Child benefit enhancement isn’t as good as appears at first glance

More money now—but that will shrink for most at tax time

To the Expositor:

Canadians have been told about the enhancement and expansion of the Universal Child Care Benefit (UCCB). The line put out is that the benefit has been extended for every child 6 through 17 by $720 and the benefit for younger children has been increased from $1,200 per year to $1,920, the same $720. The first six months of the enhanced benefits arrive in a single cheque in July–$360 per child. It sure looks and sounds like a large expansion of the UCCB. How large an expansion is really being offered? The answer: much less than you think.

Looking only at the increase in the cheque ignores the fact that the expansion of the UCCB is accompanied by the removal of the non-refundable tax credit associated with a child less than 18 years of age. Thus federal taxes are being increased for all tax-paying families using this credit. If you paid federal taxes in 2014, for each child under 18, your taxes will increase by $338 in 2015. For a family paying federal taxes, the increase in child support from the federal government is no longer the full $720 but $720 minus $338 or $382 per year. This is a lot less than the $720.  But as they say in the infomercials, there is more to come.

The increased UCCB payments increase the taxable income of the lower income spouse or single parent in 2015. The amount of taxes paid on an additional dollar of income depends on the level of your taxable income. In the lowest federal tax bracket, the extra taxes are 15 cents per dollar of income. Thus an extra $720 in taxable income from the enhanced UCCB generates an additional $108 in federal taxes.   Even in the lowest tax bracket, the after-tax increase in the UCCB is now only $274 per year per child. This is a lot less than $720. And there is more to come.

If your federal tax bracket is between $43,953 and $87,907 of taxable income, you pay 22 cents on an additional dollar of taxable income. The enhanced UCCB generates an additional $158 in federal taxes in 2015. Your gain per child is now $224 per year or $18 a month, quite a bit less than the $720. And as they say in the infomercials, there is even more.

The increase in taxable income increases your provincial income tax bill. The provincial tax rate that approximately matches the 22 percent federal bracket is an additional nine cents of taxes on a dollar of taxable income. Thus the $720 UCCB raises an additional $66 in provincial taxes. Your gain has fallen from $720 per child per year to $158 per child per year, $13 a month.

For a household that is paying federal and provincial taxes, the annual increase in the UCCB is extremely small, certainly nothing like the $720 trumpeted in the government’s publicity. Why did the Conservative government undertake this program? There are two possible answers.

The non-cynical answer is that the UCCB enhancement is aimed at the very low income households who do not pay federal or provincial taxes. These are the households who clearly benefit from the enhanced UCCB. Because these households pay no taxes, the non-refundable tax credit was not useful to them. Because these households pay no taxes, the increase in their income from zero to a small positive amount does not generate tax payments. The increase in the UCCB will actually increase the resources flowing to these very disadvantaged children. Perhaps the real goal of the program is to help the most disadvantaged children in Canada.

This proposition that the government cares most about the most disadvantaged children is undone by the income-splitting proposals for families. A family with two children and one high-income parent and one low income parent that is able to reduce taxes by the full $2,000 available through income splitting is gaining $1,000 per child per year. That is a much larger amount that then after-tax value of the enhanced UCCB.

Income splitting is not available to children of single parents or children of two parents with very two low incomes in the bottom tax bracket. These disadvantaged children gain nothing from income splitting.

If the government wanted to help the most disadvantaged children, they could have simply made the $338 tax credit a refundable tax credit as the most straightforward way to help these lowest income families.

How would a more cynical person interpret the enhanced UCCB? The cynic would note that the non-refundable tax credit was not a very visible way to support families with children.

You might notice the tax credit when you did your taxes. However, very few people can even do their own taxes. This is particularly the case as the Conservatives have made the personal income tax system more and more complex with each passing year.

A monthly UCCB cheque comes to mind every month. The payment of six months of benefits in one cheque in July will make it appear that there was a large increase in the support for families that, as we have shown, did not really happen for most recipients. Perhaps the recipient of this cheque will be more inclined to vote Conservative in October, especially if they are repeatedly told the other parties will change this program.

When you receive your July payment towards your additional $720 per child, just remember that for many of you, your 2015 income taxes will rise by $562. There is more money in your pocket now, but less money later. What the one hand giveth in the enhanced UCCB, the other taketh away in income taxes.

David Johnson