How becoming a new parent affects your taxes.
May 20, 2020
To help new parents, the Canada Revenue Agency (CRA) has put maternity and parental leave benefits in place to give those caring for their newborn some additional (yet still taxable) support. However, a recent H&R Block survey revealed that almost a third (29%) of Canadians were taxed more heavily than they expected they would be while on parental leave. New parents, here are some important things to be aware of.
Who is eligible 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 be eligible for Employment Insurance (EI) maternity and parental benefits, the applicant must meet the following criteria:
- They are pregnant or has recently given birth when requesting maternity benefits.
- They are a parent caring for newborn or newly adopted child.
- Their regular weekly earnings have decreased by more than 40% for at least one week.
- They have accumulated a minimum of 600 insured hours of work in the 52 weeks before or since the start of their claim or since the start of their last claim, which ever is shorter.
New parents who are self employed must be registered with the EI program for at least 12 months before their application in-order to be eligible, and they must also have paid EI premiums for a certain duration of time.
Whether you’re working for a company or running your own business, maternity benefits can start as early as 12 weeks before the due date or from the date of birth of your child. You won’t be able to receive these benefits more than 17 weeks after the due date or date of birth of your child.
Parental benefits, on the other hand, can be received within specific periods of time 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. Extended parental benefits (18 weeks), account for 33% of average insurable weekly earnings, up to a maximum of $344 in 2020.
When on leave, there will be a delay of four to six weeks before your first payment is received. Because of that, it’s suggested that you apply for EI parental benefits as soon as you stop working and before you give birth for maternity benefits. Your employer will then issue your Record of Employment after which you will receive the appropriate amount depending on which type of leave you’re taking.
How to estimate your benefits
To estimate your benefits, you can use this calculator or follow this formula:
- Add your insurable weekly earnings from your best weeks based on information found on your Record of Employment. (Best weeks are the weeks during which you earned the most money)
- Divide that amount by the number of best weeks based on where you live
- Multiply the result by 55% for maternity and standard parental benefits, 33% for extended parental benefits or 75% if you’re part of the Quebec Parental Insurance Plan
- This equals your estimated benefits for your leave
Note that if your family income is less than $25,921, you may be eligible for the family supplement.
How are maternity and parental leave benefits taxed?
No matter which type of benefits you receive while on leave, those benefits are considered earnings and are taxable. This includes top-up benefits from your employer, EI maternity and parental benefits, and the Quebec Parental Insurance Plan maternity and parental benefits.
When determining how much tax to withhold at source, the government does not consider any other income you might have earned during the year. As a result, if this additional income wasn’t taxed at source, you could end up owing additional taxes when you file your tax return. The good news is that recipients of maternity and parental benefits are not subject to the rules for recipients of regular EI benefits, which require repeat claimants to repay a portion if their total income for the year exceeds $66,375.
To avoid an unwelcome surprise come tax time, here are a few steps you can take to minimize the amount of taxes you owe.
- Step 1: Plan, plan, plan! Welcoming a new child into your life comes with an abundance of costs from food and clothing to daycare fees. Calculating your earnings, while also estimating your upcoming childcare expenses and eligible tax deductions is a great way to make sure you’re keeping track of your finances.
- Step 2: Do your research. It’s important to find out how much tax your employer will deduct from your top-up during your leave (if you are receiving one) and to set aside the appropriate amount of money to pay your taxes. This will ensure you avoid any surprises come tax time. Alternately, you can also ask your employer to increase tax deductions before you begin your leave. And should they deduct too much, you’ll get it back in the form of a refund after you file your tax return.
- Step 3: Now that you’re informed and prepared, you know what to expect and can enjoy parenthood, tax-worry free!
If you have any questions on how becoming a new parent impacts your taxes, H&R Block Tax Experts are here to help. Visit here for the latest information on how we’re making ourselves available to our clients during the COVID-19 crisis and how we can best serve you.
For additional support available to parents during COVID-19, click here .