Tory $1,200 child care grant: rich folks keep $1,000, poor $300

The Incredible Shrinking $1,200 Child Care Allowance: How to Fix It

There are three reasons why the Child Care Allowance will be worth less than $1,200 a year.

First, because it is a taxable benefit, the Child Care Allowance will increase families’ federal and provincial/territorial income taxes; as their taxable incomes rise, so will their income taxes. This feature will affect the large majority of Canadian families with children, which pay income tax, exempting only those with very low incomes.

Second, if the Child Care Allowance is included in the calculation of net family income – as is the case for other major income benefits such as Old Age Security, the Canada and Quebec Pension Plans, Employment Insurance and social assistance – then it will increase families’ net income and so will reduce their benefits from geared-to-income programs such as the federal Canada Child Tax Benefit and refundable GST credit, as well as provincial/territorial child benefits, earnings supplements and refundable tax credits. This feature will affect lower-income and modest-income families that are the main recipients of income-tested programs (the exception being the broad based Canada Child Tax Benefit, which also serves most families with above-average incomes).

Third, the Child Care Allowance will replace the Canada Child Tax Benefit’s young child supplement, which currently (July 2005-June 2006) pays an extra $243 per year for children 6 and under, rising to $249 for July 2006-June 2007 when the Child Care Allowance will launch. However, if families claim the child care expense deduction, they usually do not receive the young child supplement. The child care expense deduction is used mainly by higher-income families with receipted child care expenses, while the young child supplement goes chiefly to low- and modest-income families that do not claim the child care expense deduction. This feature of the new program will right off the top – before we even count income tax hikes and benefit reductions – lower the $1,200 Child Care Allowance from $1,200 to $951 for families (most of them with low or modest incomes) that currently receive the young child supplement under the Canada Child Tax Benefit.

Of course, we hope that the actual design of the Child Care Allowance, when it is revealed in the upcoming federal Budget, will attempt to avoid at least some of these problems.

However, the tax system is a complex web of credits and benefits, so while the most extreme consequences may be mitigated, there are others that may well pass unseen. In the meantime, as there has been no suggestion to the contrary, we have to analyze the proposal as it has been presented.

Take the example of an employed single parent living in Ontario with one young child and net family income of $30,000, which is in the middle-income range for that type of family (estimated average income for an employed single parent in 2006 is $33,900). The family will receive a Child Care Allowance of $1,200 for a year. But that $1,200 in additional income means that the family will pay $337 more in federal and Ontario income taxes. If none of the Allowance’s effects on income-tested benefits are mitigated, the family will receive $561 less from geared-to-income federal and Ontario tax credits and child benefits (whose payments fall as incomes rise). The total tax increase and benefit reduction comes to $899. Thus the net (after tax and benefit reductions) Child Care Allowance is $301 – just one-quarter of the promised $1,200. NUPGE