WRITTEN BY VANCITY
Becoming a parent comes with a million little (and big) decisions. You’re juggling to keep your newborn alive and well (no small feat) while also trying to keep yourself alive and well, too. Needless to say, taxes are the last thing on your mind.
But the more you know, the more money you can save. And with the cost of diapers today, any extra cash in the bank is a bonus! Plus, we believe wholeheartedly that financial literacy is a vital—yet often overlooked—part of family planning. The more confident you feel in your financial planning, the better equipped you’ll be to focus on what truly matters: nurturing your growing family.
We teamed up with our trusted financial partner, Vancity Credit Union, to bring you expert advice on the financial realities new families face. This blog has got you covered on how to make the system work for you, touching on topics like parental leave, RESP contributions, and free money from government tax breaks and benefits.
Interested in covering all of your financial bases? Then, the free online course Wealthy Beginnings: Nurturing Finances and Family from Conception to Kindergarten is for you. This course is designed to guide your family to financial peace of mind!
Now, without further ado, here’s everything you need to know about how your beautiful baby impacts your taxes.
The tax considerations of parental leave
Parental leave is a much-needed time to bond with your baby. But it’s important to plan for how your parental leave benefits might affect your taxes. Your parental leave benefits—whether from the government, your employer, or both—are considered taxable income. Tax is withheld separately on these payments, which means your total earnings may not be considered. Your total earnings could push you into a higher tax bracket and result in an unexpectedly higher tax bill.
Luckily, employers have forms you can complete to request additional tax deductions. This can help you to make sure that enough is withheld upfront, so you don’t have to worry about paying tax later. If you’re unsure how your income while on leave affects your taxes, speak to a professional advisor.
Combining sick leave EI with parental leave
Every pregnancy journey is different. Sophie Liu, Wealth Advisor at Vancity and Aviso Wealth, for example, speaks about having gestational diabetes during her last trimester. Sophie was able to combine medical EI with her maternity leave to extend her time away from work.
If you experience complications like Sophie did, you may qualify for medical EI before your maternity leave starts. This can provide additional financial support during a challenging time. Just remember that medical EI is also considered taxable income, so make sure to set aside enough for taxes!
Standard vs. Extended Parental Leave
Parents can choose between two parental leave options:
- Standard leave: Up to 40 weeks with the caveat that one parent cannot take more than 35 weeks.
- Extended leave: Up to 69 weeks with the same total amount as standard leave, but spread over a longer period, so your weekly payments will be less. One parent cannot take more than 61 weeks.
When you’re deciding which is right for you, consider that extended leave may save you money by delaying childcare costs, which can be pretty pricey.
Tax-wise, the lower benefit amount of extended leave could lower your annual taxable income, while returning to work earlier could put you into a higher tax bracket. Of course, everyone’s experience is unique, and it’s worth consulting with an advisor prior to making a decision on which type of leave is right for you.
How one parent taking parental leave could impact income tax brackets
If one parent’s income is significantly reduced during parental leave, it may change their tax bracket and overall household tax situation. This could impact deductions, credits, and overall tax refunds or amounts owed.
Speak to a financial professional to find out how you can best make parental leave work to your advantage.
Government tax breaks and benefits
Raising a child is expensive. You’re going to find yourself wondering how a human so small could need so many things. Luckily, the government has a few financial lifelines to help soften the blow. Plus, we have some pertinent advice on saving money by knowing what to buy, borrow, or skip for your newborn.
When you register your baby’s birth, you can use the Automated Benefits Application (ABA) to automatically apply for several programs, including:
- Canada child benefit (CCB): A tax-free monthly payment designed to help parents survive the endless diaper purchases. For the payment period from July 2024 to June 2025, you could get up to $7,787 per year for each child under six, and up to $6,570per year for each child aged six to 17—because the expenses don’t magically stop once they start school.
- GST/HST credit: A tax-free quarterly payment designed to offset sales tax. This credit offers up to $680 per year, plus an extra $179 annually per child under 19—because who knew tiny shoes could cost that much?
- Other related provincial or territorial programs: Many provinces and territories offer additional family benefits (like the BC Family Benefit), so depending on where you live, you can score even more financial help.
Benefits you need to apply for individually:
- Child disability benefit: A tax-free benefit for families caring for a child under 18 who qualifies for the disability tax credit. This benefit is paid monthly along with the CCB, ensuring parents have extra support. This can be claimed by the parent providing primary care for the child. If the care is provided equally, either parent can claim the credit.
- Canada workers benefit (CWB): A refundable tax credit for working low-income individuals and families. Eligible applicants may also qualify for quarterly advance payments.
RESP contributions and government educational grants.
It’s never too early to start saving for your child’s education. Annie Kuan, Wealth Advisor at Vancity and Aviso Wealth, says, “As soon as my son had a SIN, I went online and opened a Registered Education Savings Plan (RESP) account. If you can’t do it yourself, ask your financial professional to do it for you.”
