Have you ever found $20 in an old coat pocket? “Found” money has a special feel to it. It’s a little bit extra that you didn’t factor into your monthly budget and it’s yours to spend.
On October 30, 2014, Prime Minister Harper announced a new tax initiative with the stated goal to provide tax relief to Canadian families. This isn’t exactly “found” money, but the implications for your clients’ saving and investment goals are similar.
The “Family Tax Cut”, if signed into law, will allow an eligible tax payer to transfer up to $50,000 of annual income to his or her spouse to receive a non-refundable tax credit of up to $2,000 per year. The Universal Child Care Benefit (UCCB) for kids under 6 is also increasing from $100 to $160 per month. Finally, a new $60 per month benefit has been added for kids aged 6 to 17.1
It’s not found money because it’s based on a calculation and not chance. But it’s extra money on top of your clients’ regular budgets. The key is to encourage clients to find ways to make this money work hard for them.
How can Canadian families maximize the benefits?
The tax savings and childcare benefits can help clients throughout their life stages. Consider a family of four with two children under six. One spouse is earning $120,000 per year and the other spouse is earning $40,000 per year in part-time income.
- UCCB: Parents are eligible for the UCCB regardless of income. In total this couple will receive $1,920 per child, for a total of $3,840 per year. The UCCB will be taxable in the hands of the lower earning spouse.
- Family Tax Cut: The higher earning spouse can transfer half the difference between their incomes to the lower earning spouse, to a maximum of $50,000. After adding the UCCB to the lower earning spouse’s income, the difference between their incomes is $76,160 ($120,000 – $43,840), so the higher earning spouse can transfer a maximum of $38,080.
The transfer equalizes both spouses’ incomes at $81,920. If the couple lived in Ontario, the UCCB would add $3,840 to their income, while the Family Tax Cut would reduce their total tax bill from $40,814 to $39,522, a $1,292 difference. Combined, the couple is $5,132 ahead ($3,840 + $1,292).
This “found” money can go a long way to help support these clients in reaching their goals.
In their thirties:
- Parents of young children are busy managing day-to-day expenses. The extra money provided by the UCCB and Family Tax Cut can help them balance their budget. It can also free up money to help them save for retirement early by maximizing their registered retirement savings plan (RRSP) contribution room.
- The money can help fund their children’s extracurricular activities (this has the added benefit of being eligible for a refundable tax credit under Canada’s Child Fitness Tax Credit).
- It can be deposited into a registered education savings plan (RESP) to help maximize their children’s education savings with help from the government.
In their forties:
- With the addition of a $60 per month UCCB for each child aged 6 to 17, they can continue to buffer their day-to-day expenses and direct more money into an RESP or RRSP.
- The children may continue to be eligible for the Child Fitness Tax Credit, which applies to children under 16, or under 18 if they’re eligible for the disability amount.
- Assuming one spouse still earns more than the other, they’ll continue to benefit from income-splitting, allowing them to build their investment base and accelerate their retirement savings.
In their fifties:
- The fifties are prime retirement savings years, but many people have children later in life which can make it hard to balance expenses with saving. If this couple decided to have another child in their late thirties or early forties, they’re eligible to receive the UCCB for another 17 years after their child is born.
- Up to $2,000 per year from the Family Tax Cut can be directed towards their retirement savings, which they may have neglected as they invested in their children’s education in their thirties and forties.
We all know that with the right plan and professional financial advice, a little can go a long way. The Family Tax Cut and changes to the UCCB have the potential to provide a great opportunity for you to reach out to clients and offer to review their plans.