written by Aaron Hector, Financial Planner at Doherty & Bryant Financial Strategists Inc.
April 19, 2016

Group Of Children Looking Down Into Camera

Budget 2016 introduced a new child benefit program called the Canada Child Benefit (CCB). This program replaced the UCCB, and despite their similar acronyms, they are very different from one another.

The U in UCCB stood for universal, and it was just that. Every Canadian resident family with a child under 18 received a benefit. For children aged 0-5, the amount was $160/month and for children aged 6-17 the amount was $60/month. This benefit was taxable as income to the lower income earning spouse (or single caregiving parent).

In contrast, CCB payments are tax-free. Eligibility for CCB payments are based on your family’s combined net income. The word “net” is important as it leads into other tax planning ideas that we will explore a little later on. In general terms, when compared with the UCCB the new program provides a higher benefit for lower and middle-income families at the expense of reduced benefits for high-income families. The specific calculation is as follows:

Step 1 – Calculate the maximum benefit

1. For each child aged 0-5 there is a maximum benefit of $6,400
2. For each child aged 6-17 there is a maximum benefit of $5,400

Step 2 – Calculate your family net income

1. This is the combined net income of both parents in the household or that of a single parent.
2. Your net income can be found on line 236 of your income tax return. Your net income will be your total income from all sources less deductions, the most common of which would be a deduction for your RRSP or pension plan contributions.

Step 3 – Calculate your benefit clawback

1. There is no clawback on family net income below $30,000
2. On family net income between $30,000 and $65,000, there will be a clawback that is based on the number of children in your family. The clawback is:
a. 1 child = 7%
b. 2 children = 13.5%
c. 3 children = 19%
d. 4 or more children = 23%
3. In addition to what’s calculated above, for a family with a net income over $65,000 the clawback on the excess would be:
a. 1 child = $2,450 + 3.2%
b. 2 children = $4,725 + 5.7%
c. 3 children = $6,650 + 8%
d. 4 or more children = $8,050 + 9.5%

For example, a family with 3 children ages 2, 4, and 6 with less than $30,000 of income would qualify for the maximum benefit of $18,200 ($6,400, $6,400, and $5,400). If this same family had a net income of $64,000, then they would be subject to a 19% clawback on the $34,000 of income that was in excess of $30,000 ($34,000 x 19% = $6,460), and they would be left with $11,740. If their family net income was $125,000 they would be subject to a 19% clawback on $35,000 of income between $30,000 and $65,000, and 8% clawback on the $60,000 in excess of $65,000. This family would be left with CCB benefits of $6,750.

Now that we understand what the CCB is and how it is calculated, we can start to actually do some planning around how to maximize the benefit.

Key Planning Point 1 – You have a new marginal tax rate.

Your marginal tax rate is the rate of tax that you pay on your next dollar of income. For example, let’s look at a family where there is one stay at home parent with zero income, and the other parent earns a gross income of $64,000. In most provinces, that would equate to a marginal tax rate of approximately 30%. However, the next dollar of income this person earns will also be subject to a 19% clawback of their CCB benefits. Effectively, this person has a tax rate of 49%!

At this level, income reduction strategies are very important and the use of a non-registered investment account when there is available room to contribute to a TFSA or RRSP would be ill-advised. When TFSA and RRSP accounts are maxed out, consideration should be given to holding income-producing assets inside tax sheltered accounts, and long-term capital gain (buy and hold) investments inside non-registered accounts.

Key Planning Point 2 – RRSP contributions are more important than ever

Given that you could now see a middle-income family with a very high effective marginal tax rate, RRSP contributions make more sense than ever. For every dollar that is saved inside your RRSP, you could recoup one half via tax savings and increased CCB benefits. The full amount of the contribution can grow inside the RRSP on a tax-deferred basis until an eventual withdrawal at some point later in life.

Key Planning Point 3 – You may never have a better reason to adjust your prior year tax returns

If you made RRSP contributions in any of the past 2 or 3 tax years (2012 – 2014), you could consider adjusting those tax returns to remove your RRSP deduction. Remember, just because you make an RRSP contribution in a given year does not mean that you are required to claim the deduction in that year. You can instead choose to carry it forward into the future.

The rational here is to remove deductions from UCCB tax years and then apply them as a lump sum onto your 2015 tax return to lower your 2015 net income (which will be the basis for calculating the first benefit period for the CCB). Care and attention need to be taken here as this will result in an increased tax bill (along with interest charges) in those prior tax years, but in the right circumstance you could very well be much further ahead. I would suggest contacting your accountant or financial planner before taking this approach.

Key Planning Point 4 – Next Generation Wealth Transfer

I will often have meetings with parents (or grandparents) who are looking for ways to help out their children financially. It is important to note that gifts from parents to children are not taxable in Canada, and so long as the child has attained the age of majority there will be no tax attribution consequences.

The discussion will sometimes lead into overall family tax planning and the parents may choose to gift annual amounts to their children so that they can top up their TFSA accounts. It isn’t uncommon for grandparents to gift money to be used for RESP contributions to take advantage of government grants and tax-deferred growth. In my experience, it has been less common for parents to gift so that their children can make RRSP contributions, but with the changing CCB rules this could at least be brought up in future discussions as this gift would not only provide long-term financial assistance to the next generation via the RRSP, but it would also provide a short-term cash flow benefit via an enhanced CCB.

Aaron Hector has been a consultant at Doherty & Bryant Financial Strategists, a subsidiary of T.E. Wealth, for nearly 10 years. He provides comprehensive financial planning to high-net-worth individuals and families in Western Canada, and has extensive experience in executive compensation plans, retirement planning, and income tax reduction strategies. As a dual citizen of Canada and the USA, he also has a passion for cross-border financial planning.

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Media & Press

via The Globe and Mail | April 22, 2016

At the age of 45, Stella is thinking of giving up a secure job in education, pension and all, to sell real estate, something she’s always wanted to do. Her husband, Steve, is an accountant, a partner in the practice. He is 50. Together, they bring in more than $175,000 a year.

They’ve raised four children, now in their teens, and are looking to the future. Steve would like to retire at the end of 2025, while Stella would like to change careers some time in the next five years.

They have a mortgage-free house, a cottage and some savings. When they retire, they hope to have $55,000 a year after tax plus another $10,000 for travel until Steve turns 80.

Their big question is Stella’s uncertain earning power if she chooses to give up her well-paying job to be a real estate agent, in which case her livelihood will depend on commission income in an uncertain market. She wonders how much she would have to earn to keep their retirement plans on track.

“Is a career change possible or do I have to stay put?” Stella asks in an e-mail.

We asked Matthew Ardrey, vice-president at T.E. Wealth in Toronto, to look at Stella and Steve’s situation. T.E. Wealth is a fee-only financial planning firm.

What the expert says

Stella’s career change would result in a substantial drop in both her current income and future pension income, Mr. Ardrey says. The couple asked the planner to look at two different scenarios, one where Stella changes jobs in five years at the age of 50 and the second where she continues in her current job to 56. In his calculations, the planner assumes a rate of return on investments of 5 per cent a year, inflation of 2 per cent and lifespans of 90 years for the couple. He assumes they both get maximum Canada Pension Plan benefits but their Old Age Security benefits are clawed back because of their high income.

Stella figures she will earn about $25,000 a year selling real estate. She would retire from that job at 60. At 61, she would get a pension of $43,890 a year, partly indexed to inflation, comprising $39,062 in base pension and a $4,828 pension bridge until the age of 65. (Pension bridges, part of some union contracts, are designed to carry over employees who take early retirement until they begin collecting government benefits at age 65.)

“In the first scenario, Steve and Stella are able to meet their retirement goal with a bit to spare,” Mr. Ardrey says. They would leave behind an estate of about $700,000 plus real estate and personal effects upon Stella’s death. “If, instead of leaving an estate, they only left behind the real estate and personal effects, they could increase their spending from $55,000 per year to $59,800 per year, inflation adjusted,” the planner says.

In the second scenario, Stella sticks with her current job until she is 56, at which time she will receive an unreduced pension of $53,330, divided into two components, a $47,465 base pension and a $5,865 pension bridge until 65. The couple are able to meet their retirement goal with an additional spending cushion.

“They would leave behind an estate of about $1.6-million plus real estate and personal effects upon Stella’s death,” Mr. Ardrey says. “If, instead of leaving an estate, they only left behind the real estate and personal effects, they could increase their spending from $55,000 per year to $66,600 per year, inflation adjusted.”

While the numbers look encouraging, the planner has some concerns. “There are some issues that they need to deal with today to make that dream a reality,” Mr. Ardrey says. Their current budget includes about $2,000 a month that is unaccounted for. “This represents significant leakage in their budget and needs to be addressed immediately,” he says. “Most people know what they earn and what they save but lose track of what they spend.”

This leakage will become increasingly important as they approach retirement. “Two thousand dollars a month changes a budget of $55,000 a year to $79,000 and causes them to fall short of this new spending goal,” Mr. Ardrey says. “If Stella changes jobs and they continue spending in this manner, they will be running a $1,200-per-month deficit,” he adds. Before they make any decisions about retirement, “they need to get their budget under control today.”



The people: Stella, 45, and Steve, 50.

The problem: Can Stella quit her well-paying job to sell real estate?

The plan: She could, but they’d have a bigger cushion if she didn’t. But first, they must pay closer attention to their spending.

The payoff: A clear road map to the future.

Monthly net income: $10,465

Assets: Bank $3,335; GICs $4,110; her TFSA $32,465; her RRSP $118,085; his RRSP $290,565; present value of her defined-benefit pension plan $367,210; children’s RESP $332,000; residence $600,000; cottage $75,000. Total: $1.8-million

Monthly disbursements: Property tax $380; water, sewer $60; home insurance $195; hydro $155; heat $190; maintenance $200; transportation $670; grocery store $1,500; clothing $110; charitable $100; vacation, travel $600; other $200; dining, drinks, entertainment $600; grooming $50; club membership $75; pets $25; life, disability insurance $125; telecom, TV, Internet $245; RRSPs $1,085; RESP $415; TFSA $460; pension plan contributions $960. Total: $8,400 Unallocated surplus: $2,065

Liabilities: None

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