The Canada Revenue Agency (CRA) offers maternity and parental leave benefits to assist new parents by providing additional taxable support during this crucial time for tax effects of new parenthood. However, a recent survey conducted by revealed that nearly one-third (29%) of Canadians faced higher-than-expected taxes while on parental leave. To ensure you’re well-informed, here are some essential aspects to keep in mind as a new parent.
Tax Effects of New Parenthood: Maternity and Parental Leave Benefits: Eligibility, Estimation, and Taxation
Parents who are on parental leave are eligible for benefits in the form of monthly payments that help support them for tax effects of new parenthood while absent from work. To be eligible for Employment Insurance (EI) maternity and parental benefits, the following criteria must be met:
- The applicant is pregnant or has recently given birth when requesting maternity benefits.
- The applicant is a parent caring for a newborn or newly adopted child.
- The applicant’s regular weekly earnings have decreased by more than 40% for at least one week.
- The applicant has accumulated a minimum of 600 insured hours of work in the 52 weeks before or since the start of their claim.
Self-employed individuals
Must be registered with the EI program for at least 12 months before their application and have paid EI premiums for a certain duration.
Maternity benefits can start as early as 12 weeks before the due date or from the date of birth of the child. Parental benefits can be received within specific periods after the child is born or adopted.
All benefits received during maternity and parental leave are considered taxable earnings, including employer top-up benefits, EI maternity and parental benefits, and benefits from the Quebec Parental Insurance Plan.
To estimate benefits, individuals can use a calculator or follow a simple formula based on their insurable weekly earnings and applicable percentage rates. Planning ahead and considering expenses and eligible tax deductions can help manage tax obligations during the leave period.
It is advisable to consult with a tax professional or advisor for personalized guidance on managing tax obligations and ensuring a smooth transition into parenthood without tax-related concerns.
Maternity and Parental Leave Benefits: Eligibility, Estimation, and Taxation
Eligibility for Maternity and Parental Leave Benefits Parents who are on parental leave are eligible for benefits in the form of monthly payments that help support them while absent from work. To qualify for Employment Insurance (EI) maternity and parental benefits, individuals must meet certain criteria. These include being pregnant or having recently given birth, being a parent caring for a newborn or newly adopted child, experiencing a decrease of more than 40% in regular weekly earnings for at least one week, and having accumulated a minimum of 600 insured hours of work in the 52 weeks before or since the start of their claim. Self-employed individuals also need to be registered with the EI program for at least 12 months before applying and have paid EI premiums for a specific duration.
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Maternity and Parental Benefits Overview
Maternity benefits can start as early as 12 weeks before the due date or from the date of birth of the child. These benefits cannot be received more than 17 weeks after the due date or date of birth. Parental benefits can be received within specific periods after the child is born or adopted. Standard parental benefits (12 weeks) account for 55% of average insurable weekly earnings, up to a maximum of $573 in 2020, while extended parental benefits (18 weeks) account for 33% of average insurable weekly earnings, up to a maximum of $344 in 2020.
Estimating Benefits and Taxation
To estimate maternity and parental benefits, individuals can use a calculator or follow a formula that considers their insurable weekly earnings. The percentage applied varies depending on the type of benefit and the province of residence. It is important to note that all benefits received during leave are considered taxable earnings, including employer top-up benefits, EI benefits, and benefits from the Quebec Parental Insurance Plan. Recipients of maternity and parental benefits are not subject to the rules for recipients of regular EI benefits regarding repayment if their total income for the year exceeds a certain threshold.
Planning Ahead to Minimize Taxes
To avoid surprises at tax time, new parents should take proactive steps to minimize the amount of taxes owed. Planning includes calculating earnings, estimating childcare expenses, and identifying eligible tax deductions. Researching the tax deductions applicable to employer top-up benefits received during leave is essential. It is recommended to set aside an appropriate amount of money to pay taxes or request increased tax deductions from the employer during the leave period. Any excess deductions can be claimed as a refund when filing the tax return.
Consulting with Tax Experts
For specific queries regarding the impact of becoming a new parent on taxes, it is advisable to consult with tax professionals or experts. Tax Experts can provide guidance and assistance in navigating the tax implications of maternity and parental leave. They can address questions and provide the latest information on available services, especially during the COVID-19 crisis.
Maximizing Tax Benefits for Your Aging Parents
Whether you are actively involved in the care of your aging parents or simply assisting them with their tax returns for elderly parents, it’s essential to keep certain tips in mind to ensure both of you receive the maximum benefits when filing your 2023 returns.
Maximizing tax returns for elderly parents
- Ensure They File a Return: Regardless of the amount of income your parent earned, it is crucial for them to file a return. By doing so, they can claim the basic personal amount and potentially qualify for additional credits and benefits. Filing a return is also necessary to determine eligibility for federal and provincial benefits like the Guaranteed Income Supplement (GIS) and the GST/HST Credit.
- Split Pension Income: Seniors have the option to split up to half of their eligible pension income with their spouse or common-law partner. This can lead to a significant reduction in taxes, especially when one spouse has minimal income compared to the other. However, certain pension payments, such as OAS, CPP/QPP, and tax-exempt foreign pensions, cannot be split.
- Claim Medical Expenses: Encourage your parent to keep track of their medical expenses throughout the year. They can claim eligible expenses, including travel medical insurance, prescriptions, eyeglasses, and dental care, to lower their tax liability. If you financially support your parent and cover their medical expenses, you might be able to claim those expenses on your own tax return.
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Also read: Understanding the Basics of Corporate Tax Returns
- Claim Tax Credits for Disability: If your parent has a disability, they may qualify for additional tax credits. The federal disability tax credit can reduce the amount of tax owed, provided they have an approved disability tax credit certificate (form T2201). Unused portions of the credit can be transferred to a spouse or to you if you provide support. Provincial/territorial disability tax credits may also be available.
- Utilize Tax Credits for Caregivers: If your parent depends on you due to a mental or physical impairment, you may be eligible to claim the Canada caregiver amount (or the Québec Tax Effects of New Parenthood credit for caregivers, if applicable). If your parent’s spouse is dependent on them, they can claim the credit as their spouse’s caregiver. These credits offer relief for the financial burden of caregiving.
- Explore Provincial/Territorial Credits: Each province or territory in Canada offers specific credits and deductions for seniors. Examples include the Ontario seniors’ public transit tax credit, designed to assist with public transit costs, and the Québec tax credits for seniors’ activities and home-support services. Familiarize yourself with the available credits in your parent’s province or territory.
By keeping these tips in mind and leveraging the expertise of tax professionals, you can help your aging parents maximize their tax benefits and ensure a successful filing for the 2020 tax year.
