Traditionally, couples have divided and conquered when it comes to running a household. One partner would work outside the home, while the other managed the household. For much of the 20th century, a single income was enough to provide the family with a good lifestyle.
Times have changed. From 1976 to 2015, the number of single-income households with children has fallen by more than half, while the number of dual-income households has nearly doubled. In today’s world, is being a single-income household financially feasible if you have kids?
It can be. If clients are wondering whether it’s feasible for them, the answer lies at the end of good, old-fashioned financial planning. For those who like to plan well in advance, the process can begin before having children. Alternatively, couples can assess affordability during a child’s first year, when one parent may already be at home receiving Employment Insurance (EI) benefits and the other is working. Returning to a dual-income household would likely provide the couple with a higher pre-tax income than a single income would. But if you consider all factors, the dual- and single-income options may be closer on an after-tax basis than originally thought.
Case study: the Grahams
Will and Clarice Graham are fictional 29-year-old Ontario residents with two children, Ardelia (two and a half) and Charlie (six months). Before taking parental leave, Will was a shift leader at a local call centre making $50,000 annually. Clarice is an accountant at a public firm making $80,000 annually. She returned to work after the 15-week EI maternity benefit ended; Will took the parental leave benefit, which lasts for 35 weeks.
Clarice would like to make partner at her firm, which would significantly increase her future income. Will and Clarice reserved a spot for Charlie at the same daycare that Ardelia attends. However, the cost of daycare has them wondering if it makes sense for Will to return to work. They want to know what their net income and cash flow would look like if Will returned to work versus if he were to stay home with Charlie.
The first step is to review their current after-tax income based on Clarice’s salary and Will’s current EI income (see Table 1). Their cash flow is balanced (not running a surplus or shortfall) based on their current expenses. Clarice also contributes $10,000 annually to her RRSP.
Table 1: Combined after-tax income, no other considerations
|Tax/CPP & EI contributions||($17,382)||($1,403)|
Note: All tables use Ontario 2017 tax rates.
Clarice and Will’s combined after-tax income is $69,725. They also qualify for an annual Canada Child Benefit (CCB) of $6,735, bringing their total after-tax income to $76,460. This gives them $6,372 per month, which covers all living expenses.
Table 2: Combined after-tax income if Will goes back to work
|Tax/CPP & EI contributions||($17,382)||($6,171)|
If Will returns to work, daycare will cost $667 per month for Ardelia and $1,000 a month for Charlie. Since Will makes less, he can claim daycare costs as a tax deduction. The maximum amount he can claim per child under six is $8,000. Will also participates in the group RRSP through his employer and contributes $5,000 annually.
For a fair comparison, we should adjust Will’s after-tax income to include the net cost of daycare. The childcare-expense deduction reduces his annual tax by $3,472 and is reflected in Table 2. This leaves him out of pocket $16,528 ($20,000 minus $3,472). Clarice and Will’s combined adjusted after-tax income is $58,919. Their new CCB amount is $6,137, leaving them with a total net income of $65,056 annually, or $5,421 a month. Despite having significantly higher gross income if Will returns to work ($130,000 versus $98,510 while he is on parental leave), they end up with $951 a month less in disposable income after daycare costs.
The final step is to assess their after-tax income if Will stays home and his EI payments stop (see Table 3). He would have neither taxable income nor childcare expenses.
Table 3: Combined after-tax income if Will stays home
|Tax/CPP & EI contributions||($15,200)||—|
Clarice’s income tax liability is smaller in this scenario because she is able to claim the spouse or common-law partner amount for Will, since his income is below the basic personal amount. This improves her after-tax income to $54,800. The CCB amount also increases to $7,790, for a total after-tax income of $62,590. This gives the Grahams $5,216 per month. This result is $205 less than if both of them are working. Is $205 per month enough financial incentive for Will to return to work?
Now that the Grahams know their net income with and without Will returning to work, they should consider:
- The budget—In either scenario, their cash flow will fall from what it was while Will was on parental leave. Completing a detailed budget and making tough lifestyle decisions should help them adjust to their lower net income. As the children reach grade-school age, circumstances may lead them to review their household budget again.
- The intangibles—If Will returns to work, who will take the kids to and from daycare? What happens if anyone is sick? How will Will’s absence from the workforce impact his future career aspirations? Further, running a dual-income household with two children in daycare is fast-paced. Are these intangibles worth the extra net income Will brings to the household?
- A review plan—It is important to have a plan and review it regularly, especially during child-rearing years. Income and costs can change frequently. With tighter cash flow, choices have to be made about which long-term goals to pursue (e.g., saving for retirement) and which to delay. As circumstances evolve, so should the plan.
Being a dual-income household with children while paying rising childcare costs can be rewarding and challenging. It is important to help those in this life stage to take a step back, assess their goals and project their net income after daycare costs and tax benefits. That will help them get a clear picture of the financial reality of childrearing.
Budgeting and managing financial expectations are critical to help families determine the best fit for their circumstances. For certain families, the numerical arguments over whether to return to work or stay home may be closer on a net basis than you might think. The cost of daycare and income-tested benefits like the Canada Child Benefit can have a material impact on a household’s bottom line. Many qualitative factors can make the decision even tougher. Making an informed decision can help families take the best course of action for both their personal and financial well-being.