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Moncton Times & Transcript ~ Tax Help Plus ~ UCCB and Child Support ~ February 20, 2007 - 25 Feb 2007 by TaxHelp
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For another filing under the heading of good deeds with unintended consequences, regular readers will remember that last week we discussed the generally positive benefits that flow from contributions to Registered Retirement Savings Plans (RRSPs). However, we also pointed out that low income folks in retirement with minimal pension income could be hurt if their RRSP pot was not large enough. The resulting small payments from the plan may in fact put the retiree’s ‘social net’ programs in jeopardy. As items and benefits like the Guaranteed Income Supplement and the Prescription Drug Plan are income tested, small RRSP payments might reduce the supplement and provide just enough income to eliminate those types of valuable programs leaving retirees to fend for themselves.
In the same but different category, another recent social program could have an unintended effect as well, but first the primer. The Universal Child Care Benefit (UCCB), a major election initiative advanced by the federal Conservatives was launched last July. It provides payments to parents of children under the age of six worth $100 a month, so that a recipient reports $600 at line 117 on the 2006 T1 tax return. Unlike the Child Tax Benefit (CTB), it is available to all parents, no matter what their income is. As a result, if you have a high family income and have kids under the age of six, and are not in receipt of the CTB you should make an application for that benefit anyway. You will then begin to receive the UCCB as it is paid to all with qualified children.
In this space I’ve also talked about the metamorphosis of the whole government funding relative to child rearing. Some of us came up under the old system where moms (whether they had income or not) received the Child Tax Benefit when they filed their tax return and a monthly Family Allowance payment. There was also the opportunity for the children to be claimed on the tax return. Just as importantly, in those days the higher income had to include those monthly payments as taxable income. When the CTB replaced these various programs in an integrated fashion, the payments were deemed to be non-taxable.
The whole issue of which parent claims the payment is germane to the story. In Canada, we operate a progressive tax system. The more one earns, the more tax one pays. Those who have visited here before or have been to one of our seminars know the importance we place on the taxpayers need to understand marginal tax rates. For instance, a New Brunswick resident in the lowest tax bracket making around $30,000 a year pays an additional $150 in taxes for last year’s UCCB payment. On the other hand, the same payment attracts about $255 in taxes for someone with $75,000 of income. Same payment, more taxes due.
A way to minimize the tax damage to this payment is to make it taxable to the lower income guardian. Without being stereotypical, a stay-at-home mom with no income would declare this payment but would pay no tax. It also wouldn’t affect any spousal claim as it is below the minimum income threshold of $685. As a result, the most dollars are available to help offset the cost of child care.
In 1997, the Child Support Guideline rules were enacted to deal with parents who were in the process of separating. At the time they were implemented for two main reasons. First, it represented that these payments would no longer be taxable to the recipient and tax deductible by the payer. Second, the guideline would publish a relative straight forward table stating what the payment requirement was based on province of residence, number of children being supported and income of the payer. It was hoped that making these tables known would take the pressure off the court system and have separating parents come to an agreement amongst themselves (as they would know in advance how much the court would assign as payment in the majority of cases). The recipient parent would have the right to annually review the paying parent’s tax return with an eye toward adjusting up the payment if income increased.
The unintended consequences? One of our regular readers has pointed out a conundrum she is facing in her family. In this instance, the reader whom I’ll anonymously call Sue, is married and has a child under six. Her husband, who for the purposes of the story we’ll call Bill, was previously married and has children as a result of that relationship. Bill currently has an on-going requirement to make child support payments under the guideline for those children. He also earns slightly less than Sue. Since Bill has to declare the UCCB, there is a resultant increase in income. This could increase his support requirement for the children from the first relationship, thereby inadvertently lowering the funds available for Sue and Bill’s child.
Is there a way out? It would seem not, other than by a sense of fair play. The mother of Bill’s first series of children would have to agree not to count the income that is paid as a result of the child of Sue and Bill’s union in the calculation. And while that may happen, depending on the feelings and intensity involved, it may not. And so, the youngest child in this instance, for whom the benefit was intended, may end up subsidizing their older siblings care!
By the way, we still have a few slots left for any group looking to have someone come out and offer a session where we discuss the newest tax changes. These events usually run somewhere around an hour once a question-and-answer is completed and are offered both during the day and evening. Most important, there is no charge for this service.
Roger Haineault is with Tax Help Inc. His column "Tax Help Plus ..." appears each Tuesday. For questions, comments or column suggestions he can be reached by calling 855-HELP (4357) or by emailing roger@help4taxes.ca
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