
Enhanced payments for the Universal Child Care Benefit would take effect as of January 2015 and would begin to be reflected in monthly payments to recipients in July 2015. This measure is expected to cost the federal government about $1.1 billion in 2014-15 and $4.4 billion in 2015-16. About four million families are expected to benefit from the enhancements under the Universal Child Care Benefit.
The enhanced UCCB will replace the existing Child Tax Credit for the 2015 and subsequent taxation years. This change would increase federal tax revenues by an estimated $0.4 billion in 2014-15 and $1.8 billion in 2015-16.
By replacing the Child Tax Credit with an expanded Universal Child Care Benefit, all families will benefit, including families with income too low to be taxable and who could not have previously benefited.
The net cost of enhancing the Universal Child Care Benefit and repealing the Child Tax Credit is expected to be $0.7 billion in 2014-15 and $2.6 billion in 2015-16.
Canadians would see the benefit of the enhanced Universal Child Care Benefit starting in July 2015:
- Existing Universal Child Care Benefit recipients – i.e., parents of children under the age of 6 – would automatically receive higher monthly benefits starting with the July 2015 payment. The July 2015 payment would include up to six months of benefits to cover the January to June 2015 period.
- Parents who are eligible for the new benefit for children aged 6 through 17 would begin receiving $60 per month for each eligible child starting with the July 2015 payment. The July 2015 payment would include up to six months of benefits to cover the January to June 2015 period. To qualify, parents have to complete the Canada Child Benefits Application form. Parents who had already completed this form to access other child-related benefits do not have to re-submit the form unless their family situation has changed.
It is proposed that the Income Tax Act be amended, as necessary, to ensure that the treatment of the existing Universal Child Care Benefit for tax and income-tested benefit purposes be extended to the enhanced Universal Child Care Benefit. In particular, amounts received under the enhanced Universal Child Care Benefit would be taxable in the hands of the lower-income spouse. Single parents would have the choice of including the enhanced Universal Child Care Benefit in their own income or in the income of a dependant for whom an Eligible Dependant Credit is claimed (or, if the parent is unable to claim such a credit, in the income of one of the children for whom the Universal Child Care Benefit is paid).
Further, amounts received under the enhanced Universal Child Care Benefit would not reduce the amount of child care expenses that can be claimed under the Child Care Expense Deduction, and would not reduce benefits paid under the Canada Child Tax Benefit and the Goods and Services Tax Credit. The enhanced Universal Child Care Benefit would also not be considered income for the purposes of federal income tested programs delivered outside of the income tax system, such as the Guaranteed Income Supplement, the Canada Education Savings Grant, the Canada Learning Bond, the Canada Disability Savings Bond, the Canada Disability Savings Grant, and Employment Insurance.
Repeal of the Child Tax Credit
Introduced in Budget 2007, the Child Tax Credit is a non-refundable tax credit based on a fixed amount per child under the age of 18 years ($2,255 in 2014, which amounts to tax relief of up to $338 per child).
The enhanced Universal Child Care Benefit would replace the existing Child Tax Credit for the 2015 and subsequent taxation years. Therefore, it is proposed that the existing Child Tax Credit be repealed for the 2015 and subsequent taxation years.
Family Caregiver Tax Credit
Economic Action Plan 2011 introduced the Family Caregiver Tax Credit to provide tax relief for caregivers of infirm dependent family members. This credit provides tax relief for caregivers of all types of infirm dependent relatives, including, for the first time, spouses, common-law partners and minor children. The way in which the Family Caregiver Tax Credit works is that caregivers claim an enhanced amount for an infirm dependant, such as a minor child, under another dependency-related credit (which would be the Child Tax Credit in the case of a minor child).
In the absence of legislative amendments, eliminating the Child Tax Credit would mean that the Family Caregiver Tax Credit in respect of infirm, minor children would no longer be available, starting in 2015. It is therefore proposed that the Income Tax Act be amended to ensure that a Family Caregiver Tax Credit amount would continue to be available in respect of an infirm, minor child when the Child Tax Credit is repealed for 2015 and subsequent taxation years.
