National Post (National Edition)
The cheques are in the mail: Make the most of your baby bonus.
Spend it or save, just don’t forget you’ll owe tax on it
The cheque is the mail. Literally. Canadians with children will be receiving hundreds of dollars in benefits over the next week and the question is how to spend it — or should you save it?
Leaving aside the politics of whether you agree with the expansion of the universal childcare benefit, it’s difficult to believe many Canadians will be sending the money back to Ottawa, even if they don’t support the current Tory regime.
As for the payouts, the benefit was increased to $160 per month for each child under the age of 6. It was also expanded to children 6-17, and parents who have kids that age will receive a benefit of $60 per month for each child. It’s retroactive to Jan. 1, and as a parent of two children in that 6-17 group I will soon be attacking that mailbox with vigour looking for $840.
Parents receiving the UCCB or the Canada child-tax benefit automatically get the enhanced amount, says Canada Revenue Agency. Even if you are not currently receiving either benefit, but have previously applied for a child who is under the age of 18 and still in your care, the cheque will arrive automatically. If you’ve never applied for either program, you need to go through the CRA’s website and set up an account.
So what’s going to happen next week when all these cheques start appearing? Bank of Montreal chief economist Douglas Porter predicts a lot of spending.
“People might pay down the odd credit card debt, which isn’t a bad thing, but I think most of it will get spent. It might not happen in the first month, but I suspect non-auto retail sales are going to be pretty strong in July and August,” Porter says.
Even the Bank of Canada expects the money will burn a hole in the wallets of parents: “Consumption is expected to accelerate as household disposable income receives a boost from retroactive federal payments to families with children,” the central bank said, in its policy report issued this past week.
Talk to financial planners about what to do with the money and you get an almost universal response: a contribution to a Registered Education Savings Plan. It’s easy to justify because the government offers 20 per cent matching funds on contributions — a $2,500 deposit per child gets you the maximum $500 annual grant.
“The natural place to consider investing the child-tax credit is into an RESP,” says Toronto certified financial planner Ted Rechtshaffen, adding that you always want to capitalize on free government money.
There’s nothing to say you can’t put the money in your own Registered Retirement Savings Plan or Tax-free Savings Account. But if you are directing the money to your own financial needs, you might want to start with debt, especially if you have high-interest credit card balances.
“Yo u can certainly make the argument for paying down debt,” says author Talbot Stevens, adding that if you’re just going to ratchet up your spending on your credit card again you’re just cheating your kids.
Jason Heath, a fee-based certified financial planner, agrees that the RESP is the best way to go, but he’s not against having a little fun with the money.
“If you’re already maxing out your RESP, spend it on a fun day out with your kids.” he says. “After all, you’re getting this money because of your kids.”
But what will $840 get me? I’d call it a mini-vacation for my family of four. “I would suggest a weekend in Ottawa with visits to the By Ward Market and to some of the great family-friendly museums such as the Museum of Civilization and the Canadian Children’s Museum,” says Keith Silverberg, owner of Suntastic Corporate Travel, adding that my trip would include two nights at a moderate downtown hotel, the museum admissions, meals and gas to get us from Toronto to Ottawa, and back.
Sticking with doing something for your children, what about camp? Better yet, what about something that will teach them about investing. University of Toronto has programs where campers learn “about the stock exchange and build a portfolio to track throughout the camp.”
And don’t forget that money used for certain camps could be applied for children’s fitness and arts tax credits. Parents can claim a 15-per-cent nonrefundable tax credit on an amount up to $500 per child per credit on the fees paid, which ultimately amounts to another $75 from Ottawa.
You could also teach your children about the value of charity and have them pick out an organization of their choice to donate some or all of the money to. It varies by province, but you can expect a non-refundable tax credit of 20 per cent for the first $200 of annual charitable donations and then 45 per cent for any donations above $200. First-time donors get an extra 25 per cent on the first $1,000.
Here’s the craziest idea of them all: put the money in a rainy day fund. “So many people live from paycheque to paycheque without an emergency fund,” says Laurie Campbell, executive director of Credit Canada.
But one last thing before you spend that money: Jamie Golombek, managing director of tax and estate planning for the Canadian Imperial Bank of Commerce, points out the money the government is handing out is taxable.
You just might need that rainy day fund after all.