Annie’s proactive decision means she’ll be able to take advantage of the Canada Education Savings Grant (CESG). The CESG matches 20% of your contributions to your child’s RESP of up to $500 in grants per year, with a lifetime maximum of $7,200 per child. If you have an unused grant from the previous year, the CESG will match your contributions up to $1,000.
“The moment you add that money into a tax-deferred program, the faster you can grow your money,” says Annie. “So, you want to get that free money early.”
The Canada Learning Bond (CLB) offers an opportunity for low-income families who cannot contribute to an RESP but still want to start one for their child. The CLB provides an “initial payment of $500 for the first year the child is eligible, plus $100 for each additional year of eligibility, up to age 15, for a maximum of $2,000” deposited into an RESP.
RESP tax implications
An RESP grows tax-free, much like an RRSP, until your child withdraws the funds for their education. At that time, though the contributions made will be tax-free, the growth and grant amounts will be taxed to the student, typically at a lower tax rate.
RESP contributions are not tax-deductible, unfortunately.
A CESG and childcare benefit strategy you can steal
The B.C. family benefit (BCFB) gives families with kids under 18 a monthly, tax-free bonus cheque. Annie suggests that one strategy is to deposit it directly into your child’s RESP. Then, the government may match that contribution by 20%.
This strategy can also be taken with any type of family benefit, like the CCB mentioned above, or any other provincial or territorial benefit.
It’s like “the government’s contributing to the RESP for you,” says Annie. And as Gill Damborg, co-founder of Brood, points out, “It’s free money.” Which is, of course, the best kind of money you can get from the government!”
Claiming child care expenses
Claiming child care expenses on your tax returns is a great way to lower the taxes you owe—meaning more money in your pocket come tax season.
There are a few eligibility requirements, such as the child must be under 16 years of age, and you, your spouse, or common-law partner must be the child’s eligible parent.
Typically, if you’re paying for child care so you or your partner can return to work or school, then you’re eligible to claim these childcare expenses.
Be sure to grab a receipt! You want to be able to prove you paid for this expense if you’re ever audited. Keeping track of your expenses in a spreadsheet or using an app is a great way to make sure every dollar is accounted for.
When it comes to childcare, getting money back is crucial. “Daycare is probably going to be a disastrous cost,” says Annie. “It can easily be $1,200 to $2,000 per month. If you have two kids, that’s $4,000. This is one of the most expensive long-term costs.” Annie also says not to forget about extracurricular activities. “Swimming, dancing, skating—those costs add up. If your kid is like my son, who had to take ‘Intro to Swimming’ seven times… well, that cost just speaks for itself!”
Keep in mind that the lower-income parent has to claim these expenses, with some exceptions.
The tax implications of wills and trusts
Wills or trusts are equally important, as they are often neglected by new parents. No one wants to think the worst might happen. But to best protect your child, you need to have a will or a trust in place.
A will tells the government where your money and your kids should go in the unlikely event that something happens to your child’s parents. A trust is more related to a complex family dynamic, like a second marriage. Trusts typically cost more and are taxed at a higher rate.
It’s important to speak to a professional to understand which is right for you and what the tax implications will be.
“This can all be so complicated,” says Sophie. “I want to share with everyone that you are not alone. You can rely on financial professionals like us at Vancity and Aviso Wealth. All you need to do is book a meeting with us. Your financial health is as important as your physical health—taking care of it can release so much stress and help you feel better.”
When it comes to knowing how to best financially support your family, a professional’s advice is key!
We’ve thrown a lot of options, information, and acronyms at you in this blog. Whether you’re thinking about opening an RESP or wondering how to best maximize government grants, there are two things we know for sure:
- A professional advisor will help you make the most of your finances and guide you down the right path.
- Two, we created the Wealthy Beginnings course to give you the knowledge you need to make secure decisions.
“Saving into registered or non-registered plans will have different tax implications,” says Sophie. “You want to be smart with your savings. There may be tax deferral benefits or tax-free benefits that come with certain registered plans. A financial professional is here to guide you through this journey.”
Ready to take the first step? Enroll in Wealthy Beginnings today. Let’s navigate this journey together.
Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. This article is for illustrative and general information purposes only and is not intended to provide specific financial or other advice. We encourage you to seek personalized advice from qualified professionals before making any banking, finance, financial planning or other decisions based on any information provided herein. Brood nor Vancity is not responsible for loss or damages as a result from reliance on this information.
About the Author
Vancity is a values-based financial cooperative serving the needs of its members and their communities. With a commitment to financial well-being, equity, and sustainability, Vancity offers expert advice and inclusive banking solutions to help families thrive—from their first savings account to planning for their child’s future. Learn more at vancity.com.