The Child Care Expense Deduction allows child care expenses incurred to earn employment or business income, pursue education or perform research, to be deducted from income for tax purposes. Generally, only the lower-income spouse can claim it.
Currently, the maximum amount that can be claimed under the Child Care Expense Deduction each year is limited to the least of:
- the total amount spent on child care expenses;
- two-thirds of the lower-income taxpayer’s earned income; and
- the total of the maximum dollar limits for all children, that is $7,000 per child under age 7, $4,000 for each child age 7 to 16 (and infirm dependent children over age 16), and $10,000 for children who are eligible for the Disability Tax Credit, regardless of their age.
To better reflect the cost of child care expenses, the Government proposes to increase the dollar limits of the Child Care Expense Deduction by $1,000 – i.e., to $8,000 from $7,000 per child under age 7, to $5,000 from $4,000 for each child aged 7 to 16 (and infirm dependent children over age 16), and to $11,000 from $10,000 for children who are eligible for the Disability Tax Credit.
These changes would apply for the 2015 and subsequent taxation years. These changes would reduce federal revenues by an estimated $15 million in 2014-15 and $65 million in 2015-16. More than 200,000 families are expected to benefit from the increases in the Child Care Expense Deduction dollar limits.
Overall, the proposed new measures announced on October 30, 2014 would provide about $4.6 billion in annual relief to about four million families with children. Families at all income levels would benefit from these new measures, with low- and middle-income Canadians receiving proportionately greater relief as a share of federal income tax paid. On average, families with children would receive about $1,140 in tax relief and benefits per year.
On October 9, 2014, the Government announced its intention to double the maximum amount of expenses that may be claimed under the Children’s Fitness Tax Credit (CFTC) to $1,000 and make it refundable. Making the tax credit refundable would ensure that even those who do not earn enough to pay income taxes benefit from this measure.
Parents would be able to take advantage of the new $1,000 maximum limit in the spring of 2015 when they file their tax returns for 2014. Beginning in the 2015 taxation year, the credit would become refundable, increasing benefits to low-income families.
The CFTC was introduced by the Government in 2006 to help promote physical fitness among children by making it more affordable for Canadian families to register their kids in fitness activities. When fully implemented, the enhancements to the CFTC would fulfill a commitment made by the Government in 2011. The enhancements would deliver additional tax relief to about 850,000 families who enroll their children in eligible fitness activities.
The examples below illustrate the impact of the proposed new measures for different family situations.
Dale and Kelly are a two-earner couple with two children aged 7 and 3. Kelly earns $95,000 and Dale earns $25,000. For the 2015 taxation year, the family would receive a net federal benefit of $2,835 as a result of the proposed new measures. This is in addition to the $2,000 in tax relief the couple would be receiving in early 2015 when they claim the Family Tax Cut on their 2014 returns.
- In 2015, the couple would begin receiving monthly Universal Child Care Benefit payments of $220, which includes $160 for their younger child plus $60 for their 7 year old (their first enhanced Universal Child Care Benefit payment would actually be received in July 2015 and would include a $720 catch-up payment for the January to June period). Previously, they had been receiving $100 per month for the younger child. Over a 12-month period, the Universal Child Care Benefit enhancement would represent a benefit of $1,440 for this family. Since the enhancements to the Universal Child Care Benefit would be taxable, and the Child Tax Credit would be repealed, the net federal benefit from the Universal Child Care Benefit for the family would be $536.
- Since the younger child attends full-time daycare and the older one attends summer camp and after-school care, Dale and Kelly would fully benefit from the $2,000 increase in the amount they can claim under the Child Care Expense Deduction for the 2015 taxation year. This enhancement to the Child Care Expense Deduction would provide $300 in additional federal tax relief.
- For the 2015 taxation year, the family’s tax payable would be further reduced by $2,000 due to the new Family Tax Cut.
As a result of the tax relief and benefit measures introduced since 2006, including those announced on October 30, this family would be better off by about $7,285 in 2015.
Isabelle and Marc are a one-earner couple earning $60,000. They have two children aged 2 and 4. As a result of the proposed new measures, this family would benefit from about $1,605 in federal relief for the 2015 taxation year. This is in addition to about $1,055 in tax relief they would receive in early 2015 when they claim the Family Tax Cut on their 2014 returns.
- The Universal Child Care Benefit enhancement would represent a benefit of $1,440 over a 12-month period. Since the enhancements to the Universal Child Care Benefit would be taxable, and the Child Tax Credit would be repealed, the net federal benefit from the enhanced Universal Child Care Benefit for the family would be $536 for the 2015 taxation year.
- For the 2015 taxation year, the new Family Tax Cut would reduce the family’s tax payable by about $1,070.
As a result of the tax and benefit measures introduced since 2006, including those announced on October 30, this family would be better off by about $6,240 in 2015.
Alison is a single parent raising one child age 4 and earning $45,000. As a result of the proposed new measures, Alison would benefit from about $420 in federal relief for the 2015 taxation year.
- The Universal Child Care Benefit enhancement would represent a benefit of $720 over a 12-month period. Since the enhancement to the Universal Child Care Benefit would be taxable, and the Child Tax Credit would be repealed, the net federal benefit from the enhanced Universal Child Care Benefit for the family would be $268.
- Since her child attends full-time daycare, Alison would benefit from the $1,000 increase in the amount she can claim under the Child Care Expense Deduction for the 2015 taxation year. The enhancement to the Child Care Expense Deduction would provide $150 in additional federal tax relief.
As a result of the tax relief and benefit measures introduced since 2006, including those announced on October 30, Alison would be better off by about $3,325 in 2015.
Thomas and Matty are a two-earner couple with two children aged 3 and 6. They each earn $60,000. For the 2015 taxation year, the family would receive a net federal benefit of $875 as a result of the proposed new measures.
- In 2015, the couple would begin receiving monthly Universal Child Care Benefit payments of $220, which includes $160 for their younger child plus $60 for their 6 year old (their first enhanced Universal Child Care Benefit payment would actually be received in July 2015 and would include a $720 catch-up payment for the January to June period). Previously, they had been receiving $100 per month for the younger child. Over a 12-month period, the Universal Child Care Benefit enhancement would represent a benefit of $1,440 for this family. Since the enhancements to the Universal Child Care Benefit would be taxable, and the Child Tax Credit would be repealed, the net federal benefit from the Universal Child Care Benefit for the family would be $435.
- Since the younger child attends full-time daycare and the older one attends summer camp and after-school care, Thomas and Matty would fully benefit from the $2,000 increase in the amount they can claim under the Child Care Expense Deduction for the 2015 taxation year. This enhancement to the Child Care Expense Deduction would provide $440 in additional federal tax relief.
As a result of the tax relief and benefit measures introduced since 2006, including those announced on October 30, this family would be better off by about $5,475 in 2015.
Table 1
Fiscal Cost of Proposed New Measures
(millions of dollars)
| 2014-15 | 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | Total | |
|---|---|---|---|---|---|---|---|
| The Family Tax Cut | 2,395 | 1,935 | 1,995 | 2,050 | 2,110 | 2,165 | 12,650 |
| Universal Child Care Benefit | 1,090 | 4,370 | 4,395 | 4,420 | 4,445 | 4,470 | 23,190 |
| Including: | |||||||
| Increase in benefits relative to current Universal Child Care Benefit | 1,230 | 4,935 | 4,965 | 5,000 | 5,030 | 5,065 | 26,225 |
| Federal income taxes on enhanced Universal Child Care Benefit | (140) | (565) | (570) | (580) | (585) | (595) | (3,035) |
| Elimination of the Child Tax Credit | (435) | (1,750) | (1,780) | (1,810) | (1,835) | (1,870) | (9,480) |
| Increase in Child Care Expense Deduction Limits | 15 | 65 | 70 | 75 | 80 | 90 | 395 |
| Total Proposed New Measures | 3,065 | 4,620 | 4,680 | 4,735 | 4,800 | 4,855 | 26,755 |
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