27
02
2018

Tax Tips for Parents – Don’t Miss out on Significant Tax Benefits and Savings

Parenthood is an exciting time full of many adventures, memories, and milestones. However, with the increasing costs of education, childcare, and children’s activities, parenthood also brings significant financial responsibilities. As such, it is prudent to take advantage of the numerous tax benefits and savings as they can take a sizeable bite out of the cost of raising children.

 

RESPs

What is an RESP?

An RESP (Registered Education Savings Plan) is an investment plan that is set up through a provider (e.g. financial institution, financial planner, etc.) and allows parents to make contributions towards their children’s post-secondary education. A range of investments are possible including savings accounts, term deposits, and mutual funds.

 

What is the benefit for setting up an RESP?

While the contributions are not tax-deductible for the parents, the investment earnings grow on a tax-sheltered basis and are only taxed in the child’s hands when withdrawn for post-secondary education. As a student, the child would owe little to no tax.  Furthermore, the government provides additional grants on top of contributions by parents as outlined here:

  • Canada Education Savings Grant (CESG): The government provides a grant of 20 cents for every dollar of contribution annually up to a maximum grant of $500 (for a contribution of $2,500). The grant is paid annually up to the year in which the child turns 17 and there is a lifetime limit of $7,200. Unused grant amounts in a year are carried forward to future years. Parents can therefore catch up on missed years or when an RESP is started late; however, since the maximum amount of grant that will be paid in any one year is $1,000 (equivalent to $5,000 of contributions) it may take more than one year to fully catch up on unused grant amounts. Depending on family income, the government may provide an additional grant of 10 or 20 cents for every dollar for the first $500 contributed annually.

 

  • Canada Learning Bond (CLB): Eligible to children born after 2003 and based on family income (generally lower income families), this program provides an initial grant of $500 as well as an annual $100 grant until the year the child turns 15.

 

How much can I contribute to an RESP?

There is a lifetime contribution limit of $50,000 per child with no limits on the contributions in each year. However, one should note that the CESG is only paid on the first $2,500 of annual contributions (up to $5,000 if there are unused grant limits). Thus parents seeking to catch up on missed contributions should only contribute a maximum of $5,000 per year to maximize the CESG. Furthermore, the CESG lifetime limit of $7,200 would be reached after $36,000 in total contributions.

 

When can withdrawals be made from an RESP?

Withdrawals can be made from an RESP when the child enrolls in post-secondary education. The investment earnings as well as the government grants (collectively called the Educational Assistance Payments or EAPs) are taxable to the child while amounts contributed by the parents are not taxable.

 

If a child does not enroll in post-secondary education, various options are available:

  • The parent can wait awhile in the event the child decides to pursue post-secondary education at a later date; an RESP can stay open for 36 years.
  • The amounts can be transferred to a sibling who is under the age of 21.
  • The RESP can be closed with the government grants returned to the government. The parent can then withdraw the investment earnings (taxed at the regular rate + 20%) and the original contributions (tax-free). The withdrawal can also be transferred to the parents’ RRSPs for up to $50,000.

 

Government Child Benefits

These are applied for through the provincial Automated Benefits Application (ABA) in participating provinces or by completing and submitting the Canada Revenue Agency’s (CRA) RC66 form.

 

Currently, the benefits consist of:

  • Canada Child Benefit (CCB): Introduced in July 2016, this replaced the Universal Child Care Benefit (UCCB), Canada Child Tax Benefit (CCTB), and child fitness and arts credits. This is a monthly non-taxable payment whose amount is calculated based on the number of children, their ages, the adjusted family income, and whether any child is eligible for the child disability benefit. An online calculator is available on the CRA’s website to allow one to estimate their benefit. The majority of families are expected to be better off under the new system.
  • BC Training and Education Savings Grant (BCTESG): This is a one-time $1,200 grant from the BC Government for children born on or after January 1, 2006 and the beneficiary of an RESP. Both the parent and child must be residents of BC to qualify. Application can be made at a financial institution once the child turns six but must be done before the child’s ninth birthday. Being a new program, if your child turned six in 2013, 2014, or 2015 the deadline is extended to August 14, 2018 or the day before their ninth birthday, whichever is later.

 

Tax Deductions and Credits Related to Children

Parents should make sure that they claim these on their tax returns. Note that the Children’s Arts and Fitness Tax credits were eliminated after 2016 as well as the BC Back-to-School Tax Credit.

 

  • Children’s Medical Expenses: Parents can claim as a tax credit eligible medical expenses for children on their tax returns. These should generally be claimed on the lower-income spouse’s return to get the maximum tax benefit, assuming they are taxable.

 

  • Child Care Expenses: Parents can deduct the cost of child care expenses. As this is a tax deduction there is a greater benefit to taxpayers in the upper tax brackets; however, in most cases it must be claimed by the lower-income spouse. For 2017, parents can claim a maximum of $8,000 for each child under the age of 7 and $5,000 for each child between the age of 7 and 16. Children with a disability will qualify for a larger deduction.

 

 

This article is courtesy of Richard Wong, CPA, CA of Wolrige Mahon LLP. Richard has extensive experience in providing accounting and tax services to physicians and other health professionals. For more information, Richard can be reached at rwong@wm.ca or at 604-691-6886.

 

author: Sasha Zalyvadna