Are you married with children? Do you want to minimize the money you send to the Canada Revenue Agency (CRA) and maximize your tax refund? If so, you have options. Being married and having children both come with certain tax benefits. However, you need to know about these perks before you can get them. In this article, I will explore two CRA tax breaks that are exclusive to those who are married, or have children, or both.
The Canada Child Benefit
The Canada Child Benefit is a cash transfer you can get if you raise a dependent child. You do not need to be married to get this one. It’s worth up to $6,400 per year for each child under the age of six in your care. It’s worth up to $5,400 for each child from 6 to 17 years of age. The amount you collect from the Canada Child Benefit depends on your income. If you earn less than $34,863, then you should receive the amounts mentioned above.
The dividend tax credit
While it might seem strange to see dividend tax credits mentioned in an article about tax breaks for Canadian parents, this credit is actually quite relevant if you or your partner has foregone paid work to focus on parenting.
This strategy here is for you and your spouse to hold dividend stocks in a taxable account instead of a TFSA. You hold GICs in your TFSA for maximum tax savings (bonds are taxed more heavily than stocks). Then, once you have your dividend stocks in a taxable account, you apply the dividend tax credit to the higher earning spouse’s tax bill, resulting in maximum savings for your family. The dividend tax credit can be quite valuable. Because of the way this tax credit is calculated, it is actually worth more like 20.7% rather than the standard 15% that tax-credits are usually worth in Canada. As a result, many low or no-income earners pay no taxes on dividends.
To illustrate how this works, let’s imagine that you held $100,000 worth of Fortis Inc (TSX:FTS) stock at the beginning of 2023 and held it to the end of the year. Fortis is a dividend stock with a 4.4% yield at today’s prices, which makes it a good example to work with. If you held your Fortis stock all through 2023, you’d have collected about $4,400 in dividends. Thanks to the dividend tax credit, you can skip paying taxes on these dividends. In fact, you can apply the dividends and the associated tax credit to the higher earning spouse’s tax refund, which maximizes your family’s savings.
Because Fortis pays ‘eligible’ dividends, you gross up its dividends by 38%, resulting in $6,072 in post-gross up dividends. A 15% credit is calculated based on those dividends; however, you actually collected $4,440, so the credit is worth 20.7% of the amount you received. If your tax rate is 15%, this credit reduces your taxes payable to zero. As a result, you are unlikely to pay any taxes on the dividends received from stocks like Fortis.
The really big benefit of the dividend tax credit is bestowed on married couples, one of whom doesn’t work for money or only works part time. If the lower earning spouse has no income apart from dividends, then he/she can’t “absorb” the full tax saving power of the dividend tax credit. That’s because the credit is nonrefundable. The higher earning spouse likely does have income to offset the credit against. So, count all dividend income on the higher earning spouse’s return. It maximizes tax savings.
