Parents can make more of their UCCB by generating tax deferred growth and securing additional government grants in a RESP
TORONTO, Aug. 4, 2015 /CNW/ - With a big retroactive Universal Child Care Benefit (UCCB) cheque in hand and increased monthly payments now flowing in, Canadian parents should plan for the upcoming tax bill and consider investing remaining benefits in a Registered Education Savings Plan (RESP), boosting savings with tax deferred growth and additional government grants.
"It's tempting for parents to spend the extra cash, especially with school around the corner soon and bills mounting," says Jamie Golombek, Managing Director, Tax & Estate Planning, CIBC. "But it's important to realize that you'll pay tax of up to 50 per cent on the UCCB next spring. For any benefit that remains after tax, you should consider contributing to a RESP, to receive even more money from the government and build a tax-sheltered nest egg for your children's education."
Enhanced UCCB: More benefits for children under six, new benefits for teenagers
The UCCB is designed to provide financial support for families with children. The federal government enhanced the UCCB this year, increasing the monthly amount for children under six from $100 to $160 and expanding the program to include a new benefit of $60 per month for children aged six through 17. On July 20, the first enhanced payment was issued and included a retroactive payment from January to June 2015, leaving parents with an extra $420 per child, representing $60 per month for the past seven months.
Newfound money might be gone next spring with 2015 tax return
But for those planning to spend the funds on their children's summer activities or on back-to-school supplies, Mr. Golombek, has a word of caution: "Much of your newfound money might be gone next spring with your 2015 tax return."
Mr. Golombek explains that the enhanced UCCB replaces the existing Child Tax Credit of $338 per child. This non-refundable tax credit for parents of children who are under 18 years of age at the end of the year was available for the last time on the 2014 tax return. And, the UCCB is taxable at your marginal tax rate with no tax withheld at source.
"The UCCB is not nearly as attractive when taxes and the loss of the Child Tax Credit are factored in," Mr. Golombek says. "Depending on your tax bracket, you may end up paying back up to half of it next year, so be sure to plan for this expense."
For example, suppose you have two children under age six and your marginal tax rate is 30%. In 2015, you would receive UCCB of $160 per child each month, for a total of $3,840 in the year. When you file your tax return next year in April, you would pay tax of $1,152 ($3,840 x 30%), leaving $2,688 in your pocket. Note that the enhanced UCCB replaces the Child Tax Credit which will no longer be available starting this year.
RESP: Tax deferred saving for post-secondary education
Mr. Golombek recommends an RESP as an effective savings strategy for the after-tax UCCB. A RESP is a tax deferred investment plan that helps you save for a child's post secondary education.
"Contributing the funds towards a RESP may effectively boost savings with tax deferred growth and additional government grants. If you have children under 18, my advice would be to contribute the after-tax UCCB towards the RESP," says Mr. Golombek.
Three reasons to put your after-tax UCCB towards an RESP, rather than spending the benefit currently:
- Tax deferred growth: While contributions themselves are not tax-deductible, all investment income and growth generated in the RESP accumulate tax deferred.
- Government contributions: The federal government adds 20% to your RESP contributions through the Canada Education Savings Grant (CESG), up to a maximum of $500 per year, per child. The CESG is payable until the end of the calendar year a child turns 17, and the maximum lifetime CESG payment is $7,200.
- Tax savings: Plan earnings and government contributions are taxed in the hands of the student, who may pay little or no taxes on the money using the available tax credits.
In the example above, contributing the after-tax amount of $2,688 to an RESP may result in an additional $538 ($2,688 x 20%) of government grants being deposited to the RESP, assuming there is sufficient CESG room. This could yield a total of $3,226 to start your children's education fund. If left to accumulate for 15 years at 5%, the amount would more than double to over $6,700.
CIBC is a leading Canadian-based global financial institution with 11 million personal banking and business clients. Through our three major business units - Retail and Business Banking, Wealth Management and Wholesale Banking - CIBC offers a full range of products and services through its comprehensive electronic banking network, branches and offices across Canada with offices in the United States and around the world. You can find other news releases and information about CIBC on our corporate website at www.cibc.com/ca/media-centre/.
SOURCE Canadian Imperial Bank of Commerce
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