Prime Minister Stephen Harper recently announced new tax reduction measures for Canadian families with children. The announcement on October 30 included the new Family Tax Cut, a federal tax credit that will allow for income splitting of up to $50,000 between spouses, enhancements to the Universal Child Care Benefit, and an increase in the allowable Child Care Expense Deduction.
Family Tax Cut – Income-Splitting Tax Credit
For the 2014 taxation year, parents with a child under the age of 18 may benefit from new income-splitting measures by “transferring” up to $50,000 of taxable income from a higher-income spouse to a lower-income spouse in order to reduce the family’s overall federal tax burden. The income-splitting benefit comes in the form of a federal non-refundable tax credit of up to $2,000 per year that can be claimed by either spouse.
To qualify for the new income-splitting credit, parents must have a child under the age of 18 who has ordinarily resided with them, and they must have ordinarily resided with their spouse or common-law partner during the year. Other exceptions may apply.
Expansion of the Universal Child Care Benefit
The Universal Child Care Benefit (UCCB) currently provides Canadian families with monthly payments of $100 for each eligible child under the age of 6. Effective January 1, 2015, the monthly UCCB entitlement will increase to $160 per month for each child under the age of 6, and $60 per month for each child aged 6 to 17. UCCB payments are paid regardless of a family’s income level. The increases will be reflected in payments starting in July 2015 (with the July payment including amounts retroactive to January).
In connection with the expansion of the UCCB, the federal government has decided to suspend the Child Tax Credit effective in 2015. For 2014, the federal non-refundable Child Tax Credit can reduce a Canadian family’s tax liability by up to $338 for each child under the age of 18. Even though UCCB payments are taxable to the lower-income spouse, the increased UCCB payments will help offset the elimination of the Child Tax Credit. The overall after-tax impact will vary, depending on the family’s net income level.
To qualify for the UCCB, the applicant must be a resident of Canada and must be the person who is primarily responsible for the care and upbringing of the child.
Increase in Child Care Expense Deduction
Starting in 2015, the maximum allowable deduction for eligible child care expenses will increase by $1,000. The maximum will increase from $7,000 to $8,000 for each child under the age of 7, from $4,000 to $5,000 for each child aged 7 to 16 (or for infirm dependent children over the age of 16), and from $10,000 to $11,000 for children eligible for the Disability Tax Credit.
Children’s Fitness Tax Credit
In a separate announcement on October 17, the federal government announced improvements to the Children’s Fitness Tax Credit. Canadian families can currently claim a federal non-refundable tax credit equal to 15% of eligible fitness expenses incurred for a child under the age of 16 (or under the age of 18 if the child qualifies for the Disability Tax Credit). Starting with the 2014 taxation year, the maximum amount of eligible expenses to be claimed in a year will increase from $500 to $1,000. In addition, starting in 2015, the credit will be refundable (the 15% credit will not be limited to the amount of federal tax owed).
Additional details are available from the Department of Finance